NOTICE: 2019 Capital Gains Available. View PDF here.

World Energy 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 -5.62% during the quarter, compared with 1.70% and -5.54% for the Fund’s benchmarks, the S&P 500 Index1 and the MSCI World Energy Index1, respectively.

What factors affected the energy markets during the quarter?

World energy markets struggled in the third quarter as U.S. producers continued to generate meager free cash flow, making the stocks relatively unattractive to many investors and extending years of chronic underperformance. Additionally, the U.S.-China trade war and China’s economic slowdown weighed on both traditional and alternative energy equities as investors feared decelerating demand and increased uncertainty about global supply chains. Oil demand growth for 2019 and 2020 continues to be revised downward in response to slowing global economic growth. Offsetting these headwinds, however, are several supply constraints including restrained international production as a result of the OPEC1-Russia December 2018 agreement to cut supply, declines in Iranian exports due to U.S. sanctions, and weakening Venezuelan production caused by continued political unrest. In addition, Iran-Saudi conflicts in the Persian Gulf could cause oil prices to spike. However, the bombing of Saudi oil facilities in September had only a brief transitory impact. More noteworthy is that U.S. oil rigs declined by about 10% during the quarter, from 793 to 713, and U.S. producers are reducing production growth rates.

As a result, we see West Texas Intermediate (WTI) oil prices as likely range-bound from $45 to $65, with the global economic slowdown offsetting the potential upside demand from International Maritime Organization's (IMO) 2020 regulations.

What factors influenced the Fund’s relative performance?

During the quarter, small-cap energy stocks trailed large caps, with the Russell 2000® Energy Index1 returning -20.70% versus the -6.74% return for the Russell 1000® Energy Index1.

The Fund’s quarterly returns were roughly in line with the MSCI World Energy Index. Weighing on relative returns were poor results from our high-yield fixed income holdings, as investors avoided risk during the period. Additionally, our investments in exploration and production and oil services stocks underperformed as investors continued to reduce exposure to these areas. However, these negatives were offset by strength in the Fund’s refiner holdings as well as relative strength in utilities and midstream positions. The alternative energy space performed well relative to the benchmark on strong performance in an investment in electric vehicles as well as semiconductor firms that provide resources to the alternative energy supply chain, including wind, solar, and electric vehicles.**

The Fund has an 11% allocation to integrated oil and gas stocks versus 46% in the Russell 3000® Energy Index1. We continue to significantly underweight this group because we see attractive opportunities for investment in alternative energy, refiners, and fixed income. We are also underweight the exploration and production industry, focusing on companies with low unit costs and companies where management has shown commitment to returning cash to shareholders. We are focused on companies that are expected to generate free cash flow in the next year.**

We are overweight the storage and transportation companies with a focus on the Permian basin and Canada as we see opportunities for returns based on production increases. The Fund has an 18% weighting in alternative energy stocks, where we believe companies continue to trade below their intrinsic value and offer attractive long-term opportunities as global economies focus on carbon reduction.**

We remain overweight refiners to potentially benefit from the price differentials between Brent and WTI crude oil as well as discounted crude that’s likely to be found throughout the U.S. because of pipeline constraints. We also are focused on refineries that we expect will benefit from the IMO 2020 rules requiring marine ships to use lower-sulfur fuel. These rules should drive demand—and pricing—of marine diesel. Refiners remain well capitalized with strong cash flow yields and limited global supply coming to the market in 2019, making them attractive investment opportunities in our view.**

What is your outlook for the energy sector?

With uncertainty over the outcome of the U.S.-China trade war, it is difficult to forecast the prospects for the energy sector. If trade tensions are resolved, we would expect oil prices to rebound on speculation of increased demand. Brent crude prices could be held within a range of $55 to $75 based on the likelihood that OPEC+ would reduce its supply cuts in the event of a price increase.

A U.S.-China trade settlement would be bullish for cyclical energy businesses. Should a trade agreement occur, we would likely increase our investment in alternative energy and refineries, particularly with IMO 2020 as a catalyst, while reducing our position in fixed income and cash to fund expanding opportunities in alternatives and refiners. Should the trade war remain entrenched, we are likely to hold our asset allocation similar to its current status.**

**
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. Since inception performance is calculated from 1/31/2014.
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. MSCI World Energy Index is designed to capture the large- and mid-cap segments across 23 Developed Markets (DM) countries. Developed Markets countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US. All securities in the index are classified in the Energy sector as per the Global Industry Classification Standard (GICS®). Russell 3000®, 2000® and 1000® Energy Indexes are designed to represent the performance of companies within specific sectors of the Russell 3000, 2000 and 1000 Indexes. Methodology equally weights securities within each sector, mitigating security specific risk and offering balanced exposure to particular sectors. 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. Organization of Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 14 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries.

2
Lipper performance calculation as of January 31, 2014.

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.
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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.

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