Market Sector Update

• Mid-cap growth stocks gained 7.57% in the third quarter of 2018, continuing a string of quarterly gains for the Russell Midcap Growth Index (the Fund’s benchmark) that started in the fourth quarter of 2015.
• Outperformance within the index came from the healthcare, information technology and industrials sectors – a narrowing of relative performance across sectors versus the second quarter of 2018.
• Trade and tariff concerns continued to pressure some sectors and stocks in the third quarter. Interest rates and a compressing yield curve dampened enthusiasm for financial service firms, banks in particular, throughout the period. That narrative shifted dramatically as the third quarter started and long-term interest rates began to increase quickly to levels not seen since 2011.
• The materials, communication services, real estate, financials and energy sectors all underperformed the index in the quarter. Sector performance within the Fund was solid and broad, with consumer staples, information technology, industrials, health care and consumer discretionary besting the index.

Portfolio Strategy

• The Fund outperformed the index in the third quarter (based on Class I shares). Consumer discretionary and health care drove much of the outperformance.
• Our consumer discretionary names made the strongest contribution to relative performance in the quarter. We were significantly overweight this strong performing group, and our names well outperformed both the index and the sector within the index. Grub Hub, Inc. continued its run of strong performance as it added diners and restaurants to its service offering. Lululemon Athletic, Tractor Supply, O’Reilly Automotive, Ulta Beauty and Norwegian Cruise Line Holdings all posted strong returns. Consumer spending has been buoyant along with job and wage gains, and many retailers have adjusted their business models to compete more effectively in an omni-channel retailing world. We had some weak names in this group, with much of that weakness related to tariff concerns, and associated demand and cost pressures. Polaris Industries, BorgWarner and Mohawk Industries all posted negative returns in the quarter.
• Our healthcare stocks posted another quarter of strong performance. DexCom led the way as the market for continuous glucose monitoring (CGM) accelerates, and the company’s G6 device gains traction. Ongoing adoption of the daVinci surgical robot, and growth in surgical procedures, moved the stock of Intuitive Surgical even further along. Glaukos, which makes a medical device for treating glaucoma, got a huge boost when a competitor’s product was called off the market. We sold Dentsply Sirona as the company’s poor performance persisted in the quarter due to a poorly conceived/executed acquisition and difficulties within its legacy business.
• The information technology and industrials sectors both contributed a slight negative to relative performance. The Fund was also underweight information technology, an outperforming sector for the index. Two weak names in these sectors were IPG Photonics, which makes components for lasers, and A.O. Smith, a maker of water heaters and water/air purification products that has a large U.S. base business and a sizeable, growing business in China. The stocks of these companies were weak in the quarter related to tariff concerns and a slowdown in Chinese business.
• Our consumer staples names performed well and made a positive contribution to relative performance.
• Our underweight position in the weak materials sector was a modest positive in the quarter, as was the Fund’s lack of exposure to the underperforming energy and real estate sectors.
• Two of the Fund’s information technology names, Pandora Media and Electronic Arts, moved into the newly minted communications services sector. Our communications services exposure made a small positive contribution to relative returns in the quarter, as our names didn’t perform as poorly as those in the underperforming sector.
• Our financials sector made a modest negative contribution to relative returns in the quarter. We were slightly overweight this underperforming group, and with respect to stock selection, performance of our banks continued to be modest at best as interest rates receded and the yield curve compressed in the quarter.

Outlook

• The U.S. market continues to power ahead, reaching all-time highs in the quarter, despite ongoing concerns about the direction of rates and worldwide trade wars. Investors have been vacillating between near-term confidence in the economy and corporate profits, and fear of the unknown related to rates and tariffs.
• Strong corporate earnings borne of the ongoing recovery post the energy sector-led downturn in 2014 and 2015, buoyant business and consumer confidence, and economic growth worldwide have underpinned the market’s move in 2017 and so far this year.
• We continue to see the near-to-intermediate term positives outweighing the concerns over rates and trade tensions, although the rate environment is more concerning to us in the intermediate term than it has been for some time, especially given the valuation levels on many long duration, high-growth stocks. We see the rate trends at this point in the cycle as a reflection of economic vitality, and not yet a challenge to growth, but the recent rate of change is causing a valuation adjustment in much of the market as investors reassess the horizon.
• Our portfolio continues to express a more economically constructive and optimistic view, although we have made moves to reduce the valuation risk in the portfolio by reducing our exposure to some of the more highly valued stocks. This has included moving to an underweight position in information technology, both proactively and based on moves in the index, for the near term.
• We are overweight the consumer discretionary, healthcare and industrials sectors. We are neutral the financials sector, and we are underweight communications services and consumer staples, although we are looking for interesting small- to mid-cap growth names for additional investment in both of those areas. We are underweight materials, and have no exposure to real estate and energy, which represent a combined 3.8% of the index. We have recently added energy to the “no exposure” list, as the secular trends for growth and efficient capital deployment in that sector are challenged, and we think we can invest more productively elsewhere.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 09/30/2018: CoStar Group, Inc. 3.1, Tractor Supply Co. 3.0, Zoetis, Inc. 2.9, GrubHub, Inc. 2.8, Chipotle Mexican Grill, Inc. 2.8, Fastenal Co. 2.5, Intuitive Surgical, Inc. 2.5, Electronic Arts, Inc. 2.4, Abiomed, Inc. 2.3 and Ulta Beauty, Inc. 2.3.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.