NOTICE: 2019 Capital Gains Available. View PDF here.

Opportunistic Fund Commentary

2Q 2019

The Fund’s Investor share class returned -0.08% during the quarter, compared with the average return of 1.25% for the 219 funds in Lipper Absolute Return category. Additionally, the Fund’s benchmarks, the S&P 500 Index1 and the HFRX Equity Hedge Index1, returned 4.30% and 0.08% 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 reduced net equity exposure during the first half of 2019 as the market rallied hard from a disappointing fourth quarter. At the end of the second quarter, the Fund’s asset allocation to equities was about 40%, including merger arbitrage positions, down from 78% at the beginning of 2019. The intention of this shift from the first quarter was to manage risk in an increasingly uncertain environment. The rebound in the equity market has only recouped levels seen in September 2018. Year-to-date, the Fund’s average net equity position is approximately 47%, including merger arbitrage positions.**

The Fund has increased its allocation to fixed income securities, including positions in higher-coupon preferred stocks. These securities do not have a high correlation to common stocks, though they provide significantly higher income than U.S. Treasuries while protecting against downside volatility. The fixed income holdings in aggregate are primarily shorter-duration corporates, varying in credit quality from investment-grade to high-yield.**

Cash holdings are also currently elevated well above historical levels as near-term opportunities in risk assets are becoming more scarce.**

The Fund’s equity holdings still favored cyclically sensitive sectors such as industrials, information technology, and communications services. Even with a lower equity asset profile, the allocation towards small-cap stocks and large caps was about equal. Newer opportunities were focused on initial public offerings and growth-oriented companies across information technology and communication services. The Fund also put a hedge on via an inverse ETF to offset elevated risk among 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?

The point-to-point strong total equity market return yearto- date suggests that investors should simply maintain net exposure to the market. However the volatility that reared its head in the second quarter is a warning. The market is benefiting from the Fed’s shift toward lower interest rates versus the multiple hikes that were foreseen coming into 2019.

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 as we enter the second half of the year. Earnings per share1 for the S&P 500 Index have come under pressure since last earnings season and second-quarter earnings are facing serious headwinds that will likely affect results. Second-quarter results and guidance for the remainder of the year will need to convince investors, and earnings growth will eventually need to support the embedded valuations. Our analysis indicates the market does not deserve a premium multiple at this point in the cycle. Earnings growth is likely to go through some turbulence for at least a few quarters due to the tough comparison with last year brought by lower taxes enacted in 2018. What is bolstering stock valuations is the unhealthy global bond market, where more than $13 trillion of debt carries a negative interest rate.

Risk comes in various forms, including the ongoing U.S.- China trade dispute and the upcoming U.S. presidential election cycle. Investors are also reminded of risk coming from the Middle East. Corporate managers are likely reigning in investment because of the near-term lack of clarity as well. Verification of this over the coming weeks will be a critical ingredient into portfolio positioning going forward. To be clear, we are not entirely negative on equity markets over the medium term, we just want a pullback to be able to invest incrementally at a more attractive level. A U.S. recession is not yet on the horizon, inflation remains contained, and consumer confidence is high. The market’s earnings yield remains highly attractive relative to fixed income assets. About half of the constituents of the S&P 500 Index offer 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

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, Monte-Carlo 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.

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 6/30/2019 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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