Market Sector Update

• The stock market continued its ascent higher through the quarter, closing out a very strong year. With fourth quarter complete, the market has now increased smartly for nine consecutive quarters.
• Economic growth has accelerated in the U.S. and in many economies around the world. This has increased the optimism for better sales and earnings for many of the economically sensitive companies in the market. In addition, the U.S. government passed tax reform, which will be a further earnings enhancer for the vast majority of domestic corporations. In summary, it was a good year and quarter to be invested in the stock market.
• During the quarter, the Russell Midcap Index (Fund’s benchmark) increased 6.07%. Two characteristics were generally present in the sectors that outperformed the benchmark during the period: economic sensitivity and a high tax rate. The materials, industrials, financials, consumer discretionary and energy sectors were up, nicely fitting the narrative of a high tax rate and economically variable earnings. The telecommunications, utilities, real estate, health care and technology sectors lacked one or both of those characteristics and underperformed the benchmark. The outlier in the quarter was consumer staples, which despite not being economic sensitive was actually the best performing sector.
• High dividend yielding stocks, those with yields greater than 2.8%, continued to underperform their non-dividend paying or lower-dividend paying brethren in the quarter. Long-term interest rates increased during the quarter to end the year at 2.4%.

Portfolio Strategy

• The Fund outperformed the benchmark during the quarter despite high yielding dividend stocks remaining out of favor. Dividend income produced 67 basis points of performance in the quarter. Sector allocation was a positive with underweight positions in both real estate and utilities and an overweight position in consumer staples. During the quarter, we made some adjustments to our sector positions. We increased our weight in health care moving it from an underweight to an equal-weight position and increased our overweight position in consumer staples. This increase came from a reduction in technology and energy, both of which moved from an overweight to underweight position. The Fund remains underweight real estate, financials and utilities.
• The Fund’s outperformance was fairly broad in the quarter with the best results generated in consumer discretionary. Polaris and VF Corp. continued their strong early year performance into the quarter. Both companies have seen their business fundamentals improve with better end market demand and less inventory at their distributors. In addition, both are nicely profitable and should benefit from a go-forward lower tax rate. Despite concerns surrounding the fitness tracking and automotive navigation markets, Garmin has been able to leverage its strength in other categories to reemerge as a modest growth company.
• Materials sector was also a source of Fund outperformance. Avery Dennison finished the year as the best performing stock in the portfolio as the adhesive manufacturer continued to overachieve its targets while increasing its long-term structural margin goals during the year. In addition, Scotts Miracle-Gro was a strong stock given solid operating performance and continue optimism in its hydroponics business as more states legalize marijuana usage.
• Financials was weak in the portfolio during the quarter, offsetting the successes in most other sectors. The Fund was underweight this sector and had no exposure to the best performing subcategories. We added Validus Holdings to the portfolio in the quarter given our belief in a positive pricing inflection in the reinsurance market.

Outlook

• Since inception of the Fund, we have been watching several key variables to determine positioning. These variables (domestic economic growth, change in interest rates, change in commodity prices and foreign economic growth) have remained consistent over the life of the Fund and continue to be monitored.
• We remain constructive on the U.S. economy and expect it to continue to accelerate into 2018. While the math behind the lower tax rate will be supportive to company’s earnings, we also believe the cuts will provide an additional stimulus in growth. Broad optimism indicators remain near or at high levels for both consumers and company executives. Finally, we believe the wealth effect from a very strong stock market in 2017 should also provide a solid backdrop for spending. We have seen some significant valuation accretion put into the market over the past couple of years given the strong returns, particularly on some of the fastest-growing companies in the market. We remain conscience of the valuations on our holdings, as well as prospective candidates.
• Of the potential foreseen risks arising, we are most acutely focused on the Federal Reserve (Fed) across a couple of items. First, the Fed has begun the great unwind of its quantitative easing stance by beginning to sell down it fixedincome holdings. We are hopeful the market takes this policy change in stride, but are keeping a watchful eye for any stress points. Second, for the first time in the past couple of years, the speeches from those on the Fed board are suggesting they may need to raise rates at a faster rate than the current market is expecting. So far, the market has taken these comments with little indigestion, but we are monitoring. Finally, we will have a new Fed chairman in Feb. 2018. We are hopeful the transition will be a smooth one. Beyond the changes at the Fed, we do believe the prospects for higher interest rates remain with full employment, an expanding economy, and tax reform that will add to the deficit, but understand that some technical factors may limit the pressure. Nonetheless, we continue to believe we can provide an attractive dividend yield versus those available in the fixed-income markets. The Fund has transitioned slightly to companies with even greater growth prospects.
• We are much less concerned about a significant increase in oil prices given the industrialization of shale oil production and the productivity and ability to bring on/take off production quickly has tightened the confidence interval around future oil prices. We are watching closely some inflation indicators given what we believe will be an accelerating economy, which could result in some inflation across the commodity complex, but haven’t seen anything too concerning at this point.
• Of all the potential outcomes from President Trump, the impact on foreign economies is by far the murkiest of all the issues. Much of the negative rhetoric seems to have been just rhetoric, with no significant policy changes, but it remains a key watch point for us. Outside the U.S., economic growth continues to progress smartly. This has helped to reverse the appreciation of the U.S. dollars that occurred after the election. Currency should provide a positive backdrop for U.S. companies with international operations through at the least the first half of 2018.

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 Dec. 31, 2017, 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 12/31/2017: HNI Corp. 3.0, Targa Resources Corp. 3.0, Republic Services, Inc. 2.9, Kellogg Co. 2.9, Scotts Miracle-Gro Co. 2.9, CH Robinson Worldwide, Inc. 2.9, Snap-on, Inc. 2.8, Rockwell Automation, Inc. 2.8, V.F. Corp. 2.8 and KAR Auction Services, Inc.

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

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. 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. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.