NOTICE: 2019 Capital Gains Available. View PDF here.

Active Core Fund Commentary

3Q 2019

The returns presented reflect fee waivers that have been in effect during the applicable periods. Without such waivers, the total returns would have been lower. Currently, contractual fee waivers are in effect from December 26, 2018 through December 31, 2019.

The Fund’s Institutional shares returned 1.19% in the third quarter. The Fund’s equity benchmark, the Russell 1000® Index1, returned 1.42%, while its fixed-income benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index1, returned 2.27%.

How did financial markets perform overall?

Despite the ongoing weakening of the global economy, at a high level, the U.S. economy has demonstrated impressive resilience, expanding at an annual pace of 2.0% in the second quarter, with expectations of a similar number in the third quarter. The U.S. labor market has been the backbone of that resilience, feeding ongoing consumer confidence and a healthy housing market.

However, U.S. manufacturing indicators pointed to a contraction in August and September, with the Institute for Supply Management (ISM) U.S. manufacturing purchasing managers’ index (PMI)1 falling to its weakest level since 2009. Clearly, the impact of global economic weakness coupled with uncertainties related to the U.S.-China trade war is causing business confidence to wane along with manufacturing activity

All of this caused the U.S. Federal Reserve Board (the Fed) to take a more aggressive stance in its efforts to provide more accommodative monetary policy. Accordingly, the Federal Open Market Committee cut the federal funds target rate twice during the third quarter, in July and September, bringing it down 50 basis points (0.50%) during the period to end in a range of 1.75% - 2.00%.

As a result, U.S. stocks had mixed results, while bonds had relatively strong returns.

How did stocks fare?

In a quarter that had fairly subdued overall results, U.S. large-cap stocks and higher-grade fixed income securities led the way. The modest 1.70% quarterly gain for the S&P 500 Index1 far outpaced the -1.00% return of the MSCI EAFE Index1, representing non-U.S. developed market stocks, and the -4.11% return for the MSCI Emerging Markets Index1. For the 12-month period ended September 30, 2019, the S&P 500 registered a 4.25% gain versus the -0.82% and -1.63% returns of the MSCI EAFE and MSCI Emerging Markets indexes, respectively.

Within the U.S. equity market, large-cap and mid-cap stocks outpaced small-cap stocks for the quarter once again. However, in a reversal from recent quarters, value outperformed growth in the mid-cap and small-cap segments, while large-cap growth slightly outperformed large-cap value. The S&P 500’s leading sectors were defensive, including utilities, real estate, and consumer staples. Energy and health care continued to be the weakest sectors, repeating their market-lagging second-quarter results.

Was the environment favorable for bonds?

In fixed income markets, U.S. and global indices had similar quarterly performance. The broad-based Bloomberg Barclays U.S. Aggregate Bond Index1 gained 2.27%, ahead of the 0.71% return of the Bloomberg Barclays Global Aggregate Index1. Reflecting a flight to safety, the Bloomberg Barclays U.S. Corporate High Yield Index1 trailed the overall U.S. bond market, with a more modest gain of 1.33% for the quarter, and the Bloomberg Barclays Global High Yield Index1 returned a weak -0.67%.

During the quarter, the U.S. yield curve inverted further, pointing to a heightened chance of a recession. Yields for the 10-year U.S. Treasury note fell 34 basis points (0.34%) while the 2-year Treasury yield fell 14 basis points (0.14%). At quarter-end, yields for the 10-year Treasury, the 2-year Treasury, and the three-month Treasury were 1.67%, 1.62%, and 1.88%, while the federal funds target rate range was 1.75% to 2.00%.

What were your key strategies during the quarter?

We continued to maintain a broadly diversified portfolio of equity and fixed-income securities. At the end of September, approximately 51.6% of the Fund was invested in stocks, 44.1% was invested in fixed-income securities, and 4.3% was in cash. For comparison, at the end of June the breakdown was 52.3% in stocks, 43.2% in fixed-income securities, and 4.5% in cash.**

Within the Fund’s equity component, we favored broad style exposure, investing in large- and mid-cap stocks within the core, value, and growth styles. We continued to maintain a modest allocation to non-U.S. stocks.**

Within the Fund’s fixed-income portfolio, we maintained a modestly short duration versus our benchmark along with a higher-quality bias. We also remained underweighted in the corporate sector, which detracted significantly from performance as corporate bond strength continued during the quarter, again led by Baa-rated securities .**

What is your outlook for the Fund?

The U.S. economy continues to grow—currently the longest U.S. economic expansion in history—driven primarily by the strength of the U.S. consumer. However, risks are mounting, driven by global economic weakness, ongoing trade-related uncertainty, and a new reliance on the Fed for accommodative policy measures to prop up the economy. These are compounded by geopolitical risks, including tensions and possible confrontations between Iran and Saudi Arabia, and U.S. domestic turmoil as the quickly developing drama of the Trump impeachment inquiry unfolds.

At quarter-end, fixed income prices were at or near their highest levels in history. Because yields are the inverse of prices, the expected returns for fixed income are at or near their lowest levels in history. Given these valuations, we believe it makes sense to exercise caution. The corporate bond market looks complacent, as it has thus far ignored what we believe to be a significant slowdown in economic growth expectations. The large underperformance of agency mortgage-backed securities so far this year, particularly relative to the returns in the corporate market, may provide a decent opportunity to move up in credit quality without giving up much yield. Outside of government-guaranteed bonds, we will continue to focus on securities that we believe can withstand significant slowdown scenarios.**

As always, we advise using caution and taking a prudent, diversified approach to your investing.**

**
Portfolio composition is subject to change.

Each Lipper Mutual Funds average is an equally weighted average of the mutual funds within their respective investment objectives, adjusted for reinvestment of capital gain distributions and income dividends.

Credit-quality ratings are derived from the underlying securities of the portfolio, and are rated by Moody’s. If a rating from Moody’s is unavailable, S&P’s rating is used. If neither Moody’s nor S&P ratings are available, Fitch’s rating is used.
1

Definitions

Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the U.S. High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. Bloomberg Barclays U.S. Corporate High Yield Index measures the USD-denominated, high yield, fixed-rate corporate bond market. The U.S. Corporate High Yield Index is a component of the U.S. Universal and Global High Yield Indices. Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based index that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed, and foreign bonds traded in the U.S. Bloomberg Barclays Global Aggregate Bond Index is a measure of global investment-grade debt from 24 local currency markets, which include treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers. ISM Manufacturing Index (ISM) is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM monitors employment, production, inventories, new orders, and supplier deliveries. A composite diffusion index monitors conditions in national manufacturing and is based on the data from these surveys. MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. MSCI EM Index is a float-adjusted market capitalization index that is designed to measure equity market performance in global emerging markets. Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders,inventory levels, production, supplier deliveries, and the employment environment. Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market. S&P 500 Index is regarded as a gauge of the U.S. equities market, this index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. These indexes are unmanaged and do not reflect the fees and expenses associated with a mutual fund. An investor cannot invest directly in an index.

Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. To obtain performance information current to the most recent month end, call 800-762-7085 or visit us at www.cavanalhillfunds.com.

The Lipper Mutual Funds Average is an equally weighted average of the mutual funds within their respective Lipper classification, adjusted for reinvestment of capital gains distributions and income dividends. Lipper ratings are not intended to predict future results, and Lipper does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright 2019, All Rights Reserved.
Morningstar rankings are based on a fund’s average annual total return relative to all funds in the same Morningstar category. Fund performance used within the rankings, reflects certain fee waivers, without which, returns and Morningstar rankings would have been lower. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100.
© 2019 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

An investor should consider a fund’s investment objectives, risks and charges and expenses carefully before investing or sending money. This and other important information about an investment company can be found in the fund’s prospectus. To obtain a Cavanal Hill Funds prospectus or summary prospectus, please call 800-762- 7085 or visit us at www.cavanalhillfunds.com. Please read it carefully before investing.

Cavanal Hill Investment Management, Inc. is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company (“BOKF”). BOKF, NA serves as the custodian for the Cavanal Hill Funds. Cavanal Hill Investment Management, Inc. provides investment advice, administration and other services for the Funds and receives a fee for providing such services as fully described in the prospectus. The Funds are distributed by Cavanal Hill Distributors, Inc., a registered Broker/ Dealer, member FINRA and wholly-owned subsidiary of BOKF. SEC registration does not imply a certain level of skill or training. Bank of Oklahoma and its affiliates Bank of Arkansas, Bank of Albuquerque, Bank of Texas, Bank of Arizona, Mobank and Colorado State Bank and Trust offer investment management and administrative services nationally and administer more than $35 billion in assets for numerous clients, including foundations and endowments, and high-net-worth individuals.
Commentary provided is for the period ended 9/30/2019 is designed to provide a frame of reference and does not constitute investment advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the authors at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This document contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about the Cavanal Hill Funds, the securities and credit markets and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forwardlooking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events and are inherently forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forward-looking statements is subject to a number of limitations and risks, which are described in the Funds’ prospectuses, and investors or potential investors, are cautioned to review the Funds’ prospectuses, and the description of such risks. Neither the Funds nor the Funds’ investment adviser, Cavanal Hill, undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

MUTUAL FUNDS AND OTHER INVESTMENTS: NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE

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