Market Sector Update
- 2Q 2016 was setting up to be relatively dull until the U.K. referendum to exit the European Union (or “Brexit”) made sure another quarter was highlighted by global market volatility. Although the Russell 1000 Growth Index (Fund’s benchmark) was up for 2Q despite the Brexit vote that occurred late in the period, the gains were relatively modest.
- Looking at returns from the Russell benchmark styles, the most notable call out is that value continues to outperform growth, extending similar trends seen in 1Q 2016.
- The market continues to favor a more risk-off approach, rewarding quality and safety. The market also continued to reward more domestic names as companies with more foreign exposure underperformed.
- Lower rates for longer is also true for the U.S. Just as the market began debating the timing of the next Federal Reserve (Fed) rate hike, the Fed is likely to push pause until much later in 2016 or 2017. A “one and done” scenario seems back in play with the 10 year yield hitting all-time lows.
- The U.S. economic indicators remain mixed. Employment gains continue and are pushing wages higher. The manufacturing economy remains in modest growth mode but inventory levels appear elevated in many segments.
- The Fund slightly outperformed the benchmark for the quarter, before the effects of sales charges.
- From an attribution standpoint, stock selection was the main contributor to the performance, with sector allocation being only a slight detractor.
- Consumer discretionary was the most notable positive contributor to performance through solid stock selection. Shares of Amazon rebounded nicely during the period. The company posted nice quarterly results, which acted as a reminder of Amazon’s strong market position both in retail and the public cloud. Lululemon Athletica shares remained strong as the company continued to execute on a product refresh and inventory management improvements.
- An overweight position in energy also made a positive contribution. Oil prices continued to move off the lows as inventory levels began to signal progress due to market rationalization. Shares of Haliburton provided most of the positive contribution for the Fund.
- Industrials were also a source of strength during the quarter. An overweight in rails and underweight in airlines explains a significant portion of the Fund’s industrials performance.
- Health care stock selection remained a source of weakness again this quarter. The big driver of underperformance was an overweight position in Allergan as the shares moved lower after Pfizer called off the acquisition of Allergan post changes in tax rules from the U.S. Treasury. Alexion shares also moved lower post a clinical trial failure.
- We expect no material change in outlook exiting the second quarter – the U.S. economy remains in low growth mode. The global outlook still remains challenged with Europe in slow growth mode, potentially slower growth given Brexit disruption, and slowing growth in China. The good news is that monetary policy globally remains extremely accommodative.
- As aforementioned, we believe there continues to be sudden changes in risk appetite in the market and it likely stems from the U.S. economy walking this fine line of slow growth, neither tipping toward strong growth nor recessionary territory but investors are always fearful they will miss either trade.
- The macroeconomic environment will likely continue to be volatile as numerous debates remain: 1) the pace at which the Fed will move interest rates higher, 2) if there are any global ripple effects from Brexit, although early signs indicate more localized risk, 3) potential for layoffs in the domestic or international markets as global companies hesitate on business investment, 4) post Brexit should there be more concern in the U.S. regarding economic and market risk from political uncertainty.
- Stock returns in the second quarter appear mainly driven by price-to-earnings expansion vs. material upward revision in earnings expectations. A more expensive market isn’t a reason in-and-of-itself to be concerned, but does imply a less favorable risk /reward.
- The Fund will continue to find the strong, sustainable, and defensible growth stocks that can be owned to maturity value.
The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2016. The manager's 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 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.
Top 10 holdings (%) as of 06/30/2016: Amazon.com, Inc. 5.0; Salesforce.com, Inc. 3.9, Allergan 3.5, Facebook, Inc. 3.4, Shire Pharmaceuticals Group 3.4, Apple, Inc. 3.4, Adobe Systems, Inc. 3.1, Alphabet, Inc. 2.9, Panera Bread Co. 2.7 and Visa, Inc. 2.7.
Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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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