Market Sector Update

• The underlying metrics on the U.S. economy remained constructive with accelerating growth in both industrial production and consumer spending during the quarter. It appears tax reform is having the desired effects of increasing investment and spending while keeping confidence levels high.
• Tariff rhetoric has changed into tariff action as the U.S. implemented the first round of tariffs versus China during the quarter. The undercurrent of foreign policy changes remains the key concern in the market.
• In the third quarter of 2018, the Russell Midcap Index, the Fund’s benchmark, increased 5%. The best performance was captured by the most expensive, fastest growing companies in market.
• Sector outperformance was narrow with the healthcare, information technology and industrials sectors all doubling the return of the benchmark. Materials was the only sector that generated negative returns in the quarter, weighted down by metals and construction materials. Consumer discretionary demonstrated significant dispersion within its subcategories with retail remaining strong while auto- and housing-related products were weak.
• High dividend yielding stocks continued to remain out of favor during the quarter. Those stocks that have a dividend yield of greater than 2.9% underperformed the benchmark. Long-term interest rates stayed relatively flat, ending the quarter at 3% on 10-Year U.S. Treasuries.

Portfolio Strategy

• The Fund outperformed the benchmark during the quarter. Dividend income produced 0.79% of performance in the quarter.
• Sector allocation was a slight headwind in the quarter from our overweight position in materials slightly offset with our overweight position in industrials and underweight positions in real estate and financials. Our sector positioning remained consistent with second quarter. We are maintaining overweight positions in materials, industrials and consumer discretionary and underweight positions in real estate, information technology, financials and energy.
• The Fund produced strong stock selection during the quarter across most sectors including industrials, financials, materials, energy, consumer staples, communication services and consumer discretionary. Our names in the Industrials sector performed strongly in the quarter. Both HNI Corp. and CH Robinson have seen strong revenue trends and it appears the cost inflation impacting their profitability are moderating allowing for forthcoming margin increases.
• The financials sector was also strong for the Fund during the quarter. Banks were a weak performing area in the market; however, our bank exposure outperformed with Glacier Bancorp seeing nice appreciation in the quarter given strong trends during its seasonally strong period of the year. In addition, AJ Gallagher, an insurance broker, has continued to see solid organic growth trends.
• The Fund underperformed in information technology and healthcare, partially offsetting these outperforming sectors. The Fund’s exposure to semiconductors, particularly Microchip, drove the underperformance. Within healthcare, Quest Diagnostics was the worst performing stock; however, the underperformance in this sector was more about not owning some of the faster growing companies versus the names that we did own.

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: Our outlook has not changed for some time and we still expect continued solid growth for the U.S. economy. We believe the tax savings are still working their way through the economy and should allow for continued economic expansion. Confidence levels are strong for the consumer and corporate executives, alike, driving spending and investment. We will be listening for any tone change over the coming earnings season due to increased uncertainty from the tariffs. One area that we have started watching more closely in recent months is the trend in housing. It is an area that seems to have hit a slower patch for both new and existing turnover. At this point, we haven’t made any portfolio changes, but this situation has heightened our awareness and curiosity of this sector given its impact in the broader economy. As we turn the calendar to 2019, we do expect some moderation in economic growth, but believe it will still be solid.
• Change in interest rates: This is an area of most acute focus for us. As global central banks have begun to put into place the great unwind of their quantitative easing stances 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. Bottlenecks in transportation, labor and raw materials have already hurt some companies’ margins and given our outlook for a continued strong economy, it is more likely these pressures will continue to build. This correlates into some weakness we have seen in housing, questioning whether the inflation in prices and increase in borrowing costs have begun to crowd out prospective buyers. We are continuing to stay very close to this variable given lower interest rates likely caused some unnatural forces to occur in the market over the past six years.
• Change in commodity prices: Broad commodity prices have moderated. We have been surprised with the increase in oil prices in 2018, 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. Near-term infrastructure constraints appear to have added a new wrinkle to the ability to quickly respond with supply growth. We believe given the resourcefulness of this industry and currently high prices, the constraints can be circumvented. We are evaluating closely the companies we own and those potential prospects for their ability to pass on higher costs so margins do not compress.
• 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. We have written about rhetoric being just rhetoric, but we have seen some action on trade issues. On the positive, we have a new trade agreement with Canada and Mexico. On the negative, U.S. relations with China don’t seem near a finish line. Rhetoric has moved to tariffs. 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 Sept. 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 09/30/2018: Cinemark Holdings, Inc. 2.9, V.F. Corp. 2.9, Cracker Barrel Old Country Store, Inc. 2.9, HealthSouth Corp. 2.9, Service Corp. International, 2.9, Quest Diagnostics, Inc. 2.9, Broadridge Financial Solutions, Inc. 2.8, National Instruments Corp. 2.8, OGE Energy Corp. 2.8 and C.H. Robinson Worldwide, Inc. 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.