Market Sector Update

• The Russell 2000 Index, the Fund’s benchmark, gained 2% for the second quarter and has advanced 17% year to date. While we are pleased with this performance, it is important to remember it has yet to fill the hole created by the sharp draw down (approximately 20%) in the fourth quarter of 2018. This leaves the Russell 2000 Index down just under 7% over the past nine months, and about 10% from its all-time high at the end of August last year.
• During the last nine months, utilities was the best sector, and led the benchmark by a wide margin, (approximately 20%), the 10-Year Treasury rate has declined by over 125 basis points (bps), and small caps have greatly underperformed large caps. None of these points would indicate as strong of a bull market as some recent headlines or market commentators would suggest. Considering we are more than 10 years into the current expansion and global growth has shown signs of waning for several quarters, we are not terribly surprised as greater volatility is often the case at the end of economic cycles, and would expect more volatility to come.
• The continuation of the market recovery in the second quarter was predominantly about global central banks – including the U.S. Federal Reserve (Fed) – maintaining a more dovish stance, thereby improving liquidity. Futures are now pricing in certainty that the Fed cuts in July.
• While nothing terribly concrete has yet to present itself, there is growing market belief that the U.S. and Chinese trade controversy will not see further escalation and some type of agreement can be reached. The big question going forward is whether it is possible to get a favorable trade agreement and sustain the Fed’s dovish stance, and if not, how will the market react. We believe this provides a fair bit of risk as delivering on both sets of expectations seems difficult to achieve.
• Due to the Fed’s dovish stance and hopes of a trade agreement, market leadership over the first half of 2019 has been an interesting mix between growth, rate sensitive/defensive and in some periods, cyclicals. This held true in the second quarter. In the case of growth, information technology names were strong as the perception that growth has become scarcer increased. Rate sensitive/defensive companies with greater dividend yields, such as utilities and real estate, saw a lift in multiples as bond-alternative yields declined. Cyclicals, like industrials and financials, performed well under the belief that an accommodative Fed and a trade agreement could lead to a soft landing and increased prospects of growth reaccelerating
• Looking ahead, we believe the debate whether this is just a late cycle pullback or a something much more significant, such as a recession, will continue to rage. Given this substantial move in the first half of the year, we believe it is harder to expect tremendous appreciation during the remainder of 2019. While we do not believe a recession is imminent, we also recognize turbulence is likely to continue for some time as the market struggles to find an answer.

Portfolio Strategy

• The Fund posted a positive return for the quarter and outperformed its benchmark before the effect of sales charges.
• Across the 11 sectors in our benchmark, we had positive performance attribution in seven, with information technology, communication services and health care performing the best. Four sectors had negative attribution; largest detractors were financials, followed by industrials and utilities.
• Across our top 20 average holdings, 13 contributed positive performance relative to the benchmark, contributing nearly 200 bps to attribution.
• In terms of individual stock performance during the quarter, 10 holdings contributed to performance attribution greater than 25 bps, and one greater than 50 bps. From a negative performance perspective, five holdings detracted greater than 25 bps, with one holding detracting greater than 50 bps. The net of these larger contributors and detractors was roughly a gain of 235 bps.
• Due to the strong start in the first half of 2019, we have a more tempered view on market returns going forward. Therefore, we have maintained a slightly more defensive posture in both sector allocation and the types of stocks held in the portfolio. That stated, we remain opportunistic as we look to take advantage of drawdowns created by volatility.

Outlook

• Looking toward the remainder of 2019, we remain resolute with our view at the end of the first quarter: we wouldn’t be terribly surprised to see the market finish in close proximity to where it ended the first quarter but cover a lot of territory in the process. We welcome being wrong in our assessment and feel like the portfolio could perform under either scenario, but also believe that having reasonable expectations is warranted after experiencing a bull market that is greater than a decade long.
• The choppiness of the market during the past six months, while probably a little extreme, is more likely to resemble what lies ahead than the lack of volatility that has been experienced over the past several years. Aside from being more typical at end of cycles, continued debate about global growth and lack of clarity around a trade resolution, both of which are likely to extend through at least the latter part of 2019, are likely to keep volatility elevated.
• 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.

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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 June 30, 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.

All information is based on Class I shares.

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.