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Manager Commentary

26 Nov 2018

The Brandes Emerging Markets Equity Strategy slightly outperformed its benchmark, the MSCI Emerging Markets Index, which fell 1.1%.

Positive Contributors

Highlighting how volatility is often part and parcel of emerging markets investing, two of this period’s major positive contributors were detractors to returns in the second quarter. Brazilian Petrobras and Argentinian YPF rebounded sharply as short-term concerns that weighed on their shares last quarter abated. As with our other oil & gas holdings, both companies continued to benefit from improved earnings and cash flows in a higher oil-price environment.

Holdings in Mexico also aided returns, led by real estate investment trusts (REITs) PLA Administradora Industrial (Terrafina) and Macquarie Mexico Real Estate Management. Investors seemed to welcome the prospect of the new trade deal between the United States and Mexico, which lifted some uncertainty regarding future relations between the two countries.

Additionally, our underweight to China helped relative performance.

Performance Detractors

The strategy’s exposure to Turkey, most notably our commercial bank holdings, hurt performance amid the country’s currency crisis. President Erdogan’s interference in monetary policy and the appointment of his son-in-law as treasury and finance minister shook investor confidence. Furthermore, weakened diplomatic relations with western partners added fuel to the lira’s tumbling. While fears of contagion momentarily spread throughout emerging markets, they have since dissipated.

As the risks of investing in the country intensified, we exited our position in bank Vakif Bankasi, especially given the company’s direct government control. We continuously monitor the situation in Turkey and maintain measured positions in Akbank, Garanti Bankasi and REIT Emlak Konut.

Holdings in Brazil also declined as the country’s upcoming election led to increased volatility. Notable detractors included food producer Marfrig Global Foods, regional jet manufacturer Embraer, health insurer Hapvida Participacoes and payment processor Cielo.

In early July, Boeing and Embraer released a non-binding agreement to establish a new joint venture (JV) for commercial aircraft. The deal values Embraer’s commercial aircraft business unit, which will be fully transferred to the new JV, at $4.75bn. Based on the proposed terms, Boeing will own an 80% stake in the JV, while Embraer will hold the remaining 20%. Embraer will also retain control of its defense and business jet operations. The deal is expected to close by the end of 2019, subject to regulatory clearance.

Embraer’s shares fell as many investors appeared unsatisfied with the offered price. However, in our opinion, the price was adequate, especially considering the other terms outlined in the agreement. Through its 20% stake, Embraer will be able to participate in the potential synergies that may materialize within the JV. Additionally, as the commercial aviation segment has faced increased competition, particularly from Chinese, Russian and Japanese newcomers, we believe the deal actually “neutralizes” a major long-term business threat for Embraer.

In August, Marfrig announced that it would sell about 90% of its stake in Keystone, a fully owned subsidiary, to Tyson Foods. Keystone supplies protein to fast food chains mostly in the United States and Asia. The deal is expected to close by year-end at an enterprise value of $2.4bn, which was below the market’s initial expectations. Nevertheless, we believe Marfrig remains undervalued. We are encouraged by the company’s continued balance sheet improvements and its efforts to streamline its business model.

Select Activity in the Third Quarter

The investment committee added X5 Retail Group to the strategy.

X5 is Russia’s largest food retailer by revenue, with an approximately 9% market share in food retailing and a strong footprint in big cities such as Moscow and St. Petersburg. The company operates in three retail formats, namely proximity/convenience stores (78% of 2017 sales), supermarkets (15% of sales) and hypermarkets (7% of sales). The company has a vertically integrated supply chain and delivers over 90% of the items sold in its stores from internal distribution centers.

A number of factors have weighed on X5’s shares, including an increasing pressure on margins (an industry-wide challenge), a recent move of management personnel to a main competitor and the potential impact of further sanctions against Russia. We believe these concerns have been more than reflected in the current share price. Despite the pressure on margins, the food retailing industry in Russia is still underpenetrated relative to developed countries, with fewer grocery stores per 1,000 inhabitants.

Trading at less than 10x forward earnings and offering a dividend yield of 5.5% as of September 30, X5 represents an appealing investment opportunity to us.

Year-to-Date 2018 Briefing

The Brandes Emerging Markets Equity Strategy underperformed the MSCI Emerging Markets Index, which fell 7.7% for the nine months ended September 30, 2018.

Similar to what happened in the quarter, holdings in Turkey and Brazil detracted from year-to-date returns. Turkish Akbank, Vakif Bankasi and Emlak Konut performed poorly, as did Brazil’s Marfrig Global Foods and Embraer.

Other detractors included Indian electric utility Reliance Infrastructure and Argentinian oil & gas firm YPF.

We saw positive contributions from our oil & gas holdings, specifically Lukoil, Surgutneftegas and Petrobras. Retailers with exposure to China—namely Lifestyle International, Bosideng and Luk Fook Holdings—also helped performance. Additionally, Indian technology company Infosys aided returns.

Current Positioning

We have increasingly found investment opportunities in China amid the country’s trade war with the United States, coupled with increased market volatility.

The strategy’s exposures have been relatively unchanged, as Brazil, Russia and Mexico continue to represent overweight positions. We also maintained higher allocations to consumer discretionary and telecommunication services companies than the benchmark.

China remained one of our largest underweights at quarter end, along with Taiwan. From a sector perspective, we held material underweight allocations to information technology and financials.

We remain convinced that the current positioning of the Brandes Emerging Markets Equity Strategy, which results from our careful bottom-up stock selection, bodes well for the long term.

Thank you for your continued trust.

Cash Flow: The amount of cash generated minus the amount of cash used by a company in a given period.

Dividend Yield: Dividends per share divided by price per share.

Enterprise value: Market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

Forward Earnings: Sell-side analysts’ consensus earnings estimates for the next fiscal year.

Forward Price/ Earnings: Price per share divided by earnings estimates for the next fiscal year.

The declaration and payment of shareholder dividends are solely at the discretion of the issuer and are subject to change at any time.

The MSCI Emerging Markets Index with net dividends captures large and mid cap representation of emerging market countries. Data prior to 2001 is gross dividend and linked to the net dividend returns.

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.

The foregoing Quarterly Commentary reflects the thoughts and opinions of Brandes Investment Partners® exclusively and is subject to change without notice. The information provided in the commentary should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that the securities sold have not been repurchased. The actual characteristics with respect to any particular account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Unlike bonds issued or guaranteed by the U.S. government or its agencies, stocks and other bonds are not backed by the full faith and credit of the United States. Stock and bond prices will experience market fluctuations. Please note that the value of government securities and bonds in general have an inverse relationship to interest rates. Bonds carry the risk of default, or the risk that an issuer will be unable to make income or principal payment. There is no assurance that private guarantors or insurers will meet their obligations. The credit quality of the investments in the portfolio is not a guarantee of the safety or stability of the portfolio. Investments in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. Securities of small companies generally experience more volatility than mid and large sized companies. Although the statements of fact and data in this report have been obtained from, and are based upon, sources that are believed to be reliable, we cannot guarantee their accuracy, and any such information may be incomplete or condensed. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. The Brandes investment approach tends to result in portfolios that are materially different than their benchmarks with regard to characteristics such as risk, volatility, diversification, and concentration. Please note that all indices are unmanaged and are not available for direct investment. Past performance is not a guarantee of future results. No investment strategy can assure a profit or protect against loss. Market conditions may impact performance. The performance results presented were achieved in particular market conditions which may not be repeated. Moreover, the current market volatility and uncertain regulatory environment may have a negative impact on future performance. The margin of safety for any security is defined as the discount of its market price to what the firm believes is the intrinsic value of that security. The declaration and payment of shareholder dividends are solely at the discretion of the issuer and are subject to change at any time.

United States: Issued by Brandes Investment Partners, L.P., 11988 El Camino Real, Suite 600, San Diego, CA 92130.

14 Nov 2018

“Bull markets don’t die of old age, they die of fright and are most afraid of recession.”  Sam Stoval, CFRA

 

“A noticeable period of monetary deceleration, now synchronized globally is consistent with lower, not higher, interest rates.” – Milton Friedman

“Even when conditions seem placid, squalls can appear quite suddenly.” – Randall Forsyth, Barron’s

“Have conviction in what you don’t own” – Barclays

“Given where we are in the cycle, I would rather have seniority.” – Krishna Memani, Oppenheimer

“We’re at the stage of the policy tightening cycle where history suggests a higher likelihood of accidents in financial markets.” – Deutsche Bank

12 Nov 2018
Q2-18

Third Quarter 2018

 

Market Commentary:

Looking back, equity markets marched higher during the quarter, extending their gains as most indices have now risen over 10 percent through the first three quarters. Growth outpaced value and large caps rose over small caps. Global markets also fared well though Asian markets continued to feel pressure from potential trade impacts. Headline risk remains regarding potential tariffs and responses with China. Despite the constant rhetoric on trade, progress was made with Canada and an agreement to replace NAFTA appears likely between the U.S., Mexico and Canada. However, economic strength remains a tailwind domestically as investors continue to look for signs of cracks from the earlier trade actions. The Federal Reserve agreed that the economy is well-supported, choosing to raise the Federal Funds Rate during the quarter, and interest rates rose broadly. Volatility remained muted again during the quarter, though market participants remained cognizant for potential speedbumps that might appear.

 

Looking forward, earnings continue to be an important measure for the strength of the underlying economy, particularly here in the U.S. Concerns over when the next recession will happen remain  given the duration of the current business cycle, while the most recent series of fiscal policies regarding trade and tariffs have further added to market worries. Equities have continued to look through the headline noise having rallied year-to-date, though mid-term elections could be a potential source of disruption. Interest rates have moved higher recently, with the Federal Reserve having hiked rates again at their most recent meeting. Another worry for the markets remains centered on the potential for the Fed to make a policy error and tighten conditions too much.  Despite these fears, the strength in topline growth and cash flows have made valuations much more appealing than they were over the last few years. Continued focus by investors on companies’ ability to offset inflationary pressures and deploy their capital in high-returning areas will be a key differentiator for higher-quality companies. Similarly, volatility has remained stubbornly low and we remain vigiliant in assessing absolute risk and strive to protect client capital during increased periods of volatility.

Timothy Plan Small Cap Value Fund Q3 2018 Commentary

 

Index Drivers:

During the third quarter, the Russell 2000 Index saw strength in the Telecommunication Services, Health Care, and Information Technology sectors while the Energy, Consumer Staples, and Real Estate sectors underperformed.

 

Performance Drivers:

The portfolio’s relative performance benefitted from favorable stock selection in Industrials and Energy. Omnicell rose after posting strong results, as their XT rollout continued, and bookings grew into the mid-teens. Albany International moved higher after posting strong top- and bottom-line results in both their machine clothing and engineered composites segments. Comfort Systems benefitted from continued strength in non-residential construction, pushing backlog up meaningfully and supporting future growth potential. Sonic Corp. rose after agreeing to be acquired by Inspire Brands at a significant premium. Continental Building Products gained on strong volumes and positive price-cost for their wallboard operations during the quarter.

 

The portfolio’s relative performance was negatively impacted by unfavorable stock selection in Consumer Discretionary and Materials. Summit Materials faced weather-related pressures on their volumes and negatively impacted their realized pricing.  Installed Building Products faced rising input costs, which pinched margins, as price increases are being enacted to match the inputs. SRC Energy has seen recent potential regulations in Colorado regarding setback distances for wells push the stock lower.  Hostess Brands fell on weak volumes and unfavorable mix which pushed gross margins down, though they did gain share in their sweet baked goods segment. Lithia Motors posted stronger topline on better used vehicle sales, but continued to see rising personnel and marketing expenses pressure margins, driving earnings below expectations.

 

12 Nov 2018

 

Market Commentary:

Looking back, equity markets marched higher during the quarter, extending their gains as most indices have now risen over 10 percent through the first three quarters. Growth outpaced value and large caps rose over small caps. Global markets also fared well though Asian markets continued to feel pressure from potential trade impacts. Headline risk remains regarding potential tariffs and responses with China. Despite the constant rhetoric on trade, progress was made with Canada and an agreement to replace NAFTA appears likely between the U.S., Mexico and Canada. However, economic strength remains a tailwind domestically as investors continue to look for signs of cracks from the earlier trade actions. The Federal Reserve agreed that the economy is well-supported, choosing to raise the Federal Funds Rate during the quarter, and interest rates rose broadly. Volatility remained muted again during the quarter, though market participants remained cognizant for potential speedbumps that might appear.

 

Looking forward, earnings continue to be an important measure for the strength of the underlying economy, particularly here in the U.S. Concerns over when the next recession will happen remain  given the duration of the current business cycle, while the most recent series of fiscal policies regarding trade and tariffs have further added to market worries. Equities have continued to look through the headline noise having rallied year-to-date, though mid-term elections could be a potential source of disruption. Interest rates have moved higher recently, with the Federal Reserve having hiked rates again at their most recent meeting. Another worry for the markets remains centered on the potential for the Fed to make a policy error and tighten conditions too much.  Despite these fears, the strength in topline growth and cash flows have made valuations much more appealing than they were over the last few years. Continued focus by investors on companies’ ability to offset inflationary pressures and deploy their capital in high-returning areas will be a key differentiator for higher-quality companies. Similarly, volatility has remained stubbornly low and we remain vigiliant in assessing absolute risk and strive to protect client capital during increased periods of volatility.

 

Timothy Plan Large/Mid Cap Value Fund Q3 2018 Commentary

 

Index Drivers:

Within the S&P 500 Index, the Health Care, Industrials, and Information Technology sectors outperformed in the third quarter while the Materials, Energy, and Real Estate sectors underperformed.

 

Performance Drivers:

The portfolio’s relative performance was aided by strong security selection in the Industrials and Energy sectors. PerkinElmer gained after posting strong double-digit organic revenue growth as a result of management’s strategy to reshape the portfolio towards higher growth areas. Hubbell gained on strong earnings as price increases began to offset expense pressures seen earlier in the year from higher input costs. FLIR Systems moved higher as the new CEO delivered on higher gross margins and earnings beat expectations. Union Pacific benefitted from solid underlying economic conditions and announced new longer-term operational improvements based on precision railroading.  Cable One’s integration of NewWave provided some tailwinds and their strong growth in high speed data continued to move their revenue per user higher.

 

Unfavorable stock selection in Information Technology and an underweight in Health Care weighed on relative performance. Eagle Materials saw wet weather and more aggressive competition weigh on the results of their cement division. Mohawk Industries faced stiff cost headwinds which pressured margins, though management has implemented price increases to help offset. Public Storage moved lower on continued fears over incremental capacity coming online in the self-storage market in excess of current demand. Dentsply Sirona posted inline results but lowered guidance as inventory destocking for dental distributors is again a headwind. Lam Research shares fell on market concerns over the duration of the semiconductor cycle.

 

12 Nov 2018

Q3 2018 Commentary

Your Timothy Plan Growth and Income Fund (TGIAX) returned -0.05% in the third quarter of 2018.  The equity portion of the portfolio positively contributed to performance.  The stocks we held in the Industrial, Financial, Basic Material, and Utility sectors also positively contributed to performance.

Concerning the current environment, we are in a period where our approach is producing less return than we would like to see.  We are disciplined and have not changed our basic methodology.  We look for undervalued companies with excellent and growing earnings whose price performance has picked up relative to the market as a whole.

We are in a period of upside down results.  In the last quarter, for instance, those stocks which were the most expensive, had poorer earnings and had been underperforming previously, outpaced those stocks with the favorable characteristics.  This is not sustainable over the long term and is often a sign of market imbalance.

Trade deals, lower taxes, deregulation and stock buy backs have boosted the stock market.  At the same time the Fed has been raising rates and bond yields appear to be heading higher.  A narrow band of stocks has been leading the market and we are in a tug of war.  On one side is a mania like approach many are taking while insiders are selling shares at an accelerated pace.

On the other side is a solid economy, great earnings and the long term momentum of a rising market.  Despite the recent set back, momentum is still favorable.  However, when it shifts we can expect the market to take a radical turn toward more conservative tactics.

We continue to buy companies with strong earnings, good valuations, and relative price strength.  Your Fund remains well diversified as we strive to provide shareholders the opportunity to grow their capital while maintaining a strong focus on preserving capital.  We believe an actively managed balanced approach should be beneficial to investors in the future.

12 Nov 2018

Macroeconomic Update

The U.S. economy continues to experience strong growth, with all economic models indicating that the Q3 Gross Domestic Product (GDP) growth rate will continue to be very strong. Specifically, the Atlanta Federal Reserve’s GDP model estimates Q3 growth at 4.1%, only modestly lower then Q2 GDP growth of 4.2%. Business confidence remained high and attempts to move product through the supply chain prior to implementation of tariff s propped up operating rates. Continued employment gains during Q3 and a further increase in average hourly earnings kept consumer confidence at elevated levels. When consumers feel confident they tend to keep their wallets open. Federal government spending, following the adoption in mid-March of a $1.3 trillion spending plan for the fi scal year ending September 30, 2018, also added to aggregate U.S. growth. That spending plan was temporarily extended to the end of 2018.

Consistent with our expectations noted in our last quarterly commentary, capital expenditure spending by businesses slowed into quarter-end as trade policy uncertainty continued and rising input prices pressured equipment affordability. Wholesale prices are clearly showing an up-trend and that is expected to eventually make its way into retail prices over the near term.

That will keep the Federal Reserve in the hot seat as it tries to manage inflation expectations while at the same time allowing this economic expansion to continue as long as possible. The above-trend growth in the second and third quarters is likely unsustainable and we would expect some softening as rising prices and rising interest rates start to have an impact.

Q3 2018 Performance Update

The Timothy Aggressive Growth portfolio returned 7.1% in the third quarter versus a Russell Mid Cap Growth Index return of 7.6%. Stock selection was strong across many sectors but especially in the Materials & Processing sector. The weakest performers were in the Financials sector. There are concerns within the Banking sector over loan growth, which has steadily decelerated throughout the year.

Contributors

The strategy’s top overall contributor on a relative basis was Insulet Corporation  (3.3%), which returned 23.6% during the quarter. Insulet is a device company that is benefitting from the accelerating adoption of pump systems by diabetics on a global scale. They are also modifying their distribution structure, moving to direct sales in Europe, which should lead to higher operating margins over the next year.

Another strong performer was RingCentral (3.0%), which returned 32% during Q3. RingCentral (RNG) is a provider of software-as-a-service, solutions for business  communications. The Company off ers a multi-user, enterprise-grade communications solution that enables customers and their employees to communicate via voice, text, HD video and web conferencing, and fax on multiple devices, including smartphones, tablets, PCs, and desk phones. The company is benefi ting from the rapid adoption of VOIP by enterprises due to lower cost, greater functionality, and,higher stability.

Detractors

The portfolio’s largest detractor during the quarter was TopBuild Corp. (1.0%), which decreased 27%. TopBuild provides insulation installation services to homebuilders, particularly for new construction. While the company never reported disappointing earnings, investors are concerned that the slowdown that is occurring in the homebuilding industry will eventually impact TopBuild. This concern has led to a significant contraction in the valuation over the past quarter. Therefore, we have sold our position in TopBuild as we believe those concerns have merit.

Another und underperformer was GDS Holdings (0.35%), an international data center and colocation service provider, which also declined 27% in the quarter. There are several macro datapoints emerging that economic activity in China is slowing rapidly. Secondly, investors are becoming concerned that the trade war between US and China will further aggravate a slowdown, which will eventually impact GDS Holdings. The position in GDS Holdings has been sold from the portfolio.

Market Outlook

As we move towards 2019, the heightened pace of both economic growth and earnings growth that we have enjoyed will be hard to maintain, possibly presenting challenges for the stock market. While US midcap and smallcap companies have less overall exposure to the escalating tariff s, they are being impacted by overall lower economic activity. Across several sectors, we are seeing earnings growth being slowed due to higher commodity costs, higher labor costs, and higher freight costs.  These higher costs are already leading to a slowdown in the housing, auto, and broad industrial sectors. Given these trends, we will continue to focus our research efforts on domestically oriented companies, particularly in the Healthcare and Technology sectors.

We continue to find compelling investment opportunities. We remain focused on generating alpha and producing the strongest investment results we can for you over the long run. We thank you for your continuing support and investment. 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.

 

12 Nov 2018

Macroeconomic Update

The U.S. economy continues to experience strong growth, with all economic models indicating that the Q3 Gross Domestic Product (GDP) growth rate will continue to be very strong. Specifically, the Atlanta Federal Reserve’s GDP model estimates Q3 growth at 4.1%, only modestly lower then Q2 GDP growth of 4.2%. Business confidence remained high and attempts to move product through the supply chain prior to implementation of tariff s propped up operating rates. Continued employment gains during Q3 and a further increase in average hourly earnings kept consumer confidence at elevated levels. When consumers feel confident they tend to keep their wallets open. Federal government spending, following the adoption in mid-March of a $1.3 trillion spending plan for the fiscal year ending September 30, 2018, also added to aggregate U.S. growth. That spending plan was temporarily extended to the end of 2018.

Consistent with our expectations noted in our last quarterly commentary, capital expenditure spending by businesses slowed into quarter-end as trade policy uncertainty continued and rising input prices pressured equipment affordability. Wholesale prices are clearly showing an up-trend and that is expected to eventually make its way into retail prices over the near term. That will keep the Federal Reserve in the hot seat as it tries to manage inflation expectations while at the same time allowing this economic expansion to continue as long as possible. The above-trend growth in the second and third quarters is likely unsustainable and we would expect some softening as rising prices and rising interest rates start to have an impact.

Q3 2018 Performance Update

The Timothy Large/Mid portfolio returned 6.2% in the third quarter versus a Russell 1000 Growth Index return of 9.2%. The Technology sector was a hard hit to the bottom line. Restricted stocks Apple and Microsoft put up double digit returns for the quarter and Western Digital, Micron and IPG Photonics all underperformed significantly. This combination “cost” the fund 250 basis points. Stock selection in Consumer Discretionary and Consumer Staples was strong with picks like Lowes (+21%), O’Reilly Automotive (+14%) and McKesson (+14%) but these didn’t compensate for the Technology pitfalls. While growth did outperform value this quarter, large growth also beat small growth names. This environment can be a headwind for our portfolio as we reach into lower capitalizations to replace larger restricted names.

Contributors

Lowe’s (LOW, + 20.7%; average position size 4.0%) is a home improvement retailer. The company had a very solid quarter, with earnings up 32% and same store-sales growth of 5.2%, a nice acceleration from the prior quarter’s +0.6%. The Street also liked the actions taken by the newly-hired CEO (former Home Depot head of U.S. stores). Following a strategic assessment of the “Orchard Supply” hardware banner, he decided to shutter all 99 stores. Additionally, the hiring of a new CFO was announced. Another top overall contributor on a relative basis was Insulet Corporation  (3.3%), which returned 23.6% during the quarter. Insulet is a device company that is benefitting from the accelerating adoption of pump systems by diabetics on a global scale. They are also modifying their distribution structure, moving to direct sales in Europe, which should lead to higher operating margins over the next year.

Detractors

Western Digital (WDC, – 23.7%, average position size 1.7%) is a maker of data storage devices and solutions. The company had a good earnings report, but guidance was disappointing and led some to fear that the “NAND” (computer memory) cycle might be turning. NAND prices fell mid-to-high single digits in the quarter, driven by strong supply growth and weaker than expected mobility demand. The better news was that WDC continues to see robust demand for its high capacity enterprise hard disk drives.

Micron Technology (MU, – 13.8%, average position size 1.7%) engages in the provision of innovative memory and storage solutions. Its specialty is DRAM (dynamic random access memory). While MU reported EPS for 4Q that surprised even the highest sell-side estimate and grew earnings 75% y/y, by far its highest EPS number ever, it guided for a significant drop-off in 1Q. While almost all sell-side models already reflect this, the additional commentary around PC concerns and China tariff exposure gave bears the excuse they needed to punish the stock. This, combined with the raised capex guidance, off set the strong beat and positive buyback update.

Market Outlook

Despite ongoing wrangling over tariff s and trade, the market seemed to take its cue from very strong earnings, powering all three U.S. market indices (S&P500, DJIA, and NASDAQ) to new highs as we closed out the third quarter. Post the tax-law changes, S&P500 earnings have climbed 22-25% for the first half of 2018, and revenue growth as also been very impressive, up 9-10%. Small stocks had a strong Q2, but Q3 saw the advantage go back to large. This was likely due at least in part to some settling down of trade-war concerns (which at their peak, had favored smaller, domestically focused companies). What has remained nearly unrelenting this year and last quarter has been the remarkable outperformance of growth stocks over value: Russell 1000Growth Index +17.1% vs. Russell 1000 Value Index +3.9% year-to-date and Russell 1000 Growth Index +9.2% vs. Russell 1000 Value Index +5.7% for Q3. As we move toward 2019, the heightened pace of both economic growth and earnings growth that we have enjoyed will be hard to maintain, possibly presenting challenges for the stock market.

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.

12 Nov 2018

Market Backdrop

Israel’s economy continues to grow at a solid pace.  Bank of Israel (BoI) research department forecasts GDP growth of 3.7% in 2018 and 3.6% in 2019.  The labor market remains tight with the unemployment rate hovering around 4%, slightly higher than the record low of 3.7% recorded in January of this year.  Annual inflation has now bounced into the lower end of the target range of the BoI of 1-3% but does not appear entrenched there yet.  Most analysts do not expect the BoI to raise rates until the inflation data remains entrenched in this range for a period.  Economists do expect for the BoI to begin raising interest rates from the current 0.10% beginning sometime in 2019.  The Monetary Policy Committee (MPC) of the BoI states that the main risk today of inflation not remaining entrenched in the target range is the possibility of a sharp appreciation in the shekel.  With major exports of the Leviathan natural gas field beginning as early as the end of 2019, the government is doing all it can to make sure the currency does not appreciate quickly from the additional foreign currency earnings.

 

Home price declines appear to have halted in the near term while volumes have rebounded after a prolonged decline since the middle of 2016.  New mortgage volumes have risen recently, and any expectations of rising rates may put some additional life into the mortgage markets as home buyers anticipate higher rates going forward.  Consumer confidence remains above average increasing recently for both current conditions and expectations.  The most recent manufacturing PMI did decline some but remains above expansionary levels.

 

Performance and Attribution

The Timothy Plan Israel Common Values Fund performed well on an absolute basis and closely matched the TA-125 benchmark index for the quarter.  Sector allocation was positive while stock selection suffered a bit.  From an allocation standpoint, the bright spot was an underweight to the Health Care sector which underperformed.  Individual stock selection was hampered by negative selection in the Energy, Materials, and Consumer Discretionary sectors.  Strong performers for the quarter included the insurance industry with holdings Clal Insurance and Migdal Insurance performing well.  In addition, cyber security firms performed well with CyberArk Software and Checkpoint Software leading the way.  Negative selection was in not owning Sodastream which rose sharply after being acquired by Pepsi and being underweight the index weight of Israel Chemicals which performed well.

 

Outlook

The strong domestic economic environment remains supportive of good earnings growth for the non-financials corporate sector.  While global trade tensions and increased geopolitical tensions in the region have increased volatility, strong domestic demand continues to support corporate earnings.  Recent deceleration in economic activity in Europe may dent near term export demand but we remain constructive Israeli equities over the next twelve months on anticipated strong earnings growth. Renewed mortgage activity and the anticipation of rising rates may also give new life to the Financials sector.

12 Nov 2018

Market Backdrop

Monetary policy normalization is still sending ripples through equity and bond markets globally.  As the U.S. economy remains on firm footing and the Federal Reserve continues to raise rates, emerging markets are feeling the brunt of the punch bowl being taken away.  Even though global monetary conditions remain accommodative, with the change in policy comes volatility.  Emerging market currencies continued to depreciate in the quarter led by the Turkish Lira which was pummeled following tensions with the U.S. but more so on lost confidence in the independence of its central bank.  Other emerging currencies also suffered with the volatility as trade tensions between China and the U.S. worry some that these countries will suffer the economic consequences of trade dislocations.  The U.S. maintained its pressure on China by announcing an additional 10% tariff on $200bn worth of goods from China with the Chinese government striking back with tariffs of its own.  Analysts suggest the Chinese government is waiting until after the U.S. mid-term elections to gauge their negotiating stance.  The Trump administration did have a trade win as Canada and Mexico agreed on a new NAFTA trade agreement providing a boost to the president’s negotiating tactics.

 

Market jitters surfaced again late in the quarter as trade tensions and the direction of interest rates worried investors.  Rising rates in the U.S., where the 10-year government bond rose above the 3.2% mark for the first time since 2011, concerns equity markets about the effect of rising rates on the economic recovery.  Some worry over the potential of an inverted yield curve sometime in 2019 as the Federal Reserve continues to raise rates.  While rates have risen, the Iran sanctions and Venezuela’s plummeting oil production have taken oil supplies off the market, leading to higher oil prices in the quarter.  Earnings growth overall remain well underpinned globally by stronger than trend economic growth.  International equity valuations, amid the stronger earnings growth, appear supportive for positive equity returns over the coming year.

 

Large caps outperformed small and mid-caps for the quarter while mid-caps remain slightly ahead for the year-to-date period.  Growth outperformed value in the quarter as growth extended its lead for the year.  The best performing MSCI EAFE countries for the quarter were Switzerland, Sweden, and Norway, while the worst performers were Ireland, Belgium, and Italy.  The best performing emerging markets for the quarter were Thailand, Qatar, and Poland, while the worst were Turkey, Greece, and China.

 

Performance and Attribution

The Timothy Plan International Fund slightly underperformed the MSCI EAFE index for the quarter.  Stock selection was challenging in the Technology and Consumer Discretionary sectors while positive in Consumer Staples and Industrials.  Two themes hurt performance in the quarter with anything related to China underperforming given weakness in that economy and concerns over the US-China trade battle.  The other negative was exposure to autos as both Europe and China auto sales were hurt during the quarter.  On the positive front, stock selection in Norway, Hong Kong, and Spain was additive to performance.

 

Outlook

Near term volatility is likely to remain in the equity markets as trade concerns, slowing economic conditions in some developed markets, and talk of less accommodative monetary policies in developed markets translate to added uncertainty for investors.  We remain constructive longer term but cautious in the near term.  US economic growth is leading the developed world while European and Japanese economic data have softened somewhat from earlier highs.  Valuations remain supportive of international equities and any relief on the mentioned concerns could lead to a strong bounce in the markets.

30 Jun 2018

Macroeconomic Update
The U.S. economy rebounded meaningfully, with most forecasters predicting annualized GDP growth will exceed 4% in the second quarter. Business confidence remained high, driving employment gains and an uptick in hourly earnings. Federal government spending also increased following the passing of a $1.3 trillion spending bill in March.

Signs of inflationary pressures emerged, however, with companies highlighting tight labor markets, higher freight costs, and rising prices for energy and key raw materials. The Federal Reserve continues to respond with rate increases, resulting in some flattening of the yield curve as long rates rise at a more measured pace due to growing uncertainty about trade policy and its impact on growth.

The market steadied in the second quarter and returns were positive in all size and style segments. Growth styles continued to outpace value in large caps but value led in small cap. Small caps handily outperformed large and midcaps, likely due to being less exposed to trade disruption. The steady introduction of tariff s across several industries and across several countries raises the risk profile of greater inflation and a negative future impact on growth. Developments are being closely monitored.

Q2 2018 Performance Update
The portfolio (+4.3%) outperformed the Russell Mid Cap Growth (+3.2%) due to strength in the Health Care sector lead by Sarepta Therapeutics. Despite mediocre performance in the benchmark, alpha was generated by our stock selections in Financial Services and Technology sectors. The Producer Durables sector struggled due to investor concerns over operating margins and rising commodity prices.

Contributors
The top performer was Sarepta Therapeutics (SRPT, 1.5%)2, which returned 78.4% during the quarter. Sarepta reported incredibly strong clinical data in its first gene therapy program to treat Duchennes Muscular Dystrophy. Also, the company made a strong strategic move in partnering with Myonexus, another biotechnology company with a compelling gene therapy program for the treatment of Limb-Girdle muscular dystrophies.

Our investments within the cyber security software segment continue to generate alpha. The most noteworthy investment has been in Varonis Systems (VRNS, 2.5%) which gained 23% during the quarter. Greater focus is being spent by enterprises on data security, as corporations are rushing to stay ahead of the latest security threats.

Detractors
Our underperformers were both Producer Durables, Oshkosh Corp (OSK, 2.4%) and Belden (BDC, 0.0%). Oshkosh suffered a -8.7% return in the second quarter, while Belden returned -11.3%. While Oshkosh did not report disappointing earnings, Belden did report very weak results, due to margin weakness in several divisions. We have sold our position in Belden, but we continue to retain our position in Oshkosh.

Market Outlook
The issues causing the greatest concerns among investors are the potential of global trade wars and rising commodity costs which cause investors to shift their focus to sectors that have less direct exposure to those wildcards. Specifically, small cap companies that are in the Health Care and Technology sectors have a favorable risk profile as it relates to those issues.

We continue to find compelling investment opportunities, particularly in the medical device industries. Also, consumer spending has recovered, leading to more investment opportunities in gaming and retail industries. 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.

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