TCW Gargoyle Hedged Value Fund

Quarterly Commentary

In the second quarter, TCW|Gargoyle Hedged Value Fund (TFHIX/TFHVX) lost -0.21%/- 0.21% (net of all fees and expenses, please see endnotes), versus a gain of 3.09% for the benchmark S&P 500 Total Return Index (“SPXT”). For the trailing twelve months TFHIX’s 13.35% return captured 75% of the SPXT’s 17.90% return. This full-year upside capture ratio was achieved in an environment in which value stocks have been out-of-favor relative to the broader market (Russell 1000 Value Index +15.52% TTM). This capture ratio is all the more impressive given that the relentless bullish advance of the SPXT has understandably inhibited the relative performance of our Fund, which targets a 50% net-long market exposure. We do not believe that value can remain uncharacteristically out of favor forever, nor do we believe that the market can continue its upward climb indefinitely...

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Investment Risks

The Fund is new. Accordingly, investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy or may not employ a successful investment strategy, which could result in the Fund being liquidated at any time without shareholder approval and could have negative tax consequences for shareholders. The Sub-Adviser also may not be fully able to implement their investment strategies within the regulatory constraints for mutual funds.
The investment strategies employed by the Fund are alternative strategies that have not been applied to mutual funds for an extended period of time. Accordingly, the Fund is subject to the risk that anticipated opportunities do not play out as planned, or that there are unexpected challenges in implementing the Fund’s strategies due to regulatory constraints for mutual funds. Alternative strategies often engage in various forms of leverage and other investment practices that are speculative and involve a higher degree of risk than traditional investments. Such practices may increase the volatility of performance and the risk of investment loss, including the entire amount that is invested. Alternative investments may not be suitable for all investors.

Equity investments entail equity risk and price-volatility risk. The value of stocks and other equity securities may change based on changes in a company's financial condition and in overall market and economic conditions. Funds investing in mid-cap companies involve special risks including higher volatility and lower liquidity.

As the writer of an index call option, the Fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the index covering the call option above  the exercise price of the call option. Since the Fund’s investment strategy does not contemplate investing in or replicating a particular index, the Fund will not profit from increases in market value of a particular index. Therefore, selling index call options also can limit the Fund’s opportunity to profit from an increase in the market value of the Stock Portfolio; however, only to the extent that the Stock Portfolio correlates with the index underlying the call option written by the Fund.

As part of its investment strategy, the Fund sells index call options to hedge the Stock Portfolio. There is the risk that the returns of the Stock Portfolio do not correlate with those of the indexes on which the call options are written. Further, the Sub-Adviser may not correctly assess the degree of correlation between the performance of the basket of indexes used in the hedging strategy and the performance of the equity securities in the Stock Portfolio being hedged. It is also not possible to hedge fully or perfectly against any risk, and hedging entails its own costs.