Market Sector Update

• The stock market flew into considerable turbulence in fourth quarter 2018 resulting in the largest quarterly decline since third quarter 2011. It appears investors have increased their skepticism about forward growth rates into 2019 despite overall economic numbers in the U.S. remaining strong throughout 2018. Many factors appear to be driving this evolving outlook including trade tariffs, a less accommodative Federal Reserve (Fed), tightening lending standards, and dysfunction in Washington. The stock market’s decline can often be a self-reinforcing mechanism affecting overall business confidence.
• In the quarter, the Russell Midcap Index, the Fund’s benchmark, decreased 15.37%, driving the index into a negative return for calendar year 2018. There was a decisive preference for the more defensive areas given the contraction in market. Utilities, real estate and consumer staples, while still negative, outperformed the index, thus exemplifying their defensive nature during the quarter. Oil prices declined 38% resulting in energy being the worst performing sector in the benchmark. Health care and industrials were other notable underperforming sectors. All other sectors contracted in line index.
• The broad defensiveness of the market was also apparent in its preference for higher divided yielding stocks. Those stocks that have a dividend yield of greater than 2.9% outperformed the benchmark by about 7%. Long term interest rates declined about 0.30% during the quarter, ending the period at 2.7% on 10-Year U.S. Treasuries.

Portfolio Strategy

• In the quarter ending Dec. 31, 2018, the Fund outperformed the benchmark and dividend income produced 0.66% of performance (based on Class I shares).
• The Fund produced strong stock selection, aided by a preference for dividend-paying stocks, during the quarter across most sectors. The financials, information technology, industrials, consumer discretionary, utilities, real estate, communication services, and materials sectors all demonstrated positive stock selection with only the health care, consumer staples, and energy sectors detracting.
• The best relative performance occurred in the financials sector driven by the individual stock performance. Arthur Gallagher, an insurance broker, was only slightly negative in the quarter as organic growth has remained quite strong for the company. First American Financial, a title insurance company, was added to the portfolio during the quarter and generated a positive absolute return as a decline in interest rates has the potential to benefit housing, the company’s end market.
• The information technology sector was also an area of strength in the quarter. The lack of exposure to the high-flying software as a service space was a positive contributor. National Instruments, a semiconductor test and measurement company, has benefited from a company specific cost program driving strong incremental margins. Microchip and Maxim, both semiconductor companies, outperformed as this area had seen significant multiple compression in the prior quarter.
• Despite being overweight the underperforming industrials sector, we were able to produce positive relative returns. Republic Services, a waste collection company, and CH Robinson, a non-asset based freight broker, held up well in the risk-off market. We sold KAR Auction Services early in the quarter prior to the significant downturn in the market.
• The Fund underperformed in both the real estate and utilities sectors. Our stock holdings in both sectors, OGE Energy and American Campus Communities, outperformed the overall sector, but our underweight position generated negative relative performance.
• Sector allocation was a slight headwind and was related to underweights in utilities and real estate slightly offset by an underweight in energy and the Fund’s cash position. During the quarter, we increased our overweight in consumer discretionary and lessened an underweight in financials. These changes were sourced by reducing our current overweight in industrials, and moving to a neutral position in consumer staples from an overweight.

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 fiscal years of the Fund and continue to be monitored.
• Domestic economic growth: Following a year of very strong economic growth, we expect to see moderation into 2019; however, we still expect growth to be nicely positive. We believe much of the favorable backdrop that has supported the economy (high levels of confidence, strong job growth, and growing wages) will still be affirmative in 2019. While tariffs have the potential to pose a negative to growth, many of the companies we have talked with believe that the increase would be very manageable and have little impact on earnings. Tax reform will continue to provide a positive environment into 2019.
• Change in interest rates: Investors seemed concerned about the Fed raising interest rates going forward despite the aforementioned solid economic reports out of the U.S. We feel this concern is at least somewhat warranted. During this cycle, interest rates were intentionally kept at a very low level for an extended period. Rising interest rates have acted as a headwind toward the Fund’s strategy of high dividend yielding companies over the past two years. However, now we believe given valuation and interest rates, we can provide a competitive yield versus what is available in the fixedincome market, while also providing capital appreciation opportunities.
• Change in commodity prices: The commodity complex has significantly declined in price over the past quarter as investors increasingly worried about future economic growth. This should provide a favorable margin backdrop for many companies as price increases will finally catch up with the input cost inflation. This is likely to be a positive to many industrials and materials companies over the next couple of quarters. The looming questions that remain in industrial commodities revolve around the impact of the tariffs. The decline in energy prices is an area of focus. We saw the impact of declining oil prices in 2015 as it drove an industrial recession. We currently don’t anticipate the same level of impact in 2019, but are watching it closely.
• Foreign economic growth: On the positive, we have a new trade agreement with our bordering countries in North America. On the negative, our relations with China don’t seem near a finish line. These tariffs are likely to negatively impact global growth rates and it appears to be showing itself with slower Chinese economic growth. We are using caution with prospective and currently owned companies understanding supply chains and geographic exposure.

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, 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.

Top 10 holdings (%) as of 12/31/2018: Targa Resources Corp. 2.9, Harris Corp. 2.9, Quest Diagnostic, Inc. 2.8, Polaris Industries, Inc. 2.8, Maxim Integrated Products, Inc. 2.8, Microchip Technology, Inc. 2.8, Cinemark Holdings, Inc. 2.8, Glacier Bancorp, Inc. 2.8 and Avery Dennison Corp. 2.8.

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.