Market Sector Update

• U.S. economic news has remained quite favorable halfway through 2018. The economy has reaccelerated, confidence has remained high, and a significant portion of the tax savings has been earmarked for reinvestment.
• International trade tariff rhetoric has served as a governing device to the market despite the favorable environment and earnings growth backdrop.
• In second quarter 2018, the Russell Midcap Index, the Fund’s benchmark increased 2.82%.
• Energy was the most significant performer in the quarter as oil prices increased $9 to $74 per barrel. Real estate and utilities both performed well as the pace of rising long-term interest rates decelerated in the quarter. Consumer discretionary performance was strong as many retail companies appeared to be on better footing given a stronger consumer and better inventory position. The health care and technology sectors have continued to return impressive performance given fundamental strength. Financials and industrials were the worst performing sectors in the benchmark. A flattening yield curve and the tariff rhetoric are seemingly the most accurate fundamental reasons for the underperformance, respectively. Consumer staples also posted a negative return in the quarter as top-line growth has remained elusive for this sector and cost pressures have mounted. Materials also slightly underperformed.
• The highest dividend-yielding stocks, those with yields greater than 2.7%, reversed their multi-quarter underperformance in the second quarter producing better than benchmark returns; however, those companies that do not pay a dividend also outperformed. The relative weakness in the benchmark occurred with companies that pay a dividend between 1 to 2.7% yield. Long-term interest rates increased 0.13% to 2.86% on 10-Year U.S. Treasuries.

Portfolio Strategy

• While the Fund underperformed the benchmark during the quarter, dividend income was a positive to performance in the period.
• Sector allocation was a headwind to the Fund given our underweight positions in real estate and energy and overweight positions in industrials and consumer staples. During the quarter, we made some adjustments to our sector positions as we increased our overweight position in materials that was sourced by partially reducing our overweight position in consumer staples.
• Three sectors drove the underperformance during the quarter: technology, consumer discretionary and energy. A slowing cell phone market caused National Instruments to report disappointing quarterly revenue driving the underperformance in technology. Despite better than expected box office returns in second quarter, Cinemark underperformed in consumer discretionary, reversing first quarter’s gains. Within energy, the underperformance can be ascribed to the underweight position in a strong performing sector.
• Partially offsetting these underperforming sectors, the Fund generated a positive contribution from both financials and materials. An underweight sector allocation and strong operational performance from Umpqua Bank drove the outperformance in financials.
• Outperformance in materials was due to RPM International, Inc., which gained significant shelf space for its wood stain product at Home Depot.

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: Not much has changed to our outlook for continued accelerating growth in 2018. We anticipate a significant portion of the savings from the tax cuts will be reinvested back into the economy throughout the calendar year. The market continues to have “walls of worry” to climb first with the consternation about the flow through of the tax reform benefit and now tariff talk or the possibility of a broader trade war. These are things we continue to evaluate but believe all are manageable.
• Change in interest rates: As global central banks have begun to put into place the great unwind of their quantitative easing stance coupled with the significant performance ascribed to those highly indebted companies in the middle of this decade, this continues to be an area of continued surveillance. Adding to the already increasing levels of concern, inflationary forces appear to be building into the U.S. economy. We are not overly concerned about the levels of inflation we will likely see given still significant deflationary forces in the economy, e-commerce and cloud computing to name a couple, but it is the periods of transition that we worry the market may not be prepared. Long-term interest rates have now become competitive with the dividend yield we believe we can generate; therefore, we have continue to emphasize the growth aspects of the underlying companies we are evaluating and the Fund is holding.
• Change in commodity prices: We have been surprised with the increase in oil prices during the quarter but have not changed our broad stance which is as prices rise, oil shale producers can quickly respond creating a counterbalancing force on any significant appreciation. Beyond oil, tariffs have the risk of adding to inflationary pressures in the economy, but we believe these will largely be managed around.
• Foreign economic growth: 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. Outside the U.S., economic growth has been a bit uneven in many of the world’s economies with a slowdown experienced in Europe. It is our expectation that growth will reaccelerate in the second half of 2018 as we moved past some anomalies that occurred in that region.

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, 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 06/30/2018: RPM International, Inc. 3.3, Targa Resources Corp. 3.1, Clorox Co. 3.0, Kellogg Co. 3.0, OGE Energy Corp. 3.0, Leggett & Platt, Inc. 3.0, Broadridge Financial Solutions, Inc. 2.9, American Campus Communities, Inc. 2.9, KAR Auction Services, Inc. 2.9 and HealthSouth Corp. 2.9.

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.