Market Sector Update

• Second quarter equity performance was strong across all styles and capitalization ranges. Growth styles continued to outperform value styles while small-cap styles outperformed all capitalization styles according to broad market indices.
• Most of the market gains in the quarter came in May as the technology sector pushed higher. However, during the quarter, especially in June, there was a clear underlying rotation to more defensive positions, specifically dividend payers and securities at lower valuation levels. This likely stems from falling bonds yields, concerns over global growth and progress toward implementation of trade tariffs.
• Although trade war rhetoric was not expected to disappear, it unfortunately intensified during the quarter as the U.S. threated additional tariffs on China but also on several U.S. allies.
• As the quarter closed out there were emerging signs that the trade war uncertainty was beginning to find its way into business and consumer confidence, supply chain lead times and Federal Reserve (Fed) outlook commentary.
• The Fed increased rates in June, marking the second this year and seventh since the first hike back in December of 2015. The front end of the yield curve moved higher during the quarter while the 10 year, despite some notable swings, moved only slightly higher resulting in a further flattening in the yield curve.
• Momentum and growth factors outperformed while value and quality underperformed. It is notable that more defensive factors, such as dividend yield, strongly outperformed momentum toward the end of the quarter.

Portfolio Strategy

• During the quarter, the Fund had strong gains similar to its benchmark, the Russell 1000 Growth Index, but underperformed in the period. Performance was driven by favorable stock selection in technology and consumer discretionary. The main detractors were industrials and energy.
• Outperformance in technology was driven by overweight positions in salesforce.com, Adobe and MasterCard. These stocks benefited from a strong and sustained level of sales and earnings growth.
• Relative consumer discretionary strength was driven by Nike, a new position during the quarter, and Amazon.com. Nike is seeing the benefits of a refresh in product innovation and new digital marketing strategy.
• Industrials was a notable detractor during the quarter as slowing global growth, potential ramifications of a trade war and a stronger U.S. dollar weighed on earnings forecasts and valuation. Stanley Black and Decker and Caterpillar were relative weak performers in the Fund.
• Weakness in energy was driven by an overweight position in oil service company Halliburton. During the quarter there was growing concern about constrained takeaway capacity in the Permian basin temporarily reducing demand for Halliburton’s services.

Outlook

• U.S economic data remained supportive of gross domestic product growth, likely 2.5% to 3.0%, with few apparent excesses. Unemployment should continue to move lower while inflationary pressures continue to build. Fed tightening will continue as policy moves from accommodative to neutral. The general set-up is a move toward late cycle with increasing risk and volatility.
• A full-blown trade war remains the biggest threat to markets. Globalization has been a boon to sales growth and profit margins for many U.S. companies. Many of these companies have also been revalued higher based on the stability and consistency in profitability given a global business model.
• This highlights that not only would a trade war unwind some of the margin benefits accrued by globalization over the past several decades, but it could also lead to a revaluation lower in those equities that benefited.
• Economist project limited first order impacts from tariffs, but clarity on trade rules is needed for corporations. Continued uncertainty about the duration of trade war rhetoric and depth of tariffs will erode the strong business confidence built following tax reform. Willingness to invest capital in long-term growth projects will diminish if the rules to global trade are not known. That pause in spending will have economic and market ramifications.
• If the trade war escalates then sectors considered more defensive – consumer staples and pharmaceuticals – would be a potential hiding spot for investors. Unfortunately, growth prospects in those sectors are currently limited and it appears too early to be interested in those areas on a fundamental basis. Thank you for your continued support.

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, 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.

Top 10 holdings (%) as of 06/30/2018: Microsoft Corp. 9.2, Amazon.com, Inc. 6.8, Apple, Inc. 5.1, Alphabet, In. 4.3, salesforce.com, Inc. 4.3, Verisk Analytics, Inc. 3.9, Adobe Systems, Inc. 3.8, CME Group, Inc. 3.6, Visa, Inc. 3.4 and Home Depot, Inc. 3.2.

The Russell 1000 Growth Index measures the performance of the large-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. Tax-management strategies may alter investment decisions and affect portfolio holdings, when compared to those of non tax-managed mutual funds. Market conditions may limit the Fund’s ability to realize tax losses or to generate dividend income that is taxed at favorable Federal income tax rates. In addition, the Fund’s tax-managed strategy may cause the Fund to hold a security in order to achieve more favorable tax-treatment or to sell a security in order to realize tax losses, which could result in losses that exceed any benefits of the tax-managed strategy. The Fund’s ability to utilize various tax-management techniques may be curtailed or eliminated in the future by tax legislation or regulations. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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.