Market Review as of 03/31/2015

The U.S. equity market (as represented by the S&P 500® Index1) barely edged up during the first quarter of 2015, amid a moderating economy and the prospect of a hike in interest rates. Hindered by harsh weather, a strong dollar, and slow global growth, U.S. real gross domestic product (GDP) expanded by 2.2% in the fourth quarter (according to the third estimate by the U.S. Bureau of Economic Analysis), down from 5.0% in the previous quarter.2 Exports, spending by state and local governments, and personal consumption expenditures bolstered growth, though spending on durable goods weakened.  

The Federal Reserve (the “Fed”) noted that U.S. economic activity expanded around the country, with most districts reporting increased home sales and improvement in employment, though wage pressures remained moderate. Manufacturing, construction, and real estate activity was mixed, while banking conditions were mostly positive.3

Elsewhere, the eurozone showed improvement, primarily as a result of strengthening in Germany. In Japan, fourth-quarter 2014 economic activity bounced back from a contraction in the third quarter. In China, the economy continued to slow, prompting the People’s Bank of China to cut its official interest rate in February, the second reduction in three months.  

The S&P 500 rose 0.95% during the quarter, with gains occurring in six of 10 major sectors. The consumer staples, consumer discretionary, telecom services, and healthcare sectors outperformed the broader market. Growth stocks (as represented by the Russell 3000® Growth Index4) outperformed value stocks (as represented by the Russell 3000® Value Index5). Small caps (as represented by the Russell 2000® Index6) outperformed large cap stocks (as represented by the Russell 1000® Index7). 

Fund Review as of 03/31/2015

During the period, the U.S. economy has continued to show improvement, returning to a more normal state as the Fed considers an increase in the fed funds rate later in 2015. Within the U.S. equity market, our process-driven emphasis on larger-capitalization companies with more U.S.-oriented businesses benefited, as did the portfolio’s lower allocation to companies with more global growth exposure. Relative performance was aided by an overweight in health care and an underexposure to utilities and energy.

Stock selection within the consumer staples sector contributed to relative performance during the period. Shares of Kroger Co., an operator of food, drug, and multi-department stores throughout the United States, climbed, as the company continues to generate better-than-expected sales and earnings growth driven by higher customer engagement. Shares of PepsiCo, Inc., a global food and beverage company, contributed to relative performance, as the company generated strong operating profit despite a challenging macro environment.

Within the information technology sector, shares of Vantiv Inc., a technology services holding company, increased due to a positive first quarter, as the company’s merchant services segment experienced strong underlying growth and the financial institution segment grew after a weak fourth quarter.

Stock selection within the industrials sector detracted from the portfolio’s relative performance during the period. Shares of W.W. Grainger Inc., a broad-line distributor of maintenance, repair, and operating supplies and services, stumbled as a result of a stronger U.S. dollar and volatile energy markets. Shares of USG Corporation, a manufacturer and distributor of building materials, were weak due to USG’s shipping business and foreign exchange headwinds in its Canadian segment. Within the energy sector, shares of Occidental Petroleum Corporation, an oil and gas exploration company, detracted from relative performance, as the challenging oil price backdrop has affected capital expenditure in the industry.

Please refer to under the “Portfolio” tab for a complete list of holdings of the Fund, including the securities discussed above.


We believe the domestic equity market as a whole to be near a fairly valued level owing to an improving economic backdrop. However, a number of individual companies are still being underappreciated by consensus, allowing for compelling idea generation and driving our belief that individual stock picking should be the primary driver of alpha in the portfolio.

We continue to focus on U.S.-centric companies that have financial and capital management flexibility to compete strategically. As a result of this view, we increased attention to stock-specific decisions, near-term fundamentals, and rigorous execution of our buy/sell discipline.

During the first quarter, we increased the portfolio’s exposure to the health care sector, increasing its overweight relative to the benchmark. We continue to favor companies that should benefit from expanding coverage under U.S. healthcare reform as well as increased scale and global reach driven by investments and acquisitions.  The portfolio also is overweight the information technology sector, where we focus on companies that should benefit from an increase in technology infrastructure spending, data-storage demand, and information security. The portfolio continues to be underweight within the utilities and telecommunication services sectors as well as the REITs industry.

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