NOTICE: 2019 Capital Gains Available. View PDF here.

Opportunistic 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 share class returned -0.92% during the quarter, compared with the average return of 0.66% for the 210 funds in Lipper Absolute Return category.

Additionally, the Fund’s benchmarks, the S&P 500 Index1 and the HFRX Equity Hedge Index1, returned 1.70% and 1.79% during the period, respectively.

What is the Fund’s strategy?

The Fund seeks the best investment opportunities throughout a wide range of categories. We seek undiscovered, neglected, or misunderstood opportunities to generate positive investment returns. Although the Fund has a primary focus on domestic equities, we consider investments across a wide range of asset classes including equities, real estate investment trusts (REITs), master limited partnerships (MLPs), preferred stocks, exchange-traded funds (ETFs), options, bonds, commodities, and money market funds. We will consider foreign and U.S. securities listed on U.S. exchanges. Furthermore, we pursue investment opportunities that we believe offer attractive risk/ return profiles or are below intrinsic value.**

We believe attractive investment opportunities often arise from situations in which Wall Street research is either nonexistent or inadequate. We rely on our in-depth, bottom-up research and evaluation process to determine whether these securities offer attractive investment opportunities. We modulate the level of exposure to risk assets based on our ability to find attractive investment opportunities. This can result in significant fluctuations of the Fund’s net exposure to risk assets over time.**

What factors influenced the Fund’s performance?

The Fund remained conservatively positioned in the third quarter in regards to equity asset allocation. At quarter-end, the Fund had a 48% allocation to equities, including merger arbitrage positions. About half of the equity holdings are in micro-cap, small-cap, and mid-cap stocks. This has been the case since the Fund's inception. However, these stocks underperformed their large-cap peers, with index proxies such as the Russell Microcap® Index1 and Russell 2000® Index1 reporting -5.45% and -2.40% total returns, respectively in the quarter.**

The Fund maintained its high allocation to fixed income securities, including positions in higher-coupon preferred stocks. These securities do not have a high correlation to common stocks, though provide significantly higher income than U.S. Treasuries while dampening downside volatility risk.**

Cash holdings also remain well above historical levels as near-term opportunities in risk assets are determined to be scarce.**

The Fund’s equity holdings still favored cyclically sensitive sectors, such as industrials, information technology, and communications services. Newer opportunities were focused on initial public offerings and growth-oriented companies in information technology and communication services. The Fund also used hedges via inverse ETFs and other instruments to offset risk in the small-cap holdings.**

What tools did you use to manage risk?

We use ETFs to hedge the Fund’s long positions and we may use options on indices or ETFs to hedge a portion of the portfolio. We also short stocks or ETFs as a hedge. When opportunities are scarce, we may raise cash to lower our net market exposure. We monitor the Fund’s stock market exposure based on our view of market conditions and investment opportunities. We measure our stock market exposure as being our investment in equities and equity-like instruments less the effect of hedging instruments, such as inverse ETFs or other instruments. Options contracts are not included in this calculation.**

Through this modulation, we attempt to minimize the influence of market corrections on the portfolio. We believe our ability to modulate our net exposure to equity markets helps to mitigate losses in a declining market, and we will reduce our equity exposure should conditions deteriorate.**

What is your outlook?

We believe the equity market is essentially fairly valued, and because we believe that the business cycle is in its later stages, we are more conservatively positioned to help protect against downside volatility.

Global interest rates remain under pressure, making equity investments more compelling for investors. The market is factoring in potential growth from the Federal Reserve Board's (the Fed) shift towards lower interest rates, but investors have never experienced the long-term impact of negative interest rates. The total value of global debt with a negative yield ballooned to roughly $15 trillion by quarterend compared with about $8 trillion at the start of 2019 (Source: Bloomberg).

The U.S. market still has the strongest underpinning in terms of growth, but year-over-year earnings growth is moderating quickly. We expect that earnings growth throughout the remainder of 2019 will moderate strongly from earlier in the year. We evaluate both macroeconomic indicators and bottom-up analysis of individual securities and the macro- portion of the analysis says the market at best is fairly valued prior to the kick off of the next earnings season. Earnings growth is likely to go through some turbulence for at least a few quarters in part from the tough comparison brought by lower taxes enacted in 2018. And domestic political turmoil and geopolitical issues have created additional uncertainty.

We believe there is evidence of risks that investors should not take lightly that could cause market turmoil. First, there are signs that growth stocks are finally losing some appeal to value stocks, and a significant rotation could cause serous market disruption, as in 2000 and late 2018. Turmoil in the IPO market is a symptom of this potential volatility, in our opinion. A number of high-profile new public stocks have been dismal performers this year. Second, there are indications that corporate spending could moderate from too much uncertainty. Most chief financial officers surveyed by Duke University believe the U.S. is now at risk for a recession in the coming year. Separately, the New York Fed publishes a model that predicts the probability of a recession, and its latest result is similar to a level experienced in 2007 when the market began to falter.

The unresolved U.S.-China trade dispute is driving most of the market uncertainty. The U.S. presidential election continues to move closer as well, with two parties with divergent viewpoints on the economy, on taxes, and on growth.

To be clear, we are not entirely negative on equity markets over the medium term, we just want a pullback to be able to enter into incremental investments at a more attractive level. Inflation remains contained, and consumer confidence is high. The earnings yield of the market still remains highly attractive relative to fixed income assets. Also, roughly half of the constituents of the S&P 500 Index have offered a dividend yield greater than 10-year U.S. Treasury notes.

**
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.
Merger Arbitrage opportunities are equities and equity-related instruments of companies engaged in a corporate transition. Many of our investments in this area are in cash-based acquisitions.
1

Definitions

Russell 2000® Index is a market capitalization-weighted index comprised of the 2,000 smallest companies listed on the Russell 3000® Index, which contains the 3,000 largest companies in the U.S. based on market capitalization. Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity market. It makes up less than 3% of the U.S. equity market. It includes 1000 of the smallest securities in the small-cap Russell 2000® Index based on a combination of their market cap and current index membership and it includes the next 1,000 securities. 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. HFRX Equity Hedge Index is an index created by Hedge Fund Research, Inc. (HFR) within its HFRX Hedge Fund Indices series. HFR utilizes a UCITSIII compliant methodology based on defined and predetermined rules and objective criteria to select and rebalance components to maximize representation of the Hedge Fund Universe. HFRX Indices utilize state-of-the-art quantitative techniques and analysis; multi-level screening, cluster analysis, MonteCarlo simulations and optimization techniques ensure that each Index is a pure representation of its corresponding investment focus. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk. 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.

2
Lipper performance calculation as of August 31, 2011.

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 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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