Market Sector Update

• Equity markets continued their ascent higher in 2Q 2017, marking seven consecutive quarters of positive performance.
• While early in the year there was much optimism around positive economic changes forthcoming from Washington, much of that optimism has faded with little progress made. Replacing that optimism for the government changes has been results and optimism around underlying company fundamentals for both sales and earnings gains in 2017.
• During 2Q 2017, the Russell Midcap Index (Fund’s benchmark) increased 2.7%. Positive performance had a decisive growth tilt with the fastest growth sectors, health care and technology posting the best returns in the quarter. Financials was the only other sector to produce positive relative performance.
• Materials, real estate, utilities, industrials and consumer discretionary all generated positive returns, but trailed the benchmark. Energy, telecommunications and consumer staples produced negative returns in the quarter.
• High dividend yielding stocks, those with yields greater than 2.8%, underperformed their non-dividend paying or lower-dividend paying brethren in the quarter. Long-term interest rates declined during the quarter while short-term interest rates increased.

Portfolio Strategy

• The Fund underperformed the benchmark during the quarter. Dividend income produced 74 basis points of performance in the quarter. While sector allocation detracted from performance, the vast majority of underperformance was result of poor stock selection. Our sector positioning stayed consistent throughout the quarter as we remained overweight consumer discretionary, technology, materials and energy. Our most notable underweight positions remained real estate, financials, utilities and industrials.
• The Fund underperformed across most sectors in the quarter with the worst relative performance in energy, health care and industrials. The underperformance in energy was driven by both our overweight position to an underperforming sector and weakness in all three of our energy stocks. Oil prices fell 10% during the quarter causing investors to question the recovery and assumed production growth for land rig operator, Helmerich and Payne, and pipeline and processing companies, Plains All American and Targa Resources.
• We were slightly underweight health care, the best returning sector in the market during the quarter, costing some relative performance. This is a sector where the Fund struggles to find good dividend payers given the reinvestment opportunities many of the companies have to reinvest cash flow. Cardinal Health was a weak stock for us as pressures in generic pharmaceutical pricing has caused a period of weakness for the company, but it appears most of those issues are now in the past.
• Our relative performance in industrials was solely driven by poor stock performance with both HNI Corp. and KAR Auction Services contracting during the quarter. HNI preannounced negatively due to an inconsistent sales pattern from its customer in its office furniture supplies business. KAR reported a disappointing profit quarter given strong revenues also driven by the inconsistency of those revenues during the period. This situation seems to have passed as the calendar page turned.

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 continue to be constructive on the U.S. economy. While some areas of the economy have shown some growth atrophy in 2017, such as auto sales, the industrial economy has been healing smartly and we expect it to continue on its current pace. Many of the economic and consumer surveys that measure optimism remain at or near all-time highs. The backdrop for the consumer remains constructive with job growth, higher wages and manageable inflation. Washington still has the ability to be additive to economic growth; however, it is also clear the probability of positive action has decreased. All in all, we expect better economic growth through the rest of 2017, but have tempered that expectation a bit from the beginning of the year given little progress on the legislative front.
• The Federal Reserve (Fed), once again, raised interest rates during the quarter and long-term interest rates, once again declined. Consensus expects continued increases from the Fed throughout the year now that the economy is on better footing. This should put upward pressure on the short-end of the curve. Given our outlook for an improving economy, we also believe there should be upward pressure on long-term interest rates, 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.
• After several quarters of lots of volatility in commodities, second quarter 2017 was fairly tame. Oil prices declined another 10% after falling 10% the prior quarter, but remained in a fairly tight range all quarter. Storage and production growth in the U.S. has decreased the probability of a significant increase in oil prices in the near-term. Marginal cost of production should be the counter-balancing factor that keeps oil prices from a significant decline, absent a significant global shock. We believe commodity prices are unlikely to spark inflation or deflation fears during the foreseeable future.
• 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. dollar that occurred after the election. Currency appears to have been a broadly negative earnings event for many U.S. companies, so the reversal seen during this quarter should be a positive earnings event in the second half of 2017.

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, 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 06/30/2017: V.F. Corp. 3.1, Polaris Industries, Inc. 3.1, Avery Dennison Corp. 3.0, National Instruments Corp. 3.0, Rockwell Automation, Inc. 2.9, Scotts Miracle-Gro Co. 2.9, Sonoco Products Co. 2.9, Republic Services, Inc. 2.9, Leggett & Platt, Inc. 2.9 and Arthur J. Gallagher & Co. 2.9.

Class R6 shares were renamed Class N on March 3, 2017.

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.