World Energy Fund Commentary

4Q 2019

The Fund’s Institutional share class returned 7.53% during the quarter, compared with 9.07% and 5.22% 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 rebounded in the fourth quarter as almost all risk assets benefited from accommodative central bank policy and the announcement of a Phase One U.S.- China trade deal. A number of factors combined to support the energy market: constrained supply partly because of the Organization of Petroleum Exporting Countries¹ and Russia agreement from December 2018, sanction-related declines in Iranian oil exports, and the risk of Iran-Saudi conflicts in the Persian Gulf and Straits of Hormuz, which could disrupt supplies and cause oil prices to spike. The number of U.S. oil rigs declined from 885 to 670 through the course of 2019 as U.S. producers reduce production growth rates.

On the negative side, the energy sector underperformed the overall equity market with the weakest returns in the S&P 500 Index for the full year, though only modestly lagging the index for the quarter. Over the past seven years, the U.S. energy sector has underperformed the overall market in all but one year. Over that time, management teams have lacked discipline in their capital decisions, investing excess cash flow to generate additional growth despite poor returns. Compounding this, private equity has poured capital into energy, providing competition for assets and reducing returns for public equity. In addition to China’s economic slowdown this year, the Saudi Aramco initial public offering (IPO), launched in the fourth quarter, could result in an oversupply of energy stocks.

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 demand from International Maritime Organization’s (IMO) 2020 regulations. Geopolitics remains a wildcard that could result in prices moving above this range temporarily.

What factors influenced the Fund’s relative performance

During the quarter, small-cap energy stocks trailed large caps by a slim margin, with the Russell 2000^® Energy Index¹ returning 5.15% versus the 5.69% gain for the Russell 1000^® Energy Index¹.

The Fund’s quarterly returns outpaced those of the MSCI World Energy Index. Relative returns were aided by strong stock selection in the exploration and production (E&P) space, and positive results in companies related to the electric vehicle supply chain, including firms that sell chips and technology into the electrical components of these vehicles. Conversely, weighing down overall returns were fixed income holdings that had low yields relative to stock returns during an equity rally, along with relatively weak performance from utilities, as defensive stocks underperformed.**

The Fund has a 10% allocation to integrated oil and gas stocks versus 43% in the Russell 3000^® Energy Index¹. We continue to significantly underweight this group because we see attractive opportunities for investment in alternative energy and refiners. We are also underweight the E&P 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 equal weight the storage and transportation companies with a focus on the Permian basin and Canada, where we see opportunities for returns based on production increases. The Fund has a 21% weighting in alternative energy stocks, where companies continue to trade below our view of intrinsic value. These companies offer attractive long-term opportunities as global economies focus on more environmentally friendly energy production and usage. We remain focused on electric vehicle makers, whose valuations we view favorably, and we added to existing positions within alternative energy during the quarter.**

We remain overweight refiners to 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 increased demand and higher prices for marine diesel. Refiners remain well capitalized with strong cash flow yields, and they should continue to benefit from wider discounts for WTI relative to Brent based on excess amounts of local light, sweet crude.**

What is your outlook for the energy sector?

With an easing of U.S.-China trade tensions and a possible resolution, we see improved prospects for the energy sector. If trade tensions are resolved, we would expect oil prices to rebound on expectations for increased demand. Brent crude prices could be held within a range of $55 to $70 based on the likelihood that OPEC+¹ 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. The Phase One trade agreement has already led us to 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. We see some relative value in mid- and small-cap E&P companies and services, but we expect investors to wait to see whether management will remain disciplined. The issues of oversupplied services and an overcapitalized industry as a result of excess prior-year investments remain.**

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.

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 2020, 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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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.

Lipper performance calculation as of January 31, 2014.

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 12/31/2019 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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