Market Sector Update

• Broad international markets were down about 1.5% in U.S. dollars though, despite the decline, the weaker U.S. dollar helped support international returns. In Europe, economic indicators disappointed relative to expectations as did in Japan, while the U.S. and China generally exceeded expectations. Despite currency headwinds outside of Europe, strong company earnings generally delivered double-digit growth.
• There are a number of geopolitical threats, none more prevalent than the developing tariff proposals between the U.S. and China. Despite the recent rhetoric, we believe rational behavior will prevail and we will avoid an all-out trade war. Nonetheless, the market is a discounting mechanism, and the probability of damaging trade policies has increased. Other risks we are actively monitoring include the rise of nationalism in Europe (as evidenced in the recent Italian elections), continued discussions between the U.S. and North Korea and the ongoing Brexit negotiations.
• Large capitalization companies outperformed in the U.S. this quarter, while small cap equities outperformed large cap equities in Europe.
• Emerging market equities had positive returns in the low single digits in the first quarter and outperformed developed market equities. Both saw a significant increase in volatility during the quarter. The best-performing major emerging market countries were Brazil and Russia and the best-performing sectors were energy, health care and financials.
• As anticipated, the U.S. Federal Reserve (Fed) raised rates in March with consensus expectations of 2-3 more Fed rate hikes in 2018. In other regions, rate policies seem mixed as we expect China and the U.K. to increase rates in 2018, while Japan and the European Central Bank to likely maintain aggressive monetary policies. Overall, we anticipate less inflation in most developed international markets relative to the U.S.

Portfolio Strategy

• Despite posting negative returns for the quarter, the Fund slightly outperformed the benchmark (before the effects of sales charges) during the period. The Fund's allocation to emerging-market equities helped performance as developing markets typically outperformed their developed market peers.
• The Fund’s relatively large allocations to the information technology and consumer discretionary and financials sectors helped performance as those sectors performed well for the period. In addition, underweight allocations to the poor performing consumer staples, energy and telecommunications sectors benefitted performance.
• From a country allocation standpoint, the Fund’s large allocations to the U.S., Japan, and the U.K. and Japan (an approximate 63% aggregate allocation) helped performance as those markets posted gains for the period. In addition, Fund allocations to Australia and India benefitted performance as those markets posted strong gains for the period.

Outlook

• Despite perceived risks to equity markets, we continue to believe global economic growth is in a sweet spot today, supported by monetary and fiscal policy globally, which is a positive for markets. In addition, we believe corporate tax relief in a number of countries (the U.S., France and Japan) as well as infrastructure spending should help extend the current market cycle.
• Global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. Despite the majority of major central banks beginning to or indicating a desire to taper their aggressive monetary policy, we believe virtually all countries are struggling with high levels of debt. As a result, we believe central banks will attempt to keep rates below nominal gross domestic product growth in order to monetize the debt. As such, we believe there is a long-term cap on how high rates can go. We anticipate the continued slow, deliberate exiting of quantitative easing and reversing of negative interest rate policy globally.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 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.

The Fund is a passively managed index fund and does not invest in securities based on the managers’ view of the investment merit of a particular security or company, nor does it conduct conventional investment research or analysis or forecast market movement or trends, in managing the assets of the Fund. The Fund seeks to remain fully invested at all times in securities that, in combination, provide exposure to the index without regard to market conditions, trends or direction.

The Fund entails other risks, including imperfect benchmark correlation and market price variance that may decrease performance. While the Fund attempts to track the performance of its stated index, there is no guarantee or assurance that the methodology used to create the Index will result in the Fund achieving high, or even positive, returns. The Index may underperform, and the Fund could lose value, while other indices or measures of market performance increase in value. 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. 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.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The Fund entails other risks, including imperfect benchmark correlation and market price variance that may decrease performance. While the Fund attempts to track the performance of its stated index, there is no guarantee or assurance that the methodology used to create the Index will result in the Fund achieving high, or even positive, returns. The Index may underperform, and the Fund could lose value, while other indices or measures of market performance increase in value. A number of factors may affect the Fund’s ability to achieve a high degree of correlation with the Index, and there is no guarantee that the Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlation may prevent the Fund from achieving its investment objective. The Fund’s use of derivatives presents several risks, including the risk that these instruments may change in value in a manner that adversely affects the Fund’s net asset value and the risk that fluctuations in the value of the derivatives may not correlate with the reference instrument underlying the derivative. 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. 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.