Market Sector Update

• Fourth quarter rounded out a very strong year for equities. Uncertainties that rattled investors at the end of 2018 reversed course allowing for a more favorable fundamental backdrop as we enter the new decade. While not yet at the finish line, it appears the on-again, off-again trade tariffs have reached a near-term conclusion with both countries claiming a deal has been struck. Financial conditions have significantly eased with lower corporate borrowing rates as the Federal Reserve (Fed) cut its benchmark rate 0.75% during 2019 and longer duration interest rates have also compressed lower. Industrial economic activity did moderate throughout 2019 as executive confidence slipped owing likely to the trade environment; however, the U.S. consumer remained resilient benefiting from strong employment, raising wages and little broad consumer price inflation.
• In fourth quarter, the Russell Midcap Index, the Fund’s benchmark, increased 7.06% generating over 30% return for 2019. Interest rates sensitive sectors, real estate, utilities and consumer staples, were the worst performers in the benchmark during the period following strong gains in the third quarter. Health care and information technology were the best performing sectors as the market had a significant preference for the fastest growth companies in the market. Energy posted benchmark-beating performance, the first in recent memory.
• Long-term interest rates increased 0.25% following declines in the prior two quarter, ending the year at 1.9% on 10- Year US Treasuries. Dividend-paying stocks significantly underperformed the non-dividend payers. Those stocks with a dividend yield of greater than 3.0% (the top quintile of dividend yield) underperformed the benchmark. This continues the trend that was evident throughout most of 2019 despite a significantly lower interest rate environment, which should have benefited income-producing equities particularly relative to fixed-income markets.

Portfolio Strategy

• The Fund posted a positive return but underperformed the benchmark in the quarter. Dividend income added to performance in the period. Sector allocation was a positive because of underweight positions in both the real estate and utilities sector. Allocation to high dividend paying securities was a notable detractor to relative performance.
• Financials produced the best relative performance in the quarter. Ares Management Corp. saw its stock deliver robust gains as the company benefits from underlying trends of capital flowing into private equity managers and the preference for fixed-income positioning within the capital structure. Glacier Bancorp also delivered nice gains in the quarter. The bank has been able to maintain a higher level of net interest margin and has shown less margin compression despite lower underlying U.S. rates.
• Solid stock selection in materials was also an area of success within the quarter. Avery Dennison Corp. and RPM International, Inc. generated benchmark-besting performance. Avery Dennison saw its organic growth accelerate in the quarter despite broad industrial slowing. RPM continues to benefit from a multi-year cost takeout program as this traditionally decentralized organization begins to leverage some centralized functions.
• Performance within information technology lagged the benchmark’s strong sector performance during the quarter. We held an underweight position and have little exposure to some of the fastest-growing areas in the sector due to the Fund’s dividend requirement. Broadridge Financial Solutions reported a disappointing quarter due to lower proxy activity versus the prior year.
• We underperformed in the communication services sector during the quarter. Cinemark Holdings, Inc., a stock we have owned since the inception of the Fund, generated a negative return in the period. The company was impacted by a slightly lower-than-expected box office throughout the second half of 2019 as well as a spike in its film rental costs due to a concentration in the number of blockbusters within the quarter.
• The health care sector was also an area of relative weakness. Similar to information technology, underperformance was more driven by what wasn’t owned versus what was owned. Within the benchmark, biotechnology and specialty pharmacy generated robust returns and these are two areas where the Fund does not have exposure given the established philosophy and process.

Outlook

• We continue to watch 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 and continue to be monitored.
• Following a confidence-inspired slowdown that had many corporate executives unsure of the proper forecasting plan for 2019, we believe growth should reaccelerate in 2020. Following a likely resolution to trade tariffs, we think companies will move from mitigation efforts toward focusing on growth and with it should come an increase in capital expenditures. We still find few excesses that have built up during this very long upcycle for the U.S. economy that would be a cause for concern. We believe U.S. consumers will continue to spend at a reasonable rate underpinned with continued job growth and upward wage pressure. The largest improvement is likely to come in the industrials sector following decelerating trends during 2019. The 2020 election will be the key watchpoint for markets.
• With an expectation for improving economic growth, there is a bias for upward pressure on interest rates; however, comments by the Fed appear to have short-term interest rates strongly anchored. Overall demand for yield has been and will likely continue to be a counteracting force on significant upward momentum on long-term interest rates. With this backdrop, we anticipate the ability to provide competitive income generation versus fixed-income alternatives while allowing for capital appreciation.
• An improving economic backdrop should drive commodity prices higher; however, we believe, particularly with oilbased commodities, there is ample supply which will limit a significant increase in prices. It appears the competitors in U.S. shale oil & gas are acting with more capital discipline, which should keep a floor on prices higher than it would be otherwise.
• It appears China has been attempting to stimulate its economy; however, there has been little evidence of its impact as the trade tensions are acting as a counterbalance. As tariffs are eliminated or lowered, we think this pressure should ease. Europe has been an area many of our corporate management teams have identified as a weak geography that has seen further atrophy. A greater dependence on the global economy and well identified structural issues appear to be the culprits. With a more favorable backdrop, we also expect European growth will also improve.

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, 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 12/31/2019: Ares Management Corp. 3.3, nVent Electric plc 3.1, Rockwell Automation, Inc. 3.1, Leggett & Platt, Inc. 3.0, Targa Resources Corp. 3.0, Hasbro, Inc. 3.0, Rattler Midstream L.P. 2.9, Polaris, Inc. 2.9, Avery Dennison Corp. 2.9 and Umpqua Holdings 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.

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. 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.