Market Sector Update

• The Russell 1000 Growth Index (the Portfolio’s benchmark) posted a modest positive return of 0.94%. On a trailing 12- month basis, starting from near the depths of the 2020 market sell off, the benchmark returned nearly 63%, a remarkable period of strength considering the dire narrative during the early days of the pandemic. Value leads growth. Growth stocks underperformed value stocks during the quarter, marking the second consecutive quarter of strength across value styles. Small-capitalization companies, and particularly the small-value style, were the real source of strength as growth styles generally lagged. There was an abundance of news to generate positive market sentiment and peak investor interest in value/cyclical style investments. The main drivers included material progress made on immunization in the U.S., a steadfast accommodative Federal Reserve (Fed), and an additional round of consumer stimulus along with tangible progress toward a significant fiscal infrastructure package under a unified legislature. The quarter saw a move in the 10-year treasury rate from under 1% to start 2021 to finishing near 1.7%, approaching the pre-pandemic level. Investors began to anticipate a less accommodative policy by the Fed, although there was no change in tone from the central bank during the quarter. Concerns surfaced that the Fed would end up behind the curve and significantly overshoot its targets, with an acute focus on inflation. This shift in sentiment is notable and drove a broad compression of equity valuation multiples. Economic indicators continued to improve during the quarter. Manufacturing data has been extremely robust and services industries saw sustained gains due to improvements in mobility. Inventories remain extremely lean implying that strength should sustain given the need to replenish channel inventories. As for performance of benchmark sectors, energy (a small portion of the index), communication services, real estate (another small weight), industrials and financials were sources of strength and are illustrative of investors’ desires to find economically leverage exposure. Relative weakness came from consumer discretionary, consumer staples and information technology. At the factor level, value factors, such as earnings yield and price-to-cash flow, significantly outperformed all other factors. Risk factors, such as beta and low price, were also outperformers. Growth factors (long-term earnings growth) and momentum factors (price returns and relative strength) trailed. It was encouraging to see quality factors (return on equity and return on assets) perform during the period, but we believe that quality was not the defining characteristic but more so along for the ride as an unintentional byproduct of value buying or momentum-selling decisions

Portfolio Strategy

• The Portfolio posted a gain during the quarter, outperforming the benchmark’s return. During the period, macro influence on stock returns diminished and stock correlations moved lower, lending to a stock pickers environment, which we found favorable. In terms of relative performance, positive contribution was generated from information technology, industrials and communication services. Performance was negatively impacted by stock selection in health care and underweight exposure to the real estate sector. Information technology was the greatest positive contributor to performance. Overweight positions in Motorola Solutions and Zebra Technologies were additive as each saw relative strength due to the potential for strong earnings revisions. Apple was a relative laggard, but our underweight position benefited relative performance. J.B. Hunt Transport Services and Stanley Black & Decker drove positive contribution from the industrials sector. J.B. Hunt saw positive sentiment around a tight freight market and strong economic environment. Stanley Black & Decker saw sustained strength out of its tools segment, dispelling concerns of a potential slowdown in consumer interest as increased mobility appears to be driving attention away from the home. Another contributor was communications services with Alphabet experiencing strong gains during the period as investors begin to anticipate the re-emergence of leisure and travel, wherein Google has decent exposure. Continued improvement in profitability from Google Cloud was also a positive. Health care was the notable detractor. An overweight position to Cerner was a detractor as guidance for the current year failed to meet investors’ expectations of an improving growth backdrop for the company. Intuitive Surgical, where we have a modest overweight, was also a detractor as investors likely grew concerned over short-term procedures volumes.

Outlook

• We anticipated continued strength from both the hyper growth and lower quality cyclical stocks into early 2021, and it was that deep value cyclical exposure that emerged as the dominate player over the past few months. We think the strength in these V-shaped economic recovery trades – specifically industrials, financials and materials – can be attributed mainly, if not entirely, from price-to-earnings multiple expansion, not earnings growth. While the economic backdrop remains favorable, we believe that valuation expansion from low-quality, economically sensitive segments can only drive returns so far. The next leg of outperformance requires one to call the magnitude of strength from the cycle – something even the most experienced economists struggle to forecast correctly. From our perspective, the reward from calling incremental upside based on macro prospects is balanced by the risk to the downside. So, what is left to do? Focus on stock-specific drivers and growth potential independent of macro influences or macro upside surprises. We remain convinced that investors will be forced to use even more discretion and picking the next winner will prove more difficult than just buying “cheap stocks” or owning a macro-influenced basket of stocks. We think the outperforming stocks that will ultimately emerge will be connected to quality businesses. Only the best businesses should see sustained relative growth, protect if economic forecasts go awry, and retain their premium valuations. Market sentiment should likely remain balanced in the near term with positive sentiment being driven by strong earnings revisions of many cyclical companies, strong economic data fueled by needed restocking and progress toward a significant U.S. infrastructure package. This should be offset by anticipation of the Fed’s monetary response to stronger growth and realization that a significant infrastructure package, while positive for near-term sentiment, really doesn’t have much effect on near-term or intermediate-term growth. Another watch item for growth stocks, particularly those names that experienced robust revenue growth as pandemic beneficiaries, is the looming deceleration of growth during the second half of 2021. This growth deceleration can be a difficult sentiment headwind for highly valued, lower-quality growth stocks. A few of these should emerge as high-quality, strong cash flow generators and we will watch for opportunities as they present themselves. Thank you for your continued support.

The opinions expressed are those of the Portfolio’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, 2021, 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 a % of net assets as of 03/31/2021: Microsoft Corp. 10.5, Apple, Inc. 7.9, Amazon.com, Inc. 7.3, Alphabet, Inc. 5.1, Visa, Inc. 4.8, Facebook, Inc. 3.7, Motorola Solutions, Inc. 3.5, UnitedHealth Group, Inc. 3.1, Intuit, Inc. 3.0 and PayPal Holdings, Inc. 2.9.

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. All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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