Quarterly Update

Oct. 2018

, | Oct. 2018

Revisiting Secular Themes in Core Equity

Secular themes offer potential and protection

Security selection within themes is key

Portfolio positioned for solid fundamentals and battle royale

One of our unique strategic differentiators is our emphasis on secular themes with the potential for above-average long-term earnings growth and tax-efficient capital appreciation. Within these themes we select high-quality securities with high market share, strong management and strong fundamentals selling at reasonable prices. Some highlights:

1. Our digital revolution theme has been a solid performer and represents approximately 30% of our portfolio. We emphasize areas of visible growth, including digital payments, mobile internet usage and digital transformation subthemes. We have avoided companies carrying ultra-high PEs or losing money, and we have been outperforming tech stocks, led by software companies such as V, MA and ADBE. Additionally, we are underweight sectors that could be negatively exposed to trade wars such as semiconductors and hardware.

2. Our health care innovators theme has also produced solid gains in 2018 and represents 15% of the portfolio. We are underweight drug manufacturers with high exposure to pricing pressures and overweight companies providing innovative health care services and products. Examples include EW in the heart valve replacement market, TMO with numerous innovative products such as genome sequencing and UNH in the services and insurance areas.

3. Our domestic growers theme provides exposure to solid domestic economic activity while minimizing trade war risks. This theme includes well-positioned, digital revolution leaders in retailing such as COST and HDI, banks such as JPM and STI, financial services providers such as CME, and utilities with above-average growth profiles such as AWK in the water utility industry and NEE with a major presence in renewable energy.

Overall, our portfolio is positioned for solid economic activity as well as the battle royale facing financial markets. Mindful of the tug of war between strong fundamentals and macro uncertainty, our risk factors such as beta, growth, and market capitalization are generally in line with the benchmark or lower. At the same time, we are underweight industries vulnerable to tariffs and trade wars, and our quality ratings and expected EPS growth rate are higher than the market.

Key Points

Secular themes offer potential and protection

Security selection within themes is key

Portfolio positioned for solid fundamentals and battle royale

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Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

Index Definitions

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The S&P/LSTA Leveraged Loan 100 Index (LL100) is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria.

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

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