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Manager Commentary

15 Sep 2020

Macroeconomic Update

From the depth of despair in late March throughout the second quarter the U.S. economy began its recovery. The aggregate data however masks the unevenness of that recovery. Industries with underlying demand that had curtailed operations as a precautionary measure against the COVID-19 virus, such as manufacturing and construction, had very different rebound dynamics than those industries that had demand evaporate as a result of the virus, such as travel, leisure, and entertainment. As of July 2, 2020, the Atlanta Federal Reserve’s GDPNowestimates Q2 2020 growth at negative 35.2% percent, the largest quarterly decline in economic growth in US history. The severe late-March collapse did not reverse course until mid-May as certain states began easing “stay-at-home” restrictions. The Institute for Supply Management Manufacturing index (June 2020 Manufacturing ISM®) which had troughed at 41.5 in April finally made its way back into expansionary territory with the June release at 52.6. Similarly, the Non-Manufacturing (services) index (June 2020 Non-Manufacturing ISM®)snapped back from a low of 41.8 in April to 57.1 in June. The New Orders and Business Activity sub-components led the move into expansionary territory but, as with the Manufacturing Index, the Employment sub-component remained in contraction. It should be noted that both of these surveys are conducted during the middle of the month, so the June readings do not incorporate the virus resurgence in some of the larger re-opening states.

Although the supply side of the economy showed an unprecedented decline from February to April, the demand side of the economy contracted even more severely. In April alone, more than 20 million people filed for initial unemployment claims. That was on top of the more than 13 million fi ling claims in February and March of this year. The fact that average hourly earnings spiked nearly 8% in April despite the decline in employment indicated that lower wage workers bore the brunt of the job losses. As states began to loosen stay-at-home restrictions in May and June, employment began to recover with over 7 million jobs added in those two months. The unemployment rate remains (as of July, 2020) at an elevated level above 11% though and the underemployment rate is at 18%. As important as the loss of jobs, personal spending also fell precipitously, down nearly 14% in April alone before partially rebounding in May on state re-openings. The fact that the incidence of COVID-19 has resurged and restrictions have been instituted or reinstituted puts the employment and spending improvements in jeopardy over the coming months.

This recession is proving to be confounding, as its effects are highly concentrated among certain industries. The food service, transportation, and hotel industries have been bludgeoned by COVID-19, and the job loss has been dramatic in these industries. However, the average median income for employees in those sectors are less than half of the U.S. median income; as a result, aggregate personal spending hasn’t been impacted dramatically. Actually, several industries such as the homebuilding and automobiles has posted favorable sales results over the past two months. The big caveat to this recovery is obviously the nascent spike of cases in 25 states since quarter end, with particularly concerning data emerging from Florida, Texas, Arizona and California.

Q2 2020 Review

The Large/Mid Growth Fund gained 22.4% in Q2, short of the Russell 1000 Growth’s +27.8%. Q2 was yet another one with a pronounced skew toward Growth – (Russell 1000 Growth +27.8% vs. Russell 1000 Value +14.3%), which creates a headwind to relative performance for the Fund – as it is smaller and less “growthy” than the benchmark (due to the restrictions). Other than Energy, which has virtually no weight in the R1G, Consumer Discretionary stocks rebounded the most in the quarter, after several of the sub-industries were the hardest-hit during the Q1 “lock-down” period. Our underweight of retailing cost us (and not owning Amazon was a 69 basis-point hit). The Technology sector was another big mover, up 33.5%, though strong moves in our holdings of NVIDIA (4.5%, up 44%)1, Synopsys (2.7%, up 51%), and Palo Alto Networks (1.6%, up 40%) couldn’t overcome the hit from not owning Apple (104 bps2; stock +44%). Our overweight of Capital Goods – and selection in the group – were also detractors; Honeywell (3.2%), Xylem (1.4%), and Caterpillar (1.0%) all went up by a lesser amount than the benchmark sector. Positives included our avoidance of Real Estate (only up 14.8%) and our selection in Health Care: Sarepta Therapeutics (1.4%) vaulted 64%, and Neurocrine Biosciences (1.2%) gained 41%.

Contributors

NVIDIA Corp. (4.5%; up 44%) designs and manufactures computer graphics processors, chipsets, and related multimedia software. It is remarkable that this stock was a top performer (+12%) in Q1, in the market’s massive sell-off , and now it is again a top performer in the “rebound” quarter (Q2). Very few stocks did well in both market environments. It speaks to the view that NVIDIA has both defensive-growth characteristics but also often has a high beta to up markets. The company had another compelling quarter, with 39% year-over-year revenue growth buoyed by staggering 80% growth in datacenters. And this was even with some COVID-19-related supply chain disruption.

Synopsys, Inc. (2.7%; up 51%) provides software products and consulting services in the electronic design automation (EDA) industry, with semiconductor companies as the primary client base. This company is a secular grower and the global leader in a duopoly market structure. They are increasing operating margins at a pace beyond what the Street was expecting, and this is allowing them to produce steady 14-15% EPS growth.

Detractors

Honeywell International (3.2%; up 8.8%) is a diversified industrial company; segments include Aerospace, Home and Building Technologies, Performance Materials, and Safety and Productivity Solutions. The Industrials sector underperformed the Russell 1000 Growth in Q2 and, additionally, Honeywell underperformed Industrials. COVID-related demand fall-off in several end markets impacted the company’s Q1 (reported in April), and organic revenue fell 4% (and they guided to a greater contraction in the following quarter). A silver lining was 140 bps of margin expansion, driven by productivity and cost controls. We view this company as a core holding longer term, due to its diversified end markets, operational execution, and strong management.

Costco Wholesale (2.8%; up 6.6%) engages in the operation of membership warehouses. The company – and stock – did extremely well in Q1, as a beneficiary of lock-downs and for being a purveyor of essential goods in bulk form. Q2 was a relative give-back of sorts (though the stock was still up); retailers and consumer outlets that are more exposed to the reopening of the economy were the winners in the second quarter. April’s -4.7% sales comp was the first negative read in quite some time, but May and June rebounded with +5.4% and +11.5% comps, respectively – both exceeding expectations.

Market Outlook

Perhaps more so than at virtually any other time in the past – other than last quarter!– visibility is extremely limited. The market sell-off of 34% in five weeks was stunning, but equally stunning has been its recovery. The Nasdaq has set new all-time high records, and the Russell 1000 Growth is now up almost 10% YTD (through 6/30). In hindsight, the Federal Reserve credit facilities and lending programs have proven to be,extremely effective, particularly in reassuring investors that the Fed will be very creative and aggressive in stimulating the economy and supporting both the equity and credit markets. As it relates to our expectations of the rest of 2020, it all circles back to how long COVID-19 will impact the economy (yes, that is the exact sentence used in the Q1 commentary). However, we have become more optimistic. The pace and initial data for the vaccine programs under development are astonishingly positive, and we now believe that vaccines will be available under Emergency Use Authorization in the fourth quarter, with wider availability in the spring of 2021. Thankfully, the structure of the virus is well defined, allowing vaccine producers to develop effective vaccines in record time. The only caveat is that it’s quite possible that this vaccine will have efficacy rates of only 50-70%, not 99% as seen with other vaccines. Therefore, it will be necessary for a large percentage of the population to be vaccinated in order to reach herd immunity.

We added some weight in Technology, such that we are only about 4% below the benchmark weight, and this is even as the benchmark sector weight went higher as a result of the Russell annual rebalance. Consumer Discretionary is the other area where we are looking for new investments.

Please feel free to call or email us with any feedback or questions about the portfolio.

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. The Index returns are provided to show an example of alternate return potential during the relevant time periods; however, indices may possess different investment attributes that may make comparisons difficult such as volatility, liquidity, market capitalization, and security types. The statistical data regarding the indices has been obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of the fees or expenses to which the portfolios are subject. This report assumes the reader has sophisticated knowledge of investing and the markets. If you require more information about the information presented, including the portfolio characteristics and risk statistics, please contact us.

Manager views expressed herein were current as of the date indicated above and are subject to change. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this commentary. A copy of the calculation methodology and the full list of recommendations made in the preceding year is available upon request. The performance data quoted represents past performance and does not guarantee future results. Performance returns quoted are gross of fees which were calculated on a time weighted basis and do not give effect to investment advisory fees, which would reduce such returns. Please see Chartwell’s Form ADV, Part II for a complete description of investment advisory fees. The following statement demonstrates the compound effect advisory fees have on investment returns: For example, if a portfolio’s annual rate of return is 15% for 5 years and the annual advisory fee for a client is 100 basis points or 1.00%, the gross cumulative 5 year return would be 101.1% and the five year return net of fees would be 92.5%. Actual fees charged to portfolios may be different due to various conditions including account size, calculation method and frequency, and the presence of a performance or incentive fee. The deduction of performance and incentive based fees will have similar, yet often larger, impacts to performance and account values than standard management fees. To receive a complete list and description of Chartwell Investment Partners’ composites, performance attribution for all securities, and/or a presentation that adheres to the GIPS® standards, please contact Lynette Treible by phone (610)407-4870, email treible@chartwellip.com, or by mail to 1205 Westlakes Drive, Suite 100, Berwyn, PA 19312.

15 Sep 2020

Macroeconomic Update

From the depth of despair in late March throughout the second quarter the U.S. economy began its recovery. The aggregate data however masks the unevenness of that recovery. Industries with underlying demand that had curtailed operations as a precautionary measure against the COVID-19 virus, such as manufacturing and construction, had very different rebound dynamics than those industries that had demand evaporate as a result of the virus, such as travel, leisure, and entertainment. As of July 2, 2020, the Atlanta Federal Reserve’s GDPNowestimates Q2 2020 growth at negative 35.2% percent, the largest quarterly decline in economic growth in US history. The severe late-March collapse did not reverse course until mid-May as certain states began easing “stay-at-home” restrictions. The Institute for Supply Management Manufacturing index (June 2020 Manufacturing ISM®) which had troughed at 41.5 in April finally made its way back into expansionary territory with the June release at 52.6. Similarly, the Non-Manufacturing (services) index (June 2020 Non-Manufacturing ISM®) snapped back from a low of 41.8 in April to 57.1 in June. The New Orders and Business Activity sub-components led the move into expansionary territory but, as with the Manufacturing Index, the Employment sub-component remained in contraction. It should be noted that both of these surveys are conducted during the middle of the month, so the June readings do not incorporate the virus resurgence in some of the larger re-opening states.

Although the supply side of the economy showed an unprecedented decline from February to April, the demand side of the economy contracted even more severely. In April alone, more than 20 million people filed for initial unemployment claims. That was on top of the more than 13 million fi ling claims in February and March of this year. The fact that average hourly earnings spiked nearly 8% in April despite the decline in employment indicated that lower wage workers bore the brunt of the job losses. As states began to loosen stay-at-home restrictions in May and June, employment began to recover with over 7 million jobs added in those two months. The unemployment rate remains (as of July, 2020) at an elevated level above 11% though and the underemployment rate is at 18%. As important as the loss of jobs, personal spending also fell precipitously, down nearly 14% in April alone before partially rebounding in May on state re-openings. The fact that the incidence of COVID-19 has resurged and restrictions have been instituted or reinstituted puts the employment and spending improvements in jeopardy over the coming months.

This recession is proving to be confounding, as its effects are highly concentrated among certain industries. The food service, transportation, and hotel industries have been bludgeoned by COVID-19, and the job loss has been dramatic in these industries. However, the average median income for employees in those sectors are less than half of the U.S. median income; as a result, aggregate personal spending hasn’t been impacted dramatically. Actually, several industries such as the homebuilding and automobiles has posted favorable sales results over the past two months. The big caveat to this recovery is obviously the nascent spike of cases in 25 states since quarter end, with particularly concerning data emerging from Florida, Texas, Arizona and California.

Q2 2020 Review

The Timothy Plan Aggressive Growth Fund returned 25.1% in Q2, underperforming the Russell Midcap Growth Index return of 30.3%. Performance in most of the sectors was relatively in line with the benchmark except for the Technology sector and the Consumer Discretionary sector, where subpar stock selection led to underperformance. The largest contributor to the relative underperformance was the cash weighting, which averaged 7.6% in Q2. YTD the cash weighting still has been a positive contributor to relative performance.

There was a meaningful shift in investors psychology in Q2, where the largest relative outperformers in Q1 became the largest relative underperformers in Q2. Specifically, there is a widespread ‘economic rebound’ trade occurring, with investors rushing into consumer discretionary and technology sectors. Whether that mindset continues as the US is dealing with record number of COVID-19 cases, as well as a likely second wave this fall, is the key question.

Contributors

The Fund’s top overall contributor on a relative basis during Q2 2020 was Horizon Therapeutics (3.2% avg. weight)1, which returned 88.1% during Q2. During Q2, Horizon Therapeutics launched Tepezza for the treatment of Thyroid Eye Disease. Despite very difficult launching conditions [launching a drug in the midst of a pandemic], the drug has seen extremely high demand, and Horizon Therapeutics has already raised guidance for 2020 sales twice over the past few months. We believe that the visibility and upside for Horizon is still significant, and it is the largest position within the portfolio.

Another strong performer was Quidel (2.1%) which returned 124% during Q2. Quidel is an established healthcare diagnostic company that reacted quickly to the pandemic and launched a COVID-19 PCR antibody test and an antigen diagnostic. Quidel is working on combining their flu assays with COVID ahead of this upcoming fall flu season; that 15-minute test should be in very high demand for the next year.

Detractors

As mentioned earlier, the Fund’s largest detractors were stocks that had the highest relative outperformance in Q1. Specifically, FTI Consulting (2.95%) decreased 4.4% while ICU Medical (1.0%), decreased 10.9% in Q2. For FTI Consulting, the stock fell out of favor as investors clamored for companies in the economic recovery basket. We still believe FTI Consulting will experience higher demand for their financial restructuring division, given the dramatic amount of financial restructurings and bankruptcies that will be brought on post the pandemic.

Regarding ICU medical, there were high hopes that the company would experience increased demand for their infusion pumpsets due to COVID, however capital sales cycles in hospitals have been dramatically negatively impacted by COVID, which led to a disappointing earnings release for ICU.

Market Outlook

Perhaps more so than at any other times, visibility is extremely limited. The market selloff of 34% in five weeks was stunning, but perhaps the market recovery has been even more stunning. The Nasdaq is setting new all-time high records, and the Russell 2000 Growth index has nearly regained all its earlier losses in record time, just in two months.

In hindsight, the Federal Reserve Credit Facilities and Lending programs have proven to be extremely effective, particularly in reassuring investors that the Fed will be extremely creative and aggressive in stimulating the economy and supporting both the equity and credit markets.

As it relates to our expectations for the rest of 2020, it all circles back to how long COVID-19 will impact the economy. (Yes, that is the exact sentence used in the Q1 commentary). However, we have become much more optimistic here. The pace and initial data for the vaccine programs under development are astonishingly positive, and we now believe that vaccines will be available under Emergency Use Authorization in Q4, with wider availability in the spring of 2021. Thankfully the structure of the COVID-19 virus is well defined, allowing vaccine developers to develop effective vaccines in record times. We were initially overly pessimistic in development timelines, anchoring our expectations on prior vaccine development timelines. The only caveat is it’s quite possible that this vaccine will have efficacy rates of 50-70%, not 99% as seen with other vaccines. Therefore, it will be necessary for a large percentage of the population to be vaccinated in order to reach herd immunity. However, we believe that the market will respond favorably to the near-term clinical data that will be published over the next two months. We are repositioning the portfolio in anticipation of these developments.

We continue to find compelling investment opportunities, particularly in the consumer discretionary sector. We are considering investments in the retail and travel related industries, as we believe that investors will look past near-term weak results towards normalized operations in 2021 and 2022. We remain focused on generating alpha and producing the strongest investment results over the long run.

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. The Index returns are provided to show an example of alternate return potential during the relevant time periods; however, indices may possess different investment attributes that may make comparisons difficult such as volatility, liquidity, market capitalization, and security types. The statistical data regarding the indices has been obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of the fees or expenses to which the portfolios are subject. This report assumes the reader has sophisticated knowledge of investing and the markets. If you require more information about the information presented, including the portfolio characteristics and risk statistics, please contact us.

Manager views expressed herein were current as of the date indicated above and are subject to change. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this commentary. A copy of the calculation methodology and the full list of recommendations made in the preceding year is available upon request. The performance data quoted represents past performance and does not guarantee future results. Performance returns quoted are gross of fees which were calculated on a time weighted basis and do not give effect to investment advisory fees, which would reduce such returns. Please see Chartwell’s Form ADV, Part II for a complete description of investment advisory fees. The following statement demonstrates the compound effect advisory fees have on investment returns: For example, if a portfolio’s annual rate of return is 15% for 5 years and the annual advisory fee for a client is 100 basis points or 1.00%, the gross cumulative 5 year return would be 101.1% and the five year return net of fees would be 92.5%. Actual fees charged to portfolios may be different due to various conditions including account size, calculation method and frequency, and the presence of a performance or incentive fee. The deduction of performance and incentive based fees will have similar, yet often larger, impacts to performance and account values than standard management fees. To receive a complete list and description of Chartwell Investment Partners’ composites, performance attribution for all securities, and/or a presentation that adheres to the GIPS® standards, please contact Lynette Treible by phone (610)407-4870, email treible@chartwellip.com, or by mail to 1205 Westlakes Drive, Suite 100, Berwyn, PA 19312.

15 Sep 2020

Market Backdrop

The economic consequences of the lockdowns due to the coronavirus are being felt throughout.  Unemployment has risen rapidly, and economic activity has slowed significantly.  The Bank of Israel Research Department now estimates the country’s GDP to contract by 6% in 2020 but bounce back strongly in 2021.  Immigration into the country has also fallen rapidly but we expect pent up demand once the coronavirus come sunder control in the country.  While the country re-opened businesses and activity in the quarter as the virus appeared to be under control, a new wave of infections has forced the government to reclose and reinstate some lockdown measures, again affecting economic activity. Given the new measures we expect GDP growth may be affected even more than recent estimates.

Much like most governments around the world, the Israeli government has also been forced to open its wallet in order to provide some support to families and businesses negatively affected during this pandemic.  The government has issued direct payment to individuals and families and is providing other support measures such as loan guarantees and reduced tax rates in certain transactions.  Debt to GDP will go up this year but we expect a normalization and resumption of strong economic dynamics to continue longer term as the pandemic is in the rear-view mirror. In addition, from a monetary standpoint, the Bank of Israel continues to offer and expand its policies to offer support to banks and the economy.  Its most recent announcement was historic for Israel, as it announced its first ever purchasing of corporate bonds in the secondary markets, providing aid to corporates amid targeting to lower credit cost.  With inflation well below the targeted range, we expect the Bank of Israel (BoI) to maintain a dovish approach for the foreseeable future. The BoI has also continued its activity in the currency market selling shekels in order to maintain an adequate exchange rate, helping the export sector.

Performance and Attribution

The Timothy Plan Israel Common Values Fund bounced back after the steep selloff caused from the coronavirus aftershocks.  The Fund continued to outperform the benchmark TA-125 index during the quarter.  Both sector allocation and stock selection helped the outperformance.  From a sector allocation standpoint, an overweight to IT and underweight to Real Estate helped while an underweight to Health Care hurt performance.  From a stock selection standpoint, good selection in Consumer Discretionary, Industrials, and Financials provided good alpha.  Good performance from Maytronics (Consumer Discretionary), Nova Measuring Systems (Technology), and Tel Aviv Stock Exchange (Financials) were helpful to the quarter’s outperformance. Not owning screened out Teva or LivePerson during the quarter hurt performance.

Outlook

Although much uncertainty remains as to the resumption of “normal” economic activity, we remain cautiously optimistic that earnings will recover over the next twelve months underpinned by a strong economic expansion. We remain constructive Israeli equities over the long term as the innovation of Israel corporates, accommodative monetary policy, and the strong long-term economic growth trend in the country supports attractive corporate earnings growth and equity prices.

15 Sep 2020

Market Backdrop

International equity investors were rewarded with a sharp rebound in stock prices during Q2 2020 as they looked beyond historically negative economic data in anticipation of a partial reopening of the global economy and progress on a vaccine.  Improving sentiment led by FOMO (Fear of Missing Out) and less defensive positioning overshadowed skepticism about a V-shaped recovery and warnings from public health experts about a second wave of infections.  Markets also shrugged off U.S./China tensions including the Senate passage of the Holding Foreign Companies Accountable Act, which requires foreign companies to provide financial transparency.  Chinese stocks who fail to comply could be delisted from major U.S. exchanges. By quarter-end, returns moderated due to overbought conditions and concern about new virus cases threatening the economic recovery.

To promote economic growth, developed market policy makers made further stimulus announcements which in total, dwarf the level of support provided during the 2008 Global Financial Crisis. In late May, the European Commission unveiled a €750B pandemic recovery plan, which was followed by bond buying programs by the ECB and the Bank of England. Of greatest surprise, however, was the kiss and make up between Germany and France for a pandemic rescue deal, a sign of a coordinated effort to lead the EU out of the biggest recession in 63 years.  Angela Merkel led the way with the announcement of a €130B package to promote growth on more than 50 initiatives.  Merkel also buried her grievances with French premier Emmanuel Macron to produce €500bn of grants (known as the Recovery Fund) for hard-pressed businesses across the EU, despite fierce opposition from countries known as the frugal four”– the Netherlands, Sweden, Denmark and Austria.  A final compromise should be resolved by the end of July and likely mark an inflection point for Europe as investors take advantage of the improving outlook.  The European Central Bank also stirred the pot with a generous increase in lending to sovereign nations and the banking sector, joining the U.S. Federal Reserve, the Bank of Japan and the Bank of England in making sure the cost of borrowing remains at all-time lows for years to come. China also continued stimulus measures with a variety of rate cuts, and increased lending facilities to commercial banks.  They also asked banks to cap interest rates on loans to selected firms.

Performance and Attribution

The Timothy Plan International Fund bounced back strongly in absolute terms and had one of its best relative return quarters in the history of the Fund versus the benchmark index.  Allocation was fairly neutral while stock selection provided all of the alpha.  Selection was positive in 9 out of 10 sectors represented in the Fund.  Stock selection was led by great selection in the Industrials and Consumer Discretionary sectors followed by the Financials, IT, and Communications Services sectors.  Individual stocks leading the way for the Fund in the quarter included Techtronic Industries (Hong Kong-Industrials), ASML Holdings (Netherlands-IT), Deutsche Boerse (Germany-Financials).  From a country standpoint, the Fund had its best selection in the quarter in the UK, China, and Hong Kong.

Outlook

The market dislocation during the first quarter has given our team the opportunity to evaluate attractive companies in various sectors where long-term structural growth stories with solid fundamentals now have compelling valuations. Although we did not expect the market to bounce back as quickly as it did, our focus on high quality, structural growth stories was quite fruitful for the quarter as the Fund outperformed handily. We expect a choppier 2nd half on a plethora of unknowns but expect investors to more and more look through to 2021as the year progresses.  The European Recovery Plan is a game changer for continued integration and debt unification there while renewed USD weakness is a tailwind to international stock returns.

15 Sep 2020

Market Backdrop

The onset of the Covid-19 virus coupled with a potential oil supply surge due to an unexpected conflict between Saudi Arabia and Russia resulted in global equity declines for 1Q 2020 on par with those seen in 1987.  Like the 2008 global financial crisis, correlations went to one and indications of fear as noted by global equity volatility indexes reached extreme levels. Cash was king and one of the only safe havens for investors.  In sharp contrast to 2019 performance, the MSCI EAFE Index lost -24.3% during the first quarter of 2020, while in the U.S., the S&P 500 lost -19.6%. Regional and country specific indexes including Europe, Japan and the Emerging Markets declined -24.3%, -17.7% and -23.6%, respectively.

By quarter-end, equity markets showed some sign of stabilization as massive levels of fiscal and monetary stimulus were pumped into the global economy.  During February and March alone, there were 253 fiscal and monetary stimulus measures announced around the world.  Most recent was the passage of the $2.2T Coronavirus Aid, Relief and Economic Security (CARES) Act in the U.S.  Additionally, the U.S. Federal Reserve cut interest rates to zero and launched a $700B Quantitative Easing program.  To put this into perspective, current Fed purchases are enough to complete QE1, which occurred in 2008 during the global financial crisis, every ten days.

Outside the U.S., $6T of stimulus was announced including a €750B Quantitative Easing program by the European Central Bank (ECB).  The U.K. also ramped up bond purchases and cut interest rates to near zero or the equivalent of 300 basis points (3%), while Japan agreed to inject $526B into their economy. Emerging market central banks in Thailand, India, Mexico and Pakistan also eased interest rates to boost their markets, while China (RMB 1.3T), India ($50B), Malaysia ($58B) and Singapore ($33B) announced fiscal support for their economies. Global short rates are now below 1.0% and have fallen further than they did in 2008.

Performance and Attribution

The Timothy Plan International Fund fell in step with global equity markets but was able to continue its relative outperformance versus the MSCI ACWI ex. US index.  Sector allocation and stock selection were both positive versus the index for the quarter. From a sector allocation standpoint, cash was helpful in addition to an underweight to Energy and Real Estate and overweight to Technology.  In stock selection, the Fund benefitted from good selection in Consumer Discretionary, Industrials, and Communications Services which more than offset poor selection in the quarter in Health Care sector as screened out names in European pharma performed well. Strong relative performance for the quarter included Fujifilm (Japan-Technology), Pan Pacific (Japan-Discretionary), and Kerry Group (Ireland-Staples). From a country standpoint, Canada, Japan, and Germany provided the best alpha for the Fund while Norway and an underweight to Switzerland proved more challenging.

Outlook

The market dislocation during the first quarter has given our team the opportunity to evaluate attractive companies in various sectors where long-term structural growth stories with solid fundamentals now have compelling valuations. The shape of the recovery is difficult to predict at this point.  However, if history is any guide to post exogenous stock performance, returns are likely to be very attractive as infection rates peak and decline, communities around the globe resume their normal daily activities and global growth returns to an upward trajectory.  We have a slightly larger than normal cash weight in the portfolio and will be careful to redeploy as opportunities arise and as time allows for this downturn to mature.

15 Sep 2020

Market Backdrop

While Israel entered 2020 on a solid footing economically, it is not immune to the domestic and global pause in economic activity caused by lockdowns as a result of the COVID-19 virus.  The International Monetary Fund (IMF) now projects Israel’s GDP for 2020 to decline by -6.3% and suffer a temporary bout of deflationary pressures as a result. The domestic and global economic shock forced the Bank of Israel (BoI) to implement unorthodox monetary policy once again (last time was in 2008). The BoI lowered interest rates by 15bps to 0.10% in early April.  The bank also announced a loan program to small businesses at low fixed rates for three years’ worth ILS5bn.  In addition, the bank also implemented QE once again and started buying government bonds of various types and maturities.

The Israeli economy has not been immune to the lockdowns seen across the globe.  It is certain to experience some short-term pains with a major increase in unemployment and reduced investment and spending. Second quarter GDP is likely to be a double-digit negative with unemployment rising quickly.  Corporate earnings will be affected but should setup for strong growth in 2021. That said, Israel’s economy comes into this crisis with one of the lowest debt/GDP ratios in the developed world and a fast-moving entrepreneurial business sector.

After three elections, the government was finally able to form a coalition between Netanyahu’s Likud and a faction of Benny Gantz’ party.  The emergency government will see Benjamin Netanyahu in power as prime minister for the fist 18 months of the 3-year caretaker government and Benny Gantz moving onto the premiership in the subsequent 18 months.  This government will hold a record number of cabinet positions as both parties negotiated plenty of their lieutenants to be part of the government.  It is seen as a major win for Netanyahu given his impending court case. The COVID-19 virus gave Benny Gantz an excuse to agree to a coalition that many of his supporters claim is contrary to the ticket he ran on against Netanyahu. We are glad to see a conclusion to this but do expect some growing pains as coalition governments tend to have difficulties staying in power for a long period of time and agreeing on tough items.

Performance and Attribution

The Timothy Plan Israel Common Values Fund was not immune to the global selloff in stocks and the TA-125 index.  While it outperformed the index, the Fund suffered in this market environment.  Sector allocation was negative for the Fund for the quarter mainly given the large underweight to the Health Care sector which was the best performing sector for the quarter.  Yet, stock selection more than offset the negative sector effect with strong selection in Consumer Discretionary, Consumer Staples, and Real Estate all providing a nice boost for the Fund relative to the index. Key stocks providing the positive alpha for the Fund in the quarter included Novolog (Health Care), Mellanox (Technology), and Rami Levi Chains (Consumer Staples).

Outlook

COVID-19 has thrown a wrench in the economic expansion but Israel’s economy and corporate earnings will not stay down for long.  While much uncertainty remains as to the resumption of “normal” economic activity, we remain cautiously optimistic that the best minds in the world all focused on one problem and a solution will ease the health care uncertainty. We remain constructive Israeli equities over the long term as the innovation of Israel corporates, accommodative monetary policy, and the strong long-term economic growth in the country supports corporate earnings growth and equity prices.

15 Sep 2020

 

Market Commentary:

Looking back, the past quarter was again a record-setter as markets rallied and the S&P 500 posted the strongest quarterly gain since 1998. This also marked the first time for a back-to-back decline and rally of such magnitude since the 1930s. Investors optimism rose as COVID-19 trends moderated from their worst levels, raising the prospects for a snapback in the economic landscape. Massive amounts of fiscal and monetary stimulus began to be disbursed, helping drive a similar snapback to the markets. Despite dire unemployment numbers, greater than 11 percent at present, consumer spending rebounded sharply as people spent their government stimulus checks. Individuals reemerged as reopening began across various states. However, as businesses started this process across the country, key states like Texas and Florida saw infection trends worsen. This raised the possibility of a second wave and remains front of mind for investors heading into the upcoming earnings season. Estimates for earnings growth have begun to moderate from their declines and improve on the margin, after falling sharply last quarter. The trajectory for future corporate profits will serve as a guide for markets going forward.

Looking forward, macroeconomic data will continue to be choppy, as shorter-term data begins to show some marginal improvements from depressed readings amidst continued lower levels of economic activity. Forecasts remain quite negative for economic growth with GDP is still expected to be down substantially for the 2Q20 period; however, expectations for these disruptions to be transitory remain. Further resumption of normal activities by businesses and consumers will be necessary for such a recovery to take place, and the worsening trends in key states may delay such efforts. The path of a recovery remains anything but clear. That said, companies with high-quality franchises and strong balance sheets are likely to remain well-positioned to weather the storm and should continue to be in demand by investors. The upcoming earnings season will serve as an important data point in understanding the impact each company has observed so far from the virus-related disruption. Management teams may have more clarity and willingness to provide financial guidance, which will help provide some framework for investors to determine potential winners and losers in the coming quarters as improvement in employment and business activity unfolds.

Timothy Plan Small Cap Value Fund Q2 2020 Commentary

Index Drivers:

During the second quarter, all but one sector was positive in the Russell 2000 Index in contrast to last quarter. Consumer Discretionary and Health Care rallied the most while Utilities declined modestly and Financials rose the least.

Performance Drivers: 

The portfolio’s relative performance benefitted from strong stock selection in Information Technology and Energy. Century Communities rallied given their entry-level price point houses and attractive geographies for their new home communities. Repay Holdings posted strong results, seeing modest impacts from COVID-19, given the non-discretionary nature of their payment verticals like automobile monthly payments. Lattice Semiconductor moved higher as strength in their communication end-markets helped buffer some disruptions from the pandemic in their auto and industrial markets. BJ’s Wholesale Club saw strength persist for memberships and staples even as the economy began to reopen during the quarter. Similarly, Papa John’s rose as positive sales trends remained well above typical levels even with the reopening of alternative choices given the ease of delivery and continued concerns across the country.

The portfolio’s relative performance was impacted by overweights and less favorable selection in Financials and Utilities. Banks faced challenging conditions, given likely credit losses from the shelter-in-place impacts on small-medium businesses and depressed interest rates. This pushed shares of Great Western Bancorp and Berkshire Hills Bancorp lower during the quarter. Avista moved lower as the pandemic has pushed out their plan for margin expansion given the disruptions to their customers and capital spending plans. NorthWestern also fell as bad weather and tracking adjustments hit their utility results amidst disruptions from the pandemic for their industrial and residential customers and longer-term plans. Children’s Place faced stiff challenges to their business as their brick and mortar stores remained closed, pressuring sales, even as their e-commerce offering grew as a partial offset.

Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting info@westwoodgroup.com. Benchmark Data Source:  © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.

15 Sep 2020

Second Quarter 2020  

Market Commentary:

Looking back, the past quarter was again a record-setter as markets rallied and the S&P 500 posted the strongest quarterly gain since 1998. This also marked the first time for a back-to-back decline and rally of such magnitude since the 1930s. Investors optimism rose as COVID-19 trends moderated from their worst levels, raising the prospects for a snapback in the economic landscape. Massive amounts of fiscal and monetary stimulus began to be disbursed, helping drive a similar snapback to the markets. Despite dire unemployment numbers, greater than 11 percent at present, consumer spending rebounded sharply as people spent their government stimulus checks. Individuals reemerged as reopening began across various states. However, as businesses started this process across the country, key states like Texas and Florida saw infection trends worsen. This raised the possibility of a second wave and remains front of mind for investors heading into the upcoming earnings season. Estimates for earnings growth have begun to moderate from their declines and improve on the margin, after falling sharply last quarter. The trajectory for future corporate profits will serve as a guide for markets going forward.

Looking forward, macroeconomic data will continue to be choppy, as shorter-term data begins to show some marginal improvements from depressed readings amidst continued lower levels of economic activity. Forecasts remain quite negative for economic growth with GDP is still expected to be down substantially for the 2Q20 period; however, expectations for these disruptions to be transitory remain. Further resumption of normal activities by businesses and consumers will be necessary for such a recovery to take place, and the worsening trends in key states may delay such efforts. The path of a recovery remains anything but clear. That said, companies with high-quality franchises and strong balance sheets are likely to remain well-positioned to weather the storm and should continue to be in demand by investors. The upcoming earnings season will serve as an important data point in understanding the impact each company has observed so far from the virus-related disruption. Management teams may have more clarity and willingness to provide financial guidance, which will help provide some framework for investors to determine potential winners and losers in the coming quarters as improvement in employment and business activity unfolds.

Timothy Plan Large/Mid Cap Value Fund Q2 2020 Commentary

Index Drivers:

Within the S&P 500 Index, all sectors posted positive returns. Consumer Discretionary and Information Technology posted the largest gains during the second quarter while Utilities and Consumer Staples rose the least.

Performance Drivers

Positive stock selection and an underweight in Health Care along with favorable selection in Consumer Staples helped relative performance. NVIDIA beat expectations as their Ampere product cycle began and their recent acquisition delivered above plan. Tractor Supply pre-announced strong results, as their e-commerce efforts and curbside pickup were well-received by their customers. Monolithic Power Systems rose as demand remained strong for their products across a broad set of end-markets, particularly video game consoles expected to launch later this year. Cadence Design Systems continued to see resiliency in demand for their semiconductor design software, driving higher earnings growth. Equifax moved higher as their investor update pointed to material revenue improvements through the quarter on strong demand for their mortgage products and in Workforce Solutions, which includes processing unemployment claims.

  

Unfavorable selection and overweights in Utilities and Real Estate weighed on relative performance given the strong rally in the market. While J.M. Smucker saw strong growth in their retail foods division drive earnings and cashflow, underwhelming guidance for the upcoming year given the impacts from COVID-19 pushed shares lower. Public Storage declined as the pandemic disrupted typical pricing initiatives and move-in/move-out activity for their storage units while expenses have remained elevated. First Hawaiian fell over concerns for a likely reserve build as regional banks prepare for pandemic-related credit issues and reduced tourism for the island. Assurant declined modestly as warranty purchases on cell phones and automobiles saw some pause in demand due to shelter-in-place orders though new phone launches should help drive growth later this year. CMS Energy faced some headwinds as investors rotated into more aggressive areas of the market despite the utility’s above-average growth, attractive valuation, and solid execution.

Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting info@westwoodgroup.com. Benchmark Data Source:  © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.

2 Dec 2019

Market Backdrop

While the Israeli economy remains on a solid footing, momentum has slowed a bit, mostly due to global growth concerns.  The manufacturing slowdown that has gripped most of the developed world appears to have caught up to Israel as well as the most recent Israel Manufacturing PMI index plunged to 44.3 in August from 52.2 the previous month.  The Bank of Israel (BoI) agrees with the slower growth as it reduced its estimate for GDP growth for 2020 from 3.5% to 3% on the back of a global growth slowdown and on expectations the government may take steps to reduce the fiscal deficit which at over 3% remains stubbornly above desired levels.

The Bank of Israel has done an about face after sticking to its aggressive hawkish tone in the early part of the quarter, it now appears has shifted to a dovish tone with some observers even thinking that the BoI may lower rates sooner rather than later.  While the benchmark rate sits at 0.25% there is not much room to lower rates.  The Monetary Committee of the BoI noted in a recent release that “if necessary, the Committee will take additional steps toward making monetary policy even more accommodative…”  Some expect foreign exchange intervention to come back in vogue as the shekel appreciation year to date has dampened exports and led to deflationary pressure.  Inflation now at a low 0.6% over the last twelve months has disappointed and has caught the BoI by surprise making it more likely they will cut rates and provide more monetary accommodation in the near term.

As far as politics, the second national elections this year led to similar results of no party or coalition winning an outright majority.  After days of significant negotiations, president Reuven Rivlin again handed prime minister Netanyahu the challenge to secure a coalition to rule the next Knesset.  There are calls for a broad-based unity government while some think the prime minister may not be able to form a coalition and president Rivlin will then task Blue and White leader Benny Gantz with the goal of forming a ruling coalition.  There is much uncertainty on the makeup of the next government.

Performance and Attribution

The

The Timothy Plan Israel Common Values Fund closely matched the performance of the TA-125 index for the quarter, maintaining its strong lead for the year to date period.  Sector allocation was positive with good allocation in Technology, Health Care, and Energy while Stock selection was challenged from weakness in the Technology sector.  Security and cyber-security plays such as Checkpoint Systems, Verint Systems, and CyberArk Software all took a pause in the quarter.

Outlook

The strong economy continues to support robust corporate earnings growth.  The labor market remains robust providing good visibility towards continued strong consumption. Some of the economic challenges are caused by the high demand in inward investment and new energy revenues that provide a good long term fiscal and trade tailwind.  We remain constructive Israeli equities over the long term as the innovation of Israel corporates and the strong economic growth in the country supports equity prices.

2 Dec 2019

 

Market Commentary:

Looking back, equity markets ended the quarter in positive territory despite continued concerns over the ongoing trade dispute and future economic growth given the deterioration of economic data. The U.S. market outperformed international equities and large caps fared far better than small caps. Investors continue to look for additional clues regarding the health of the economy given the longevity of the business cycle. The Federal Reserve cut rates twice during the quarter, marking the first time for such actions in over a decade. The market remains optimistic regarding additional future rate cuts in order to help bolster the economy. Interest rates fell sharply during the quarter, notably the yield on the 10-year U.S. treasury declined to 1.66%, falling 34 basis points over increasing demand for safe-haven assets amidst the uncertainty. The impact from macroeconomic uncertainty is clearly weighing on business confidence as company fundamentals have so far remained relatively resilient, while supporting the belief that earnings will be up year-over-year in 2019.

Looking forward to the end of the year and into 2020, earnings growth remains a key question for investors as earnings for the upcoming third quarter are once again slated to fall year-over-year. The prior two quarters saw positive surprises, relative to estimates, push growth back into positive territory but looking ahead, the market is still forecasting another year of strong growth into 2020. In contrast, the most recent GDP reading was for 2%, decelerating from the prior quarter, and other indicators such as the ISM’s PMI for manufacturing fell even farther into contractionary territory for the first time in nearly a decade. These, along with the trade disputes, continue to weigh on business confidence and have started to have some modest impact on consumer confidence as well. As the economic cycle continues to progress into its latter stages, the preference for high-quality, stable, and cash generative businesses are likely to increase even more so as markets become increasingly concerned for those companies with more challenged models. These differences, we believe, will cause further dispersion in returns between those companies best able to weather these uncertainties versus those who are not. We remain vigilant in assessing absolute risk in the securities we invest in and striving to protect client capital during these times for potential volatility from the uncertainty.

Timothy Plan Small Cap Value Fund Q3 2019 Commentary

Index Drivers:

During the third quarter, Utilities and Real Estate were the best performing sectors in the Russell 2000 Index while Energy and Health Care were the worst.

Performance Drivers:

The portfolio’s relative performance benefitted from an underweight in Health Care and favorable stock selection in Industrials. J&J Snack Foods posted a strong quarter driven by strength in their frozen beverage portfolio. Easterly Government Properties moved higher on steady performance as the company continued acquiring government investment properties. Lattice Semiconductor rallied as their strong product pipeline and improving gross margins continued to exceed investor expectations. CONMED reported a beat and raise quarter with strong organic growth from their core areas of orthopedics and general surgery, as well as from their recent acquisitions. Federal Signal shares appreciated after the company posted accelerating orders on new product cycles and the potential for accretive acquisitions.

The portfolio’s relative performance was negatively impacted by an overweight in Energy along with less favorable selection. Consumer Discretionary also detracted from performance due to unfavorable selection. ProPetro shares declined as falling commodity prices continued to pressure spending by their core exploration and production customers. Callon Petroleum declined as well as the lower crude oil prices sent investors elsewhere in the market. Children’s Place faced headwinds as the promotional environment for children’s clothing remained high after the bankruptcy of Gymboree. Omnicell shares fell on investor concerns over deterioration in working capital metrics after a negative research report was published. Comfort Systems USA declined after some slowness in nonresidential construction caused sales and margins to fall short of expectations.

Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting info@westwoodgroup.com. Benchmark Data Source:  © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.