Performance

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Performance

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Disclosure

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

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FIRST QUARTER 2017

Hanseatic Market Commentary

U.S. stock market indices posted strong results in Q1 of 2017; the total return for the S&P 500 was 6.1% and the NASDAQ rose 10.1% paced by an extraordinary 25% gain in Apple. Stocks are generally responding positively to the pro-business agenda emanating from the new leadership in Washington. Catalysts for the market’s advance included the promise of lower taxes and less regulation.The year 2016 was a year of surprises, confounding conventional wisdom at every turn. The year commenced with one of the worst starts ever as stocks dropped 10% during the first five weeks in response to the collapse in oil prices. But by the end of the first quarter, the market had erased all the early carnage and climbed into positive territory. Then came the election surprises, both the Brexit vote in June and the Trump election ran counter to conventional wisdom as did the resilience of the equity markets following these events. Against this chaotic and unpredictable backdrop, US Equities closed the year with healthy gains.

Most notable in Q1 was the Federal Funds rate increase in March which is the second hike in three months and the third overall since December 2015. To put this in some perspective, the December 2015 rate increase was the first monetary tightening since June 2006. Historically, Fed tightening cycles have not ended well because of policy overshoot that induced recessions and equity bear markets. In the current environment with the real 10-year treasury yield negative, we view the recent interest rate hikes as the initial steps in the process of removing the substantial monetary accommodation that has accumulated in recent years. We think that it will take considerable time before monetary policy by itself poses a substantial risk for equity markets.

The strong post-election rally has been attributed to the rising business and investor confidence tied to the pro-business policy agenda of the incoming administration which includes tax reform, regulatory relief and infrastructure spending. One could argue, however, that economic and stock fundamental improvement had already begun prior to the election. For instance, the Citigroup Economic Surprise Index which measures how economic data releases compare to the consensus expectations bottomed in October 2016. Also, aggregate S&P500 earnings also turned positive in October following a one-year earnings recession. The market itself had been trending positively since the February 2016 bottom although it corrected about 4% for the S&P500 and 7% for the Russell 2000 over the several week period leading up to the election. The point is that things were notably more constructive from an economic, earnings, and market trend standpoint compared to the 12 months prior.

Near term, there are plenty of reasons to be cautious about the U.S. stock market. Valuations are elevated from the perspective of Price/Earnings and Price/Sales ratios as well as profit margins. Retail investors who have been rather timid over much of the bull market have belatedly become bullish in recent months with near panic buying, mostly passive ETFs. The volatility index (VIX) remains very low suggesting complacency, although the recent market correction has reigned in some excess in sentiment measures. Political rancor, foreign election uncertainty, and a more hawkish Fed all have the potential to prompt a deeper pullback than the markets have experienced recently.e good odds that the current leadership can persist.

On a positive note, the fundamental driver of stock prices, earnings, are strong. According to Factset, the estimated earnings growth rate for the S&P 500 in Q1 of 2017 is 9.1%, the best reading since Q4 of 2011. A number of factors have supported the improvement including stability in energy prices and the U.S. dollar plus the fact that economic growth is on the upswing both domestically and globally.

Another positive development in Q1 was the emergence of European equities following a nearly three year bear market. Over the course of the secular decline, benchmarks for German and Spain equities declined 30% and 47% respectively. Now, despite political uncertainty and a looming banking crisis in Italy, European stocks are, from the standpoint of our model, positioned better than any time since 2012. Europe’s improvement along with current positive trends in U.S., Asian and emerging market stocks constitute the first synchronized global bull market in several years.congress. That is, to what extent will reality match the hopes and promises? Is the market priced for perfection? A valid concern in our view. Markets typically climb a wall of worry, but this currently seems in short supply.

Despite the strong overall performance of U.S. stocks in Q1, there was considerable sector rotation beneath the market surface. Energy stocks performed poorly, correcting most of their Q4 2016 appreciation. Industrial and Financial stocks in general spent most of the first quarter consolidating their gains on an absolute basis, but losing ground relative to most benchmarks. Most notable was the strong showing from technology stocks. Capitalization-weighted tech indices were strong because of Apple’s performance, but by our measures tech stock gains were equally robust measured on an unweighted basis.In conclusion, the U.S. stock market remains in a secular bull market, the second longest in market history. While long from a calendar standpoint, the market is remarkably absent the excesses in sentiment and relative valuation that have historically characterized market tops. Also, the market has only recently emerged from a 2+ year consolidation period that was in effect a cyclical bear market from a time perspective. What also seems likely from our work is that new and more focused and enduring leadership has emerged in the form of the cyclical and financial market sectors.

We continue to believe that the underlying characteristics of the uptrend in U.S. stocks are positive and from a probability standpoint can endure beyond conventional expectations.work is that new and more focused and enduring leadership has emerged in the form of the cyclical and financial market sectors.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP INSTITUTIONAL EQUITY

The Large Cap Institutional Equity composite return was 8.57%, the Russell 1000 Growth benchmark return was 8.91%. The composite’s first quarter modest lag was derived from relative underperformance in six of eleven sectors. Technology and Healthcare were the most notable sectors contributing 0.99% and 0.70% respectively to the relative performance. Industrials, Materials and Telecom contributed 0.27%, 0.26%, and 0.06% respectively. Consumer Discretionary, Energy, Consumer Staples, and Financials detracted 1.08%, 0.68%, 0.48%, and 0.22% respectively from the relative gain. Real Estate and Utilities detracted a combined 0.18% from relative performance. The portfolio is overweight Industrials, Financials, and Technology and underweight Staples, Consumer Discretionary, and Healthcare.The Large Cap Institutional Equity composite return was -0.43%, the Russell 1000 Growth benchmark return was 1.01%. The composite’s fourth quarter lag was derived from relative underperformance in eight of eleven sectors. Technology was the most notable sector contributing 0.87% to the relative performance. Energy and Utilities contributed a combined 0.09%. Industrials, Staples, Consumer Discretionary, Materials, and Real Estate detracted 0.56%, 0.54%, 0.48%, 0.35%, and 0.26% respectively from the relative gain. Healthcare, Financials, and Telecom detracted a combined 0.21% from relative performance. The portfolio is overweight Industrials, Financials, and Energy and underweight Consumer Discretionary, Staples, and Healthcare.

ALL CAP GROWTH EQUITY

The All Cap Growth Equity composite return was 8.69%, the Russell 3000 Growth benchmark return was 8.63%. The composite’s first quarter modest outperformance was derived from relative outperformance in five of eleven sectors. Healthcare was the most notable sector contributing 1.31% to relative performance. Utilities, Materials, Telecom and Consumer Discretionary contributed a combined 0.20% to relative performance. Energy, Staples, and Industrials detracted 0.39%, 0.35%, and 0.32% respectively from relative performance. Technology, although returning 3.85% during the quarter was outpaced 0.17% by the 4.02% return in the benchmark sector. Real Estate and Financials combined detracted 0.26% from relative performance. The portfolio is overweight Financials and Energy and underweight Staples and Consumer Discretionary. Most of the other sector weights in the portfolio are in line with the benchmark +/- 1.50%.The All Cap Growth Equity composite return was -0.42%, the Russell 3000 Growth benchmark return was 1.20%. The composite’s fourth quarter underperformance was derived from relative underperformance in eight of eleven sectors. Technology was the most notable sector contributing 1.32% to relative performance. Materials and Energy contributed a combined 0.37% to relative performance. Consumer Discretionary, Healthcare, and Industrials detracted 0.91%, 0.87%, and 0.82% respectively from relative performance. Financials, Staples, Real Estate, Utilities, and Telecom combined detracted 0.73% from relative performance. Underexposure to Consumer Discretionary, Industrials and Financials were the main drivers behind the lag coupled with corrections in select Healthcare stocks. The portfolio is overweight Financials and Industrials and underweight Staples and Consumer Discretionary.

ALL CAP GROWTH CONCENTRATED EQUITY

The All Cap Growth Concentrated Equity composite return was 3.33%, the Russell 3000 Growth benchmark return was 1.20%. The composite’s fourth quarter outperformance was derived from relative outperformance in three of eleven sectors. Technology, Utilities, and Energy were the most notable contributing 4.96%, 0.63%, and, 0.54% sequentially to relative performance. Staples, Healthcare, Materials, Industrials, and Financials detracted 1.55%, 1.03%, 0.94%, 0.21%, and 0.13% respectively from relative performance. Telecom and Real Estate detracted a combined 0.09% and underexposure to Telecom contributed a modest 0.06% relatively. The portfolio is overweight Energy, Financials, Utilities, and Industrials and underweight Healthcare, Staples, and Consumer Discretionary.

MID CAP EQUITY

The Mid Cap Equity composite return was -0.95%, the Russell Midcap Growth benchmark return was 0.46%. The composite’s fourth quarter underperformance was derived from relative underperformance in eight of eleven sectors. Technology, Utilities, and Consumer Discretionary were the most notable contributing 1.02%, 0.14%, and 0.12% sequentially to relative performance. Underperformance in Staples, Materials, and Real Estate detracted 1.04%, 0.75%, and 0.46% respectively from relative performance. Financials, Energy, Healthcare, Industrials, and Telecom detracted a combined 0.50%. The portfolio is overweight Financials, Industrials, Energy, and Materials and is underweight Consumer Discretionary, Healthcare, and Staples.

SMID EQUITY

The SMID Cap Equity composite return was 1.29%, the Russell 2500 Growth benchmark return was 2.60%. The composite’s fourth quarter underperformance was derived from relative underperformance in nine of eleven sectors. Energy and Technology were the most notable contributing 0.94% and 0.62% respectively to relative performance. Industrials, Consumer Discretionary, Materials, and Financials detracted 0.95%, 0.77%, 0.45%, and 0.36% respectively from relative performance. Underexposure to Industrials, Consumer Discretionary, and Financials were the main detractors. The portfolio is overweight Energy and Tech and is underweight Consumer Discretionary, Real Estate, Healthcare, and Staples.

SMALL CAP EQUITY

The Small Cap Equity composite return was 0.79%, the Russell 2000 Growth benchmark return was 3.57%. The Small Cap Equity composite’s fourth quarter underperformance was derived from relative underperformance in eight of eleven sectors. Energy, Tech, and Staples were the most notable contributing 0.49%, 0.17%, and 0.01% respectively to relative performance. Consumer Discretionary, Materials, Healthcare, Financials, and Real Estate detracted 0.73%, 0.66%, 0.65%, 0.52%, and 0.38% sequentially from relative performance. Utilities, Industrials, and Telecom detracted a combined 0.47%. The portfolio is overweight Tech and Energy and is underweight Real Estate and Healthcare.

AMERICAS EQUITY

The Americas Equity composite return was -0.02%, the MSCI All Cap Americas Index return was 2.85%. The composite’s fourth quarter underperformance was derived from relative underperformance in nine of eleven sectors. Tech was the most notable sector contributing 2.27% to relative performance. Energy contributed a modest 0.30% to the relative performance. Healthcare and underexposure to Financials were the two most notable sectors detracting 1.94% and 1.44% sequentially from relative performance. Consumer Discretionary, Materials, Staples, Industrials, Utilities, Telecom, and Real Estate detracted 0.55%, 0.39%, 0.37%, 0.36%, 0.19%, 0.13%, and 0.10% respectively from relative performance. At the sector level, the portfolio is overweight Tech, Industrials, Materials, and Financials and underweight Staples, Consumer Discretionary, Telecom, and Real Estate. The portfolio is underweight developed U.S. and Canada by 13%, and overweight emerging markets by 11%.

LATIN AMERICA EQUITY

The Latin America Equity composite return was 2.43%, the Russell Latin America benchmark return was -1.68%. The composite’s fourth quarter outperformance was derived from consistent performance across six of eleven sectors. Most notable were Financials, Materials, Utilities, Energy, Industrials, and Consumer Discretionary contributing 1.64%, 1.15%, 0.55%, 0.49%, 0.35%, and 0.08% sequentially to performance. Tech, Staples, Real Estate and Telecom detracted 0.96%, 0.71%, 0.21%, and 0.16% respectively from performance. Healthcare had no exposure and was flat. The portfolio is overweight Industrials, Utilities, Real Estate, and Materials and is underweight Financials, Staples, Telecom, Consumer Discretionary, and Energy.

GROWTH & INCOME EQUITY

The Growth & Income Equity composite return was 3.89%, the S&P 500 Total Return benchmark return was 3.82%. The composite’s fourth quarter outperformance was derived from relative outperformance in six of eleven sectors. Notable were Technology, Energy, Healthcare, and Materials contributing 0.89%, 0.77%, 0.51%, and 0.34% respectively to relative performance. Utilities and Industrials contributed a combined 0.10% to relative performance. Real Estate and Financials were notable detracting 1.17% and 0.59% respectively from relative performance. Consumer Discretionary, Staples, and Telecom detracted a combined 1.00% from relative performance. The portfolio is overweight Materials, Financials, Utilities, and Industrials and is underweight Staples and Telecom.