Market Sector Update

• Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Fund’s benchmark) enjoyed the strongest returns across the domestic equity spectrum again in the second quarter of 2019, with an index return of 5.4%, following 19.6% in the first quarter of the year. In deconstructing the return, all sectors within the index posted positive returns except for energy. The leading performing sectors were financials, communication services, consumer discretionary, industrials and real estate.
• Continued strong performance in the domestic market appears to be due to a more dovish Federal Reserve (Fed) indicating potential rate cuts are coming in the back half of 2019, and ongoing hopes for governmental stimulus in China moderated slightly by the on-again, off-again potential for a trade deal. The U.S. economy continues to remain resilient to many of these shocks, whether real or perceived, that are being thrown its way.

Portfolio Strategy

• The Fund posted a positive return but underperformed its benchmark in the second quarter of 2019. Relative underperformance came from the consumer discretionary and information technology sectors.
• Consumer discretionary continues to be the biggest sector overweight in the Fund. While this overweight was beneficial to the Fund, stock selection within the sector, particularly in specialty retail and luxury goods, more than offset the contribution. Underperformance came from overweight positions in Tiffany & Co. and Burberry Group Plc, both of which were negatively impacted by the continued strength of the U.S. dollar, the trade war impasse and declining tourism at flagship stores.
• Performance strength came from MercadoLibre, Inc. and Grubhub Inc. MercadoLibre continued to post solid returns, as the Latin American focused e-commerce company demonstrated strong growth after emerging from a significant corporate investment period. Grubhub was a positive overweight in the Fund for the quarter as the restaurant delivery landscape lost Amazon as a player in the space at the end of June, eliminating one potential competitor for the company. Grubhub also restructured its debt, leading to additional cash on the balance sheet with looser covenants, allowing for potential acquisitions.
• Another area of weakness for the Fund versus the benchmark was in information technology. Although the Fund was underweight this underperforming sector, stock selection within the sector dragged performance lower, namely holdings Arista Networks and Palo Alto Networks. Arista Networks, a provider of data center switches, declined as it reported disappointing guidance given the slowdown on spending from a large cloud customer. Palo Alto Networks, a leader in global cybersecurity, announced negative estimate revisions due to the change in business model as customers shifted from paying up-front subscriptions to software as a service, thereby causing a hit to near term earnings. Additionally, the company announced the acquisition dilution was worse than expected.
• From a sector perspective, the Fund benefitted from relative outperformance in industrials and materials. The Fund’s industrials exposure was a slight overweight in the quarter that benefitted from several names, including CoStar Group, Inc. CoStar Group is the leading provider of real estate data, analytics and marketplace-listing platforms, including Apartments.com. The company has a defensible franchise of mainly subscription-based revenue that continues to grow with solid management execution. Recent online traffic trends for Apartments.com and ForRent.com indicated robust growth over the past 12 months, far outpacing that of competitors.
• The Fund’s cash exposure, while at the low end of our typical range, was a slight drag on performance.

Outlook

• The market’s temperament cooled substantially from the first quarter to the second quarter, based largely on trade war concerns and the ultimate effect the impasse will have on global and U.S. gross domestic product growth. Though the ramifications of the impasse seem largely contained at this point, we remain vigilant with regard to any potential changes on business activity. We also appreciate that many of the rest of the world’s economies are challenged and we continue to watch for any signs of inflection. The Fed is now talking about interest rate cuts in the back half of 2019 and there is much rhetoric around a resolution, albeit on the horizon, to the China/U.S. trade wars. Near-term confidence in the economy and corporate profits became more uncertain in the second quarter, with decelerating earnings growth once again the talk of the markets.
• For the quarter within the benchmark, higher debt companies outperformed lower debt companies. Our take is that, while interest rates declined more than 0.4% on the 10-year treasury and the market is looking forward to two or three cuts to the Fed Funds rate this year, the environment for companies to add leverage is not the same as it was in the past cycle of cuts post the global financial crisis.
• While the Fund’s portfolio represents an economically constructive point of view, our approach is essentially balanced based on stock selection as opposed to overt sector allocations. The portfolio continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance.
• The Fund remains overweight the consumer discretionary, health care and industrials sectors. We are underweight the information technology sector but still have a healthy exposure. We are also underweight the financials sector. We have no exposure to the real estate and energy sectors, which represent a combined 3.6% of the benchmark.

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 June 30, 2019, 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.

Top 10 holdings (%) as of 06/30/2019: CoStar Group, Inc. 3.5, Tractor Supply Co. 3.0, Zoetis, Inc. 2.8, Chipotle Mexican Grill, Inc. 2.8, Electronic Arts, Inc. 2.7, ServiceNow, Inc. 2.4, Keysight Technologies, Inc. 2.2, TransUnion 2.2, Market Axess Holdings, Inc. 2.2 and Guidewire Software, Inc. 2.0.

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.

All information is based on Class I shares.

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.