Market Sector Update

• The tailwinds of lower regulations and taxes, improved consumer sentiment, robust capital spending and strong earnings growth in the U.S. manifested themselves and contributed to strength in the Russell 2000 Growth Index (the Fund’s benchmark), which delivered a 5.5% return for the third quarter.
• Consumer and business confidence remained near cycle highs and interest rates, while moving higher, seeming to signal economic strength and a modest pick-up in inflation. Labor markets remain tight with wages showing signs of firming; all supportive factors contributing to the Federal Reserve conducting its third interest rate hike for the year in September. Slowing in China and currency volatility in emerging markets is being closely watched as the near decadelong U.S. economic expansion progresses.

Portfolio Strategy

• For the quarter, the Fund delivered positive returns and outperformed its benchmark (based on Class I shares). The small-cap growth segment remains one of the strongest investment classes in the market.
• The Fund benefitted most through gains in information technology and healthcare. Strong stock selection in the software, health care equipment and healthcare technology industries drove the gains during the period. This outperformance was tempered by stocks within the consumer discretionary and financials sectors, primarily related to names connected to the auto, housing and capital markets industries. The portfolio’s underweight position in biotechnology grew from the second quarter due to changes in the benchmark, yet had minimal impact on performance during the period.
• Information technology remains the largest weighting in the portfolio but gains were harvested due to both market capitalization size and outperformance and redeployed into consumer discretionary and health care, including new names in the health care equipment as well as hotels and leisure industries. We are looking to add names within industrials but remain highly selective, focused on positive sales and earnings revisions stories. We remain overweight energy, which is finally starting to show some life, and also maintain a slight overweight in financials, emphasizing growth banks and capital markets players. The portfolio remains underweight health care, primarily due to limited exposure to biotechnology.

Outlook

• We have recently noticed a growth to value and a small-cap to large-cap rotation, both of which can be headwinds for the Fund. These rotations, however, have often been short-lived corrections for the small-cap growth space and we suspect something similar this time. We think the fundamental case for a cyclical, value-driven rally akin to 2016 has flaws. Specifically, the domestic economy is already overheating in some areas and weakening in the important housing and auto sectors, emerging markets are suffering from the dollar and tariffs, China appears to be slowing, and even the eurozone is facing significantly higher oil prices than the U.S. Still, in periods of rotation we pay close attention to our risk management, which positions the portfolio across the growth spectrum and provides some stability in these markets. Accordingly, we view dislocations as an opportunity to identify the best positioned domestic growth companies that can sustain high sales and earnings growth through 2019. Areas of focus remain software, medical equipment, communications, retail and entertainment in the consumer space, and select industrials.

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.

The Russell 2000 Growth Index measures the performance of the small-cap growth 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. Investing in small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.