Market Sector Update

• While the Russell 2000 Index ended 2018 with a resounding thud – down 20% for the fourth quarter – the Fund’s benchmark shot out of the blocks in 2019, returning nearly 15% in the first quarter. Being that we are now more than 10 years into this bull market while global growth shows signs of waning, it should not be terribly surprising that greater volatility has been exhibited, especially as seen over the previous six months, as is often the case at the end of economic cycles.
• The big market recovery in the first quarter in many ways was about the Federal Reserve (Fed) backpedaling on its rate and balance sheet policies. As rates came down in reaction to the Fed’s dovish stance, investors poured into risk assets. The question going forward is whether the Fed’s reversal suggests something more ominous or whether it will inject some much leading liquidity that will help sustain this economic expansion for longer.
• Due to the Fed’s dovishness, the leadership in the market was an interesting mix of growth, cyclicals and rate sensitivity. In the case of growth, technology and health care names were strong as the perception that growth has become scarcer increased. Cyclicals like energy and materials exhibited a recovery on the prospect that the Fed’s actions would lower the chances of a recession and hopefully lead to a soft landing. Lastly, rate-sensitive companies with greater dividend yields, like real estate holdings, saw a lift during the quarter as yields have become rare.
• Looking ahead, the debate on whether this is just a late cycle pullback or a something much more significant, such as a recession, will continue to rage. Given the substantial move in the first quarter, we expect it will be harder for tremendous appreciation from here during the remainder of the year. While we don’t believe a recession is imminent, we also recognize that turbulence is likely to continue for some time as the market struggles to find an answer.

Portfolio Strategy

• The Fund delivered a positive return for the quarter and performed in line to its benchmark (before the effect of sales charges.)
• Despite taking a more defensive posture for the period, we were pleased to keep pace with the benchmark, especially since few funds in the category did. Across our top 20 average holdings, 14 contributed positive performance relative to the benchmark, contributing roughly 125 basis points (bps) to attribution.
• Across the 11 sectors in our benchmark, we had positive performance attribution in five with consumer discretionary, information technology and consumer staples performing the best and negative attribution in six as financials, performed the worst, which was followed by materials and health care.
• In terms of individual stock performance during the quarter, 10 holdings contributed to performance attribution greater than 25 bps, and two greater than 50 bps. From a negative performance perspective, eight holdings detracted greater than 25 bps, with one holding detracting more than 50 bps.
• Because of the first quarter’s strong start, we have a more tempered view on the upside market returns going forward. We have maintained a slightly more defensive posturing 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 wouldn’t be terribly surprised to see volatility persist and the market ultimately finish in close proximity to where it ended the first quarter. We welcome being wrong in our assessment, and feel like we could do fine 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, what will further propel this volatility is the continued debate about global growth that likely extends through at least the mid part of the year when comparisons get easier and the likelihood of a trade resolution is complete.
• 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 March 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.

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.