Market Sector Update
- Financial stocks led the charge in the
quarter on renewed optimism for progrowth
policies following the election of
Donald Trump along with continued
Republican control of both houses of
Congress. The idea that pro-growth reform
will finally take hold in the U.S. government
sent interest rates sharply higher, with 10-
year government yields moving from 1.6%
at the end of the third quarter to over 2.4%
at the end of the year.
- The energy and industrials sectors also
performed well in anticipation of progrowth
stimulus under the new
government. Health care names again
led on the downside as they have all year,
a somewhat surprising result given the
Republican sweep in November.
Investors seem to be betting that pricing
pressures in the sector will remain, opting
instead to place bets in sectors more
likely to benefit from economic recovery.
*Top 10 holdings (%) as of 12/31/2016: Halliburton Co. 3.8, Wells
Fargo & Co. 3.4, Shire Pharmaceuticals Group 3.4, JPMorgan
Chase & Co. 3.4, Union Pacific Corp. 3.3, Cimarex Energy Co.
3.2, Kraft Food Group 3.2, Morgan Stanley 3.2, Alphabet Inc.
3.2 and Microsoft Corp. 3.1.
Portfolio Strategy
- The Fund sharply underperformed the
S&P 500 Index, its benchmark, during the
quarter ended Dec. 31, 2016.
- This was primarily the result of
positioning heading into the quarter that
assumed a status quo environment of low
economic growth in the U.S. and
continued gridlock in Washington. This
led us to a significant underweighting of
the financials sector heading into the
election, a decision that cost the portfolio
over 100 basis points of relative
performance for the quarter.
- Underperformance of large portfolio
holdings such as Shire Pharmaceuticals,
Alibaba, Molson Coors, Newell Brands,
and Medtronic also hurt relative
performance, as these names likely
suffered from money rotation into more
cyclical stocks by aggressive investors.
Outlook
- With the expectation that pro-growth
policies will succeed at accelerating growth
in the U.S., we have made some notable
changes in the Fund, the most substantial
being an overweighting of financials for the
first time since 2009/2010.
- Acceleration of growth in the later stages
of the business cycle appears likely to be
somewhat inflationary as labor conditions
have tightened and commodity costs are
on the rise. OPEC’s “Thanksgiving
surprise” adds fuel to the thought that
inflationary pressures will rise over the
coming year or two. Federal Reserve
policy is likely to be more proactive, and
for the first time since 2010, banks have an
earnings catalyst in the form of wider
lending spreads, accelerating capital
markets activity, and lower corporate tax
rates.
- Our largest additions in this area include
Wells Fargo, Morgan Stanley, and Chicago
Mercantile Exchange. We continue to be
optimistic around energy investment in
the U.S., particularly following OPEC’s
decision to cut production. U.S.
companies with low-cost positions in key
shale basins and/or service technology
are in a prime position to accelerate
growth with a backdrop of an easing
regulatory burden. Halliburton continues
to be our favorite along with Cimarex and
EOG in this area.
- The robust growth in the energy patch
over the coming years should also benefit
key industrials holdings such as Union
Pacific and Canadian Pacific. Media and
health insurance companies are current
examples of names we like under a
scenario of corporate tax reform. A
reduction in our consumer staples and
health care holdings, particularly those
companies with large international
exposures, has helped fund the areas of
increased investment.
- We remain optimistic that the current
regime of accelerated growth and higher
interest rates should provide a more
target-rich opportunity set of companies
for our highly active style of investing.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2016. The managers' views are subject to change at any time based on market and other conditions,
and no forecasts can be guaranteed. Past performance is not a guarantee of future results.
The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. 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. Because the Fund is generally invested in a small number of stocks, the performance of any one security held
by the Fund will have a greater impact than if the Fund were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns
on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller 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. 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.
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Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and
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