Market Sector Update

• While 2018 started out as a boon for small-capitalization companies and their investors, it ended with a resounding thud as the Russell 2000 Index, the Fund’s benchmark, was down 20.22% in the fourth quarter.
• There were several fears at play, including concern that global growth is decelerating as a result of tightening monetary policy, trade tensions and numerous geopolitical concerns (ongoing Washington dysfunction, Brexit, France’s yellow vest movement and budget concerns in Italy.)
• Because of these factors, focus quickly turned from capital appreciation to preservation. Cash was the best performer in the quarter, followed by utilities (-1.99%), consumer staples (-13.25%), real estate (-14.09%). More cyclical groups such as energy (-41.24%) and materials (-26.47%) brought up the rear. In short, there were very few places to hide for the period, especially in December, which saw the worst sell off in recent memory.
• Looking ahead, the debate will continue to rage as to whether this is just a late cycle pullback or a something much more significant, such as a recession. We believe that it is not a recession, but also recognize that turbulence is likely to continue for some time as the market struggles to find an answer.

Portfolio Strategy

• The Fund performed in line to its benchmark for the quarter, while outperforming the benchmark on a year-to-date basis (before the effect of sales charges.)
• While we believe we were well positioned for the selloff, we were not terribly pleased with our performance for the period, particularly in stock selection. Across our top 20 average holdings, half contributed positive performance relative to the benchmark, contributing roughly 10 basis points (bps) to attribution. We had anticipated better performance from our higher conviction names.
• Across the 11 sectors in our benchmark, we had positive performance attribution in six with information technology, real estate and consumer staples performing the best and negative attribution in five as communications services, performed the worst, followed by consumer discretionary and health care.
• In terms of individual stock performance during the quarter, seven holdings contributed to performance attribution greater than 25 bps, and two greater than 50 bps. From a negative performance perspective, seven holdings detracted greater than 25 bps, with two holding detracting greater than 50 bps.
• Keeping our more tempered view of the overall market, we maintained a slightly more defensive posturing as we exited 2018. However, we firmly believe volatility creates opportunity, so we are actively looking for individual stocks that fit our investment thesis. For example, we added to our underweight position in the energy sector, which had underperformed badly, but still offers pockets of opportunity in our estimation.

Outlook

• Looking ahead at 2019, we believe the market drawdown already experienced makes it difficult to become much more defensive, and generally believe a majority of the absolute pain has already been felt. That stated, we do not believe there is any easy resolution to what has been put into motion, and it will require some time to work out.
• While we could easily see a market snap back due to the recent dramatic selloff, we also believe that more choppiness lies ahead. This is very common late in economic cycles, as we grapple with slowing global economic growth, tightening in monetary policy and seeing whether we can move past the trade tensions with China.
• Taking these headwinds into consideration, it is important to remember we are in the ninth year of this bull market and the economic cycle is not young. While we believe a recession is not on the near-term horizon, it is likely we will see more measured global economic growth, and need to adjust our expectations for returns accordingly.
• Regardless of how the market performs in 2019, we remain committed to the Fund’s process of identifying quality underappreciated companies, and believe the construction of the portfolio is well balanced so as to perform well versus our peers and benchmark, regardless of the environment over time.

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 Dec. 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.

Scott Sullivan served as a portfolio manager on the Fund until May 8, 2018.

The Russell 2000 Index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. 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. Investing in small-cap growth and value stocks may carry more risk than investing in stocks of larger, more well-established companies. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. Value stocks are stocks of companies that may have experienced adverse developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the Fund’s manager, undervalued. Such security may never reach what the manager believes to be its full value, or such security’s value may decrease. The Fund typically holds a limited number of stocks (generally 40 to 60). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger 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.