Performance

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Performance

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Disclosure

Performance results are based on estimates. For gross and net performance results, see performance table. Commentary section is based on gross performance results only for better comparison to benchmark data. Although the information contained in the commentary sections have been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. Past performance is not necessarily indicative of future results. Different types of investments involve varying degrees of risk.

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THIRD QUARTER 2019

Hanseatic Market Commentary

September ended on a positive note for the stock market as the S&P 500 (+1.72%), the Dow Jones Industrial Average (+1.95%), the Russell 2000 Index (+1.91%) and the NASDAQ (+0.46%) all performed well. The quarter also ended positively for the S&P 500 (+1.19%) and the Dow Jones Industrial Average (+1.19%), but negatively for the Russell 2000 Index (-2.76%) and the NASDAQ (-0.09%).

In general, stocks peaked in late June, declined sharply through August and recovered in September. The S&P 500 recorded its worst day of the year on August 5, plunging nearly 3% amid worries over the global economy. The catalyst for the panic retreat to safe havens, including gold and U.S. Treasuries, was the news that China had weakened the Yuan below seven for a dollar for the first time in more than 10 years. The fear was that China was intentionally undervaluing its currency to increase the competitiveness of its exports and further widen the U.S. trade deficit.

Market volatility continued in August, stoked further on August 14 when the yields on the 10-year U.S. Treasury notes fell below yields on 2-year notes for the first time since 2007, hence the inversion. The headline fact is that an inversion in the yield curve is notable because it has preceded every U.S. recession over the past 45 years. But there is another and perhaps more relevant fact to keep in mind: While an inverted yield curve has preceded U.S. recessions, not every curve inversion was followed by a recession. And when the inversion did lead to a recession, there has been a significant time lag between the two. In the past instances, the U.S. economy did not peak until an average of 21 months after the 2/10 year inversion. We should also note that while the financial media devoted considerable coverage to the recession connection, the actual 2/10 inversion was very short lived, less than one day. Since then, the yield curve has normalized and the spread between the two treasury yields has widened considerably.

The markets have a lot to contend with as we enter the fourth quarter. Weakness in the early October economic reports are reviving talk of recession and, finally, the end of this long economic cycle. One of the reports, the Institute for Supply Management’s (ISM) manufacturing report, showed U.S. factory activity contracted for the second month in September and was worse than expected. Separately, the ISM’s non-manufacturing index also declined well below forecasts, fueling concerns that the global slowdown and trade war are gaining a foothold in the service industry which makes up the majority of the economy and accounts for the biggest share of the labor force.

The October 4 government jobs report added 136,000 jobs in September, somewhat less than the consensus estimate of 147,000. The unemployment rate was 3.5%, the lowest in 50 years and down from 3.7% the prior month. The economy’s employment engine has slowed somewhat, but the slight decline is not surprising now that the recovery has passed its 10-year anniversary, and there are more job postings than job seekers. One takeaway – employers keep hiring at a steady if unremarkable pace. That said, the jobs report had enough data to support differing economic outlooks.

As expected, the Fed lowered interest rates at the September FOMC meeting. Now, in early October, there is already pressure for another cut at the next monthly meeting following reports that stress in manufacturing has intensified. While manufacturing is now a small part of the economy, ongoing trade uncertainty and the potential for a broader economic slowdown creates risks such that the Fed may feel compelled to further reduce rates later this month. With the Fed, it is simple. It will cut rates enough to maintain the momentum of the economic expansion.

While watchful for evidence of spillover effects from a challenged manufacturing sector to consumer confidence and spending, we think the primary market risk continues to be the ongoing U.S.- China trade conflict. High level negotiations between the countries are scheduled later in October. The outcome will be important in that it represents an opportunity to forestall the imposition of a new round of tariffs on Chinese goods set to go into effect in December. While a complete agreement is unlikely, even a partial resolution would be constructive for market sentiment.

We still believe there is potential for what continues to be a secular bull market. Bull markets don’t die of old age but rather of overconfidence and a “this time is different” mentality. Currently, there are no excesses in investor sentiment. Based on money flows and confidence measures, investors’ highest priorities are safety and yield. The outlook is understandable as the market peaked in January 2018 and has gained very little since. High market volatility during this low return period has also taken a toll on investor confidence.

Current market conditions still favor the equity market going forward. Employment is solid, interest rates and inflation are low, and importantly, we have an accommodative Fed. Also, fourth quarter market seasonality is favorable. Historically August-September is the weakest two-month return period for the S&P 500 while the fourth quarter is often the strongest, particularly following a weak third quarter.

HANSEATIC QUARTERLY STRATEGY PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY (LG)

The Large Cap Equity strategy return was up 0.78%, the Russell 1000 Growth benchmark return was up 1.49%. The strategy’s third quarter underperformance was derived from relative underperformance in four of eleven sectors. Real Estate and Staples contributed 0.27% and 0.25% respectively to the relative performance. Utilities, Healthcare, Industrials, Energy, and Materials contributed a combined 0.19%. Communication Services, Technology, Financials, and Consumer Discretionary detracted 0.59%, 0.47%, 0.30%, and 0.05% respectively from relative performance. The portfolio is overweight Materials, Financials, Industrials, and Real Estate and underweight Communication Services, Technology, Healthcare, and Consumer Discretionary.

ALL CAP GROWTH EQUITY (AG)

The All Cap Growth Equity strategy return was down 3.84%, the Russell 3000 Growth benchmark return was up 1.10%. The strategy’s third quarter underperformance was derived from relative underperformance in eight of eleven sectors. Consumer Discretionary, Staples, and Energy contributed 0.21%, 0.09%, and 0.04% to relative performance. Technology, Healthcare, and Communication Services detracted 2.84%, 1.64%, and 0.45% from relative performance. Real Estate, Materials, Financials, Industrials, and Utilities detracted a combined 0.35% from relative performance. The portfolio is overweight Staples and Materials and underweight Technology and Healthcare.

ALL CAP GROWTH CONCENTRATED EQUITY (CD)

The All Cap Growth Concentrated Equity strategy return was down 2.05%, the Russell 3000 Growth benchmark return was up 1.10%. The strategy’s third quarter underperformance was derived from relative underperformance in five of eleven sectors. Consumer Discretionary, Industrials, and Materials contributed 0.56%, 0.25%, and 0.24% to relative performance during the quarter. Staples, Financials, and Energy contributed a combined 0.28% to relative performance. Technology and Healthcare detracted 2.27% and 1.75% from relative performance. Communication Services, Real Estate, and Utilities detracted a combined 0.48% from relative performance. The portfolio is overweight Materials and Financials and underweight Technology and Healthcare.

ALL CAP TAX EFFICIENT EQUITY (TE)

The All Cap Tax Efficient Equity strategy return was down 2.51%, the Russell 3000 benchmark return was up 1.16%. The strategy’s third quarter underperformance was derived from relative underperformance in six of eleven sectors. Notable sectors were Energy, Consumer Discretionary, and Materials contributing 0.35%, 0.26%, and 0.20% respectively to relative performance. Real Estate and Financials contributed a combined 0.25% to relative performance. Technology, Healthcare, Industrials detracted 1.48%, 1.45%, and 1.04% respectively from relative performance. Communication Services, Utilities, and Staples detracted a combined 0.75% from relative performance. The portfolio is overweight Technology, Materials, and Consumer Discretionary and underweight Industrials, Energy, and Staples.

MID CAP EQUITY (MC)

The Mid Cap Equity strategy return was down 0.18%, the Russell Midcap Growth benchmark return was down 0.67%. The strategy’s third quarter outperformance was derived from relative outperformance in six of eleven sectors. Financials, Healthcare, and Staples contributed 0.95%%, 0.94%, and 0.34% respectively to relative performance. Energy, Utilities, and Consumer Discretionary contributed a combined 0.41% to relative performance. Technology detracted 1.74% from relative performance. Industrials, Real Estate, Materials, and Communication Services detracted a combined 0.41% from relative performance. The portfolio is overweight Materials, Staples, and Financials and is underweight Industrials and Consumer Discretionary.

SMALL CAP EQUITY (SC)

The Small Cap Equity strategy return was down 5.25%, the Russell 2000 Growth benchmark return was down 4.17%. The Small Cap Equity strategy’s third quarter underperformance was derived from relative underperformance in five of eleven sectors. Healthcare, Staples, and Communication Services contributed 1.10%, 0.54%, and 0.42% respectively to relative performance. Materials, Industrials, and Consumer Discretionary contributed a combined 0.74% to relative performance. Technology detracted 2.35% from relative performance. Energy, Utilities, Financials, and Real Estate detracted a combined 1.52% from relative performance. The portfolio is overweight Consumer Discretionary and Technology and underweight Healthcare, Industrials, and Real Estate.

GROWTH & INCOME EQUITY (GI)

The Growth & Income Equity strategy return was up 0.74%, the S&P 500 Total Return Index return was up 1.70%. The strategy’s third quarter underperformance was derived from relative underperformance in seven of eleven sectors. Notable were Real Estate, Financials, Healthcare, and Consumer Discretionary contributing 0.72%, 0.52%, 0.40%, and 0.09% respectively to relative performance. Technology detracted 1.45% from relative performance. Utilities, Industrials, Communication Services, Staples, Energy, and Materials detracted a combined 1.24% from relative performance. The portfolio is overweight Real Estate and Utilities and underweight Communication Services, Consumer Staples, and Industrials.

BALANCED RISK (BR)

The Balanced Risk strategy return was up 4.68%, the S&P Target Risk Moderate Index return was up 1.67%. The strategy’s third quarter outperformance was derived from positive performance in Utilities and Staples respectively. High Yield equities, Investment Grade bonds, Intermediate Term bonds, and Emerging Market bonds contributed modestly to performance. High Yield bonds detracted modestly from performance. The portfolio is ~60% defensive and high yield equites and ~40% fixed income.

CONSERVATIVE RISK (CR)

The Conservative Risk strategy return was up 2.71%, the S&P Target Risk Conservative Index return was up 1.90%. The strategy’s third quarter outperformance was derived from positive performance in Intermediate Term bonds, Utilities, Staples, Investment Grade Corporate bonds, High Yield equities, and Emerging Markets Bonds respectively. High Yield bonds detracted modestly from performance. The portfolio is ~30% defensive and high yield equites and ~70% fixed income.

LATIN AMERICA EQUITY (LA)

The Latin America Equity strategy return was down 9.03%, the MSCI EM Latin America Index return was down 6.21%. The strategy’s third quarter underperformance was derived from negative performance in five of eleven sectors. Most notable were Staples, Energy, and Communication Services contributing 0.62%, 0.20%, and 0.04% respectively to performance. Financials, Industrials, and Materials detracted 5.97%, 1.83%, and 1.09% from performance. Utilities and Technology detracted a combined 1% from performance. There was no exposure to Consumer Discretionary, Healthcare or Real Estate. Further, on August 12th, Argentina’s currency collapsed and stocks and bonds crashed to a degree not seen in 18 years as voters favored a return to economic statism touted by Alberto Fernández over President Macri and his market-friendly approach in the country’s primary vote on August 11th. Several Argentinian stocks in the portfolio were down severely on the news and were subsequently sold as they violated sell disciplines. Three stocks, PAM, BMA, and GGAL, accounted for losses of 5.75% during the quarter. Exposure to Argentina at the end of the quarter was 3.21%. The portfolio is overweight Utilities and Industrials; and is underweight Financials, Materials, Consumer Discretionary, and Consumer Staples.