Steward Funds N-CSRCertified annual shareholder report (management investment company)

Dear Shareholder:

It is our pleasure to present you with the 2022 Steward Funds, Inc. Annual Report. Within the pages of this report, you will see detailed information regarding the Funds, including performance, specific holdings within each Fund, and a summary of the key factors that have affected the Funds’ performance for the most recent fiscal year.

Dedicated to widely-held traditional values, our Steward Funds use a proprietary screening methodology that seeks to screen out companies recognized for their material business involvement, through direct participation and/or percentage of revenue, in abortion and abortifacients, adult entertainment, alcohol, embryonic stem cell research, gambling, recreational cannabis, and tobacco. We believe that investors do not need to sacrifice investment returns to align their investments with their values.

In that vein, we are excited to announce that for the eighth consecutive year our Steward Global Equity Income Fund (ticker SGISX) has received multiple Lipper Fund Awards for its performance. Specifically, the Steward Global Equity Income Fund was named the Best Global Equity Income Fund in the ten-year performance category for the period ended November 30, 2021, by Refinitiv. We are proud of this impressive track record.

In addition to receiving recognition for our investment product performance, we are also extremely proud of the recognition we have received related to the corporate culture at Crossmark Global Investments (the investment advisory firm that manages the Funds). As a faith-based firm, we are committed to operating according to the highest levels of excellence within our industry. Our commitment to our core values of integrity, courage, commitment, proficiency, and professionalism is unwavering. We believe that a vibrant, healthy corporate culture contributes substantially to the success of our clients.

During this last year we were honored to receive Houston’s Best and Brightest Companies to Work for Award given by the National Association for Business Resources (the fifth year in a row Crossmark has received this recognition), as well as being named one of the Best Companies to Work for in Texas by the joint efforts of the Texas Association of Business and the Texas Society of Human Resource Management. These awards demonstrate our commitment to creating a positive work environment for our employees where our core philosophy of serving our clients with excellence can thrive.

On behalf of all of the professionals at the Steward Funds and Crossmark Global Investments, we sincerely thank you for the trust you have placed in us. We invite you to learn more about the Steward Funds, Crossmark Global Investments, and the various investment options available by visiting our website at crossmarkglobal.com. Additionally, if you are ever in the Houston, Texas area, we would love to meet you personally. Feel free to stop by our office at any time.

Again, thank you for choosing to invest in the Steward Funds.

Sincerely,

Michael L. Kern, III, CFA

President – Steward Funds, Inc.

With regard to performance attribution for the Fund during the fiscal year ended April 30, 2022, there are several sectors and individual stocks worth highlighting.  From a sector allocation standpoint for the stock portfolio, the sectors contributing the most to relative performance against the S&P 500 were Consumer Discretionary, Consumer Staples, and Utilities (each overweight relative to the sector weights of the S&P 500).  Detracting the most from relative performance were Communication Services (overweight), Information Technology (underweight), and Financials (overweight). Stocks that contributed the most to relative performance were ConocoPhillips (0.52% of total average net assets), Eli Lilly (0.85% of total average net assets) and Exxon Mobil (1.2% of total average net assets).  Stocks detracting the most from relative performance were Adobe (1.9% of total average net assets), Apple (4.6% of total average net assets), and PayPal (1.1% of total average net assets).  When considering the values based screens we apply, the net impact for the Fund of not owning the screened-out companies was -95 bp, with almost all of the negative net impact coming from our Embryonic Stem Cell research screens and Abortion-related screens.

As we look to the rest of the 2022 calendar year, volatility will likely remain front and center for markets driven by a tightening Federal Reserve, concerns over inflation, an unsettled war in Ukraine, high global commodity prices, Covid lockdowns in China, and cracks in global supply chains, to name a few factors.  How this continues to play out from an implied volatility vs. realized volatility standpoint (otherwise known as the volatility premium realized by writing covered calls) is yet to be determined. However, we do believe we’ve entered a new regime characterized by higher implied volatility compared to the historically low volatility regime bookended between the Great Financial Crisis of '08/'09 and the start of Covid lockdowns in early 2020. 

The Fund’s principal investment strategy is to invest in a portfolio of large-cap, dividend-paying, equity securities that are listed on U.S. exchanges and to write (sell) covered call options on those securities with the overall goal of providing options premium income and lowering volatility of the Fund’s portfolio when compared to the broader uncovered large-cap securities market, subject to the limitations of the Fund’s values-based screening policies.

Under normal market circumstances, the Fund will:

Covered call options may be written on the Fund’s equity securities. A call option gives the purchaser of the option the right to buy, and the writer, in this case, the Fund, the obligation to sell, the underlying security at a specified exercise price at any time prior

The covered call strategy used by the Fund is designed to earn extra premium income to moderate the impact of market declines and to reduce the volatility of the Fund’s portfolio. This strategy means that the Fund may be expected to underperform equity

Our long positions returned  -12.92% during this period, while our short positions returned 19.67%.  Biggest positive contributors were communication services (+206bp), healthcare (+185bp), industrials (+151bp), information technology (+143bp); biggest detractors were utilities (-112bp) and energy (-106bp).  The largest individual stock contributors were shorts (Wayfair +123bp, Shoals Technologies +103bp, Novavax +102bp, GoHealth +93bp, Unity Software +77bp, and Roku +75bp).  Biggest detractors were also shorts: New Fortress Energy -88bp and GameStop -52bp).  The Fund was hurt by 98bp due to values-based screens with the majority of that coming from our inability to own certain healthcare companies (United Healthcare -25bp, Johnson and Johnson -24bp, Bristol Myers Squibb -12bp, and Merck -10bp).

Our view is that the equity market is in a tug of war between a good earnings tailwind and a modest valuation headwind.  Despite a positive earnings picture, the overall macro backdrop has become less favorable for the equity market in 2022.  The combination of elevated market valuations, revenue and earnings growth losing steam, a war and higher oil prices, and rising bond yields point to a more difficult year with more frequent pullbacks and higher volatility.  Valuation will be of paramount importance in positioning equity portfolios in our view.  We believe that it makes sense to lean modestly in favor of value/cyclicals.  2022 is shaping up to be more challenging for investors, as central banks progressively unwind unprecedented monetary accommodation in response to ongoing economic recovery and expansion and elevated inflation pressures.  While we expect decent economic and earnings growth will be a tailwind for equities, rising interest rates and stubborn inflation will be headwinds. This is likely to create volatility and, at times, turbulent churning.

We expect a pause in the cyclical rise in bond yields, as growth concerns have increased and there should be less alarming inflation data ahead, at a point when government bond markets are extremely oversold.  A pause, in turn, should allow the recent risk-off phase to diminish once investors realize that the economic progress remains positive. The foundations under the global economic expansion are still solid in our view, but the liquidity boom is unwinding, and we expect financial market returns will be far less than in recent years, as bond yields move higher over time.

In the near-term, there is room for both stocks and bonds to rebound from an oversold starting point, during which expected ongoing growth worries may favor bonds over stocks.  However, on a 6-12 month horizon, our constructive economic outlook and sticky inflation imply another upleg for global bond yields and therefore that equities will resume outperforming bonds.  Barring a sharper decline in inflation than we anticipate, we believe multi-asset portfolios will struggle to generate positive real returns in the year ahead.

The Fund pursues its investment objective utilizing a market neutral strategy, the goal of which is to generate absolute returns that are due primarily to stock selection, rather than the returns and direction of the stock market. Under normal market conditions, the Fund invests at least 80% of its assets in equity securities. The Fund implements its market neutral strategy by establishing long and short positions in a diversified portfolio of equity securities, subject to the limitations of the Fund’s values-based screening policies on long positions.  Substantially all of the equity securities in which the Fund takes long and short positions will be included in the Russell 1000 Index at the time of purchase.  As a result, the Fund will invest significantly in large-capitalization companies.  When the Fund takes a long position in a security, it purchases the security outright.  When the Fund takes a short position, it sells a security that the Fund does not own at the current market price and delivers to the buyer a security that the Fund has borrowed.  The Fund is obligated to return the security to the lender, which is accomplished by a later purchase of the security by the Fund.  The Fund may use all or a portion of the proceeds of its short sales to purchase additional long positions.

Portfolio management will invest in long positions that are expected to deliver the overall returns of the stock market, plus additional performance unique to the specific stocks purchased by portfolio management.  The short positions selected by portfolio management are expected to deliver the inverse of the overall returns of the stock market, plus additional performance unique to the specific stocks sold short by portfolio management. At any time, the Fund's net long exposure to the stock market (long market value minus short market value) could range between -20% and 40%.

Portfolio management will select securities using an investment process that combines quantitative techniques, fundamental analysis and risk management.  Securities generally are added to the portfolio as long or short positions based both on security rankings provided by multi-factor quantitative models and on fundamental analysis of the securities.  In addition, portfolio management will utilize risk management techniques to establish constraints on the amounts invested in individual securities and sectors.  Portfolio management generally will decrease or eliminate a short or long position in a security if the security’s model ranking changes significantly or research reveals a significant change in the company’s fundamentals.

Portfolio management may consider among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments. With respect to security rankings provided by the multi-factor quantitative models, the models include a component for ranking companies using values-based characteristics.

Fund and Market Performance

(Institutional Class Shares)

For the fiscal year ended April 30, 2022, the Steward Global Equity Income Fund returned 0.02%. The return for the global market as represented by the S&P Global 1200 index was -3.10% for the same period. For dividend income comparison purposes, the MSCI World High Dividend Yield Index returned 3.51%.

The Fund’s allocation at the end of the period was 63% U.S. and 37% international with domestic stocks outperforming their international counterparts during the year.

Positive relative performance for the fiscal year was led by the energy sector as U.S. policy on fossil fuels curtailed new oil exploration and development reducing global supply. This combined with the geopolitical instability of Russia invading Ukraine has created further volatility and pressure on energy prices. Russia is the third largest oil and gas producer and the global backlash to the Ukraine invasion has created an aversion to Russian imports.  Shares of holdings Canadian Natural Resources Ltd. (1.91% of total net assets) and Petroleo Brasileiro SA (1.98% of total net assets) jumped 45.00% and 55.06% respectively for the period held. Shares of Cigna Corp. (2.49% of total net assets) rose 14.22% for the period held as revenues have been increasing consistently for the past several years. The health insurance provider has been growing its membership over many quarters and it is expected to continue. Management’s strategy is driven by opportunistic acquisitions and providing high quality products and services. The company has distributed over $9 billion to shareholders in 2021 though dividends and share repurchases. The last dividend payout reflected an increase of 12%.

Negative contributors to relative performance included Companhia Brasileira de Distribuicao, which dropped -41.78% before being sold out of the Fund in February. The Brazil based supermarket and department store retailer posted impressive results during the previous fiscal year that were boosted by increased demand for essentials. The pandemic had led to customers stockpiling supplies and increasing consumption at home. This trend, however, reversed during the current fiscal year as demand dropped impacting the company’s profitability. Shares of SAP SE (1.42% of total net assets), a Germany based provider of enterprise application software and software related services, dropped -26.88% during the period held. Recent weakness in software licenses and support services have weighed on company performance. SAP has also increased investment in enhancing its cloud-based offerings which has been exerting pressure on the company’s profitability. This transition to its cloud business has already been gaining strength and the company’s solid ecosystem continues to support growth across its product line.

Performance of the Fund can also be affected by the values-based investment policies. Compensating for a specific restricted industry or company whose total return deviates dramatically from the overall S&P Global 1200 Index is extremely difficult regardless of its weight within that Index. For the year ended April 30, 2022, the Fund’s values-based investment policies had a slight negative impact on performance.

With the pandemic now largely in the rear view mirror the market has become focused on geopolitical issues involving the Russian invasion of Ukraine and the corresponding impact that will have on the global economy. Inflation which has already been running hot coming into the first quarter has only gotten worse with the added pressure of rising oil prices due to embargoes on Russian crude. Company earnings continue to be strong but near future caution is warranted in our opinion. We believe this is a more favorable environment for a dividend strategy with its lower volatility profile and ability to lessen the impact of potential market gyrations.

The Fund pursues its investment objective through investment in U.S. and non-U.S. dividend-paying stocks that have demonstrated above-median yield and a positive trend in dividend payouts and favorable earnings growth, subject to the limitations of the Fund’s values-based screening policies. The Fund invests primarily in common stocks of companies that represent a broad spectrum of the global economy and a range of market capitalizations, including large-cap, mid-cap and small-cap. The Fund may also invest in other investment companies and real estate investment trusts. The Fund will invest in dividend-paying securities of issuers throughout the world and the Fund will generally seek to have 30% to 50% of its net assets, and, under normal market conditions, no less than 30% of its net assets, invested in securities of non-U.S. issuers. Under normal market conditions, the Fund will invest at least 80% (measured at the time of investment) of the value of its net assets, plus the amount of any borrowings for investment purposes, either directly or through other investment companies, in dividend-paying securities. The Fund will also, under normal market conditions, invest at least 80% (measured at the time of investment) of the value of its net assets, plus the amount of any borrowings for investment purposes, either directly or through other investment companies, in equity securities. (Any such other investment company will also have similar policies to invest at least 80% of the value of its net assets, plus the amount of any borrowings for investment purposes, in (a) dividend-paying securities and (b) equity securities.) The Fund will provide shareholders with at least 60 days’ prior notice of any change in these policies. The Fund may invest up to 80% of its total assets in securities of non-U.S. issuers and no more than 40% of its total assets in securities of companies in emerging market countries.

Fund and Market Performance

(Institutional Class Shares)

For the fiscal year ended April 30, 2022, the total return for the Steward International Enhanced Index Fund was -7.67%.  When compared against the -1.63% total return of the S&P ADR Index (the Fund’s primary benchmark), the Fund underperformed by 604 bp.  The Fund’s dual market strategy – which allocates to both non-U.S. developed market (DM) ADR securities and to emerging market (EM) ADR securities – remained unchanged throughout the year at 85% non-US DM and 15% EM.  These allocation weights continue to represent our relatively neutral outlook between non-US DM and EM going forward.

The allocation to EM was the biggest driver of Fund underperformance (-380 bp of net impact) during the year ended April 30, 2022, as EM ADRs returned -27.1% representing 2,535 bp of underperformance relative to the primary benchmark.  Much of this underperformance in EM ADRs was due to the exposure from Chinese stocks.  Individual EM ADR stocks in the portfolio that provided the biggest detractions from relative performance versus the primary benchmark included Pinduoduo (-68% total return), Alibaba (-57% total return), Baidu (-41% total return), and NIO Inc. (-58% total return).

Another sub-component affecting the Fund’s net performance relative to the primary benchmark is the Steward Funds values-based screens. For the year ended April 30, 2022, the companies included in the Fund’s values-based screens represented an average of approximately 19% of the primary benchmark’s market capitalization.  Not owning these screened-out companies had a -275 bp net impact on the Fund’s performance relative to the primary benchmark.  Overall, the restriction on stem cell research and abortion-related securities accounted for nearly all of the net negative impact, while the Alcohol screens and Tobacco screen provided a smaller negative net impact.  The recreational cannabis screen was the only values-based screen that contributed positive performance, but the net negative impact was immaterial in comparison to the negative impact from the other screens. 

Going forward, we will continue to carefully examine the rationale of a neutral tilt weighting between non-US developed markets and emerging markets. Much of what we are monitoring are the direction of global interest rates, inflation, commodity prices, Covid-19 lockdowns vs. re-openings, changes in the unprecedented fiscal and monetary responses by governments and global central banks, changing developments in potential regulatory actions by the US on Chinese ADRs, and more recently, the downstream effects of the Russian invasion of Ukraine. 

The Fund pursues its objective by seeking to enhance its performance over that of its primary benchmark index by 1) changing the relative weighting in the Fund’s portfolio of equity securities of developed market companies and of emerging market companies, and 2) utilizing computer-aided, quantitative analysis of valuation, growth, dividend yield, industry, and other factors to attempt to compensate for the exclusion of certain index securities due to the Fund’s values-based screening policies.

Under normal circumstances, the Fund will invest at least 80% of its assets in the securities of companies included in the Fund’s primary benchmark and will invest at least 80% of its assets in the securities of non-U.S. companies. The Fund’s investments are allocated in an attempt to match the characteristics of a blend of the primary benchmark with varied weightings from time to time of a secondary broad-based index that includes only securities of issuers in emerging market countries.

During the stub period in question (November 18, 2021 through April 30, 2022), the Steward Large Cap Core Fund was helped by stock selection and hurt by sector allocation.  In particular, stock selection was exceptionally strong in technology (+265bp) with smaller contributions from consumer discretionary, communication services, and industrials.  The biggest positive technology contributors were HP Inc. (+28bp), underweighting Meta (+28bp), underweighting Nvidia (+28bp), Hewlett Packard Enterprise (+18bp), Western Union (+14bp), Mastercard (+13bp), and Norton LifeLock (+13bp).  Other positive contributors were AmeriSource Bergen (+31bp), Cigna (+25bp), and underweighting Amazon (+21bp).

The biggest sector detractors were underweight energy (-125bp) and consumer staples (-94bp). This was partially offset by underweighting communication services (+58bp). The biggest negative contributors to individual stock performance were Williams Sonoma (-25bp) and underweighting Berkshire Hathaway (-25bp).  The Fund was hurt by 98bp due to values-based screens with the majority of that coming from our inability to own certain healthcare companies (United Healthcare -25bp, Johnson and Johnson -24bp, Bristol Myers Squibb -12bp, and Merck -10bp).

Our view is that the equity market is in a tug of war between a good earnings tailwind and a modest valuation headwind. Despite a positive earnings picture, the overall macro backdrop has become less favorable for the equity market in 2022.  The combination of elevated market valuations, revenue and earnings growth losing steam, a war and higher oil prices, and rising bond yields point to a more difficult year with more frequent pullbacks and higher volatility. Valuation will be of paramount importance in positioning equity portfolios in our view.  We believe that it makes sense to lean modestly in favor of value/cyclicals.  2022 is shaping up to be more challenging for investors, as central banks progressively unwind unprecedented monetary accommodation in response to ongoing economic recovery and expansion and elevated inflation pressures.  While we expect decent economic and earnings growth will be a tailwind for equities, rising interest rates and stubborn inflation will be headwinds.  This is likely to create volatility and, at times, turbulent churning.

We expect a pause in the cyclical rise in bond yields, as growth concerns have increased and there should be less alarming inflation data ahead, at a point when government bond markets are extremely oversold.  A pause, in turn, should allow the recent risk-off phase to diminish once investors realize that the economic progress remains positive. The foundations under the global economic expansion are still solid in our view, but the liquidity boom is unwinding, and we expect financial market returns will be far less than in recent years, as bond yields move higher over time.

In the near-term, there is room for both stocks and bonds to rebound from an oversold starting point, during which expected ongoing growth worries may favor bonds over stocks.  However, on a 6-12 month horizon, our constructive economic outlook and sticky inflation imply another upleg for global bond yields and therefore that equities will resume outperforming bonds. Barring a sharper decline in inflation than we anticipate, we believe multi-asset portfolios will struggle to generate positive real returns in the year ahead.

The Fund’s principal investment strategy is to invest in a portfolio of large-cap equity securities, subject to limitations of the Fund’s values-based screening policies. Under normal market conditions, the Fund invests at least 80% of its assets in securities of large-cap companies. The Fund’s benchmark index is the Russell 1000 Index.  Substantially all of the equity securities in which the Fund invests will be included in the Fund’s benchmark index at the time of purchase.

Portfolio management will select securities using an investment process that combines quantitative techniques, fundamental analysis and risk management.  Securities generally are added to the portfolio based both on security rankings provided by multi-factor quantitative models and on fundamental analysis of the securities.  In addition, portfolio management will utilize risk management techniques to establish constraints on the amounts invested in individual securities and sectors.  Portfolio management will generally sell a security if its model ranking declines significantly or research reveals a significant deterioration of the company’s fundamentals.

Portfolio management may consider among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments.  With respect to security rankings provided by the multi-factor quantitative models, the models include a component for ranking companies using values-based characteristics.

During the stub period in question (November 18, 2021 through April 30, 2022), the Steward Large Cap Growth Fund while down in absolute terms, handily outperformed the Russell 1000 Growth benchmark.  The biggest positive contributors came from stock selection (+395bp), especially in information technology (+212bp).  Best performing stocks included underweighting Netflix (+59bp), McKesson (+47bp), CH Robinson (+37bp), Cardinal Health (+36bp), HP Inc. (+35bp), and Iron Mountain (+34bp).  Worst stock contributions were Abbvie (-39bp) and Bath and Body Works (-30bp).  Values-based screening cost the Fund 18bp.

Our view is that the equity market is in a tug of war between a good earnings tailwind and a modest valuation headwind.  Despite a positive earnings picture, the overall macro backdrop has become less favorable for the equity market in 2022.  The combination of elevated market valuations, revenue and earnings growth losing steam, a war and higher oil prices, and rising bond yields point to a more difficult year with more frequent pullbacks and higher volatility. Valuation will be of paramount importance in positioning equity portfolios in our view. We believe that it makes sense to lean modestly in favor of value/cyclicals.  2022 is shaping up to be more challenging for investors, as central banks progressively unwind unprecedented monetary accommodation in response to

We expect a pause in the cyclical rise in bond yields, as growth concerns have increased and there should be less alarming inflation data ahead, at a point when government bond markets are extremely oversold.  A pause, in turn, should allow the recent risk-off phase to diminish once investors realize that the economic progress remains positive. The foundations under the global economic expansion are still solid in our view, but the liquidity boom is unwinding, and we expect financial market returns will be far less than in recent years, as bond yields move higher over time.

In the near-term, there is room for both stocks and bonds to rebound from an oversold starting point, during which expected ongoing growth worries may favor bonds over stocks. However, on a 6-12 month horizon, our constructive economic outlook and sticky inflation imply another upleg for global bond yields and therefore that equities will resume outperforming bonds. Barring a sharper decline in inflation than we anticipate, we believe multi-asset portfolios will struggle to generate positive real returns in the year ahead.

The Fund’s principal investment strategy is to invest in a portfolio of large-cap growth securities, subject to limitations of the Fund’s values-based screening policies. Under normal market conditions, the Fund invests at least 80% of its assets in securities of large-cap companies. The Fund’s benchmark index is the Russell 1000 Growth Index. Substantially all of the equity securities in which the Fund invests will be included in the Fund’s benchmark index at the time of purchase.

The Fund invests primarily in securities that are considered by portfolio management to have potential for earnings or revenue growth. Portfolio management will select securities using an investment process that combines quantitative techniques, fundamental analysis and risk management.  Securities generally are added to the portfolio based both on security rankings provided by multi-factor quantitative models and on fundamental analysis of the securities. In addition, portfolio management will utilize risk management techniques to establish constraints on the amounts invested in individual securities and sectors. Portfolio management will generally sell a security if its model ranking declines significantly or research reveals a significant deterioration of the company’s fundamentals.

Portfolio management may consider among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments. With respect to security rankings provided by the multi-factor quantitative models, the models include a component for ranking companies using values-based characteristics.

During the stub period in question (November 18, 2021 through April 30, 2022), the Steward Large Cap Value Fund underperformed noticeably due to poor sector allocations by underweighting energy (-93bp), overweighting information technology (-90bp), overweighting consumer discretionary (-69bp), and underweighting utilities (-58bp). The values-based screening cost the Fund 101bp with nearly all of that coming from our inability to own certain healthcare companies (Johnson and Johnson -34bp, United Healthcare -34bp, Bristol Myers Squibb -21bp, and Merck -13bp.)

The biggest sector weight detractors were underweight energy (-125bp) and consumer staples (-94bp). This was partially offset by underweighting communication services (+58bp). Worst performing stock contributions were Bath and Body Works (-43bp), underweighting Chevron (-36bp), underweighting Exxon Mobile (-34bp), and Janus Henderson (-33bp). This was positively offset by positive stock selection in information technology (+129bp).  Best stock contributors were Marathon Petroleum (+35bp), Conoco Phillips (+27bp), and Amerisource Bergen (+25bp).

Our view is that the equity market is in a tug of war between a good earnings tailwind and a modest valuation headwind. Despite a positive earnings picture, the overall macro backdrop has become less favorable for the equity market in 2022.  The combination of elevated market valuations, revenue and earnings growth losing steam, a war and higher oil prices, and rising bond yields point to a more difficult year with more frequent pullbacks and higher volatility. Valuation will be of paramount importance in positioning equity portfolios in our view. We believe that it makes sense to lean modestly in favor of value/cyclicals.  2022 is shaping up to be more challenging for investors, as central banks progressively unwind unprecedented monetary accommodation in response to ongoing economic recovery and expansion and elevated inflation pressures.  While we expect decent economic and earnings growth will be a tailwind for equities, rising interest rates and stubborn inflation will be headwinds. This is likely to create volatility and, at times, turbulent churning.

We expect a pause in the cyclical rise in bond yields, as growth concerns have increased and there should be less alarming inflation data ahead, at a point when government bond markets are extremely oversold.  A pause, in turn, should allow the recent risk-off phase to diminish once investors realize that the economic progress remains positive. The foundations under the global economic expansion are still solid in our view, but the liquidity boom is unwinding, and we expect financial market returns will be far less than in recent years, as bond yields move higher over time.

In the near-term, there is room for both stocks and bonds to rebound from an oversold starting point, during which expected ongoing growth worries may favor bonds over stocks. However, on a 6-12 month horizon, our constructive economic outlook and sticky inflation imply another upleg for global bond yields and therefore that equities will resume outperforming bonds. Barring a sharper decline in inflation than we anticipate, we believe multi-asset portfolios will struggle to generate positive real returns in the year ahead.

The Fund’s principal investment strategy is to invest in a portfolio of large-cap value securities, subject to limitations of the Fund’s values-based screening policies. Under normal market conditions, the Fund invests at least 80% of its assets in securities of large-cap companies. The Fund’s benchmark index is the Russell 1000 Value Index. Substantially all of the equity securities in which the Fund invests will be included in the Fund’s benchmark index at the time of purchase.

The Fund invests primarily in securities that are considered by portfolio management to be undervalued with good prospects for capital appreciation. Portfolio management will select securities using an investment process that combines quantitative techniques, fundamental analysis and risk management.  Securities generally are added to the portfolio based both on security rankings provided by multi-factor quantitative models and on fundamental analysis of the securities. In addition, portfolio management will utilize risk management techniques to establish constraints on the amounts invested in individual securities and sectors. Portfolio management will generally sell a security if its model ranking declines significantly or research reveals a significant deterioration of the company’s fundamentals.

Portfolio management may consider among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments. With respect to security rankings provided by the multi-factor quantitative models, the models include a component for ranking companies using values-based characteristics.

For the Steward Select Bond Fund, the shorter duration positioning as a result of our investment process proved to be the largest positive contributor to the Fund’s performance vs. the Index contributing 372bp to performance.  As yields moved significantly higher over the past few months, a shorter duration assists in limiting the interest rate sensitivity of the Fund.  Along with the duration positioning, the income generated from an overweight to the investment-grade corporate allocation and the selection effect from our choice of corporate issuers were also positive contributors to performance.  The same overweight to the corporate sector that was positive from an income perspective was a drag on performance in regards to overall allocation as corporate spreads widened in addition to the yield curve shifting higher.  The yield curve was the largest negative contributor to performance due to the shorter treasury notes held in the fund.  Even though short duration for the portfolio overall was beneficial, the 2-year part of the curve had the largest move causing the largest price decline. We have about a 4.5% allocation to this part of the curve for treasury notes which caused yield curve placement to be the largest drag on performance for the year.  The worst performers were the longer duration corporate securities like Sherwin Williams, Starbucks and United Parcel Service.  Performance is due to the structure/maturity of the bond and not the individual issuer in this environment. The best individual performers were variable-rate mortgage-backed securities as the coupons adjust with rising rates buffering some of the price decline seen in fixed rate securities.  In addition, our preferred holdings and shorter maturity corporate bonds like CVS and Procter & Gamble were strong individual performers as well.

We have made progress in extending our duration of the Fund closer to neutral as we anticipate that yields are getting toward the top end of their expected trading range.  Inflation and central bank actions could adjust our outlook if we don’t see inflation begin to moderate and these changes would be incorporated into our investment process to help determine the strategy of the Fund which incorporates decisions on duration targets, yield curve placement, sector allocation and security selection. We maintain our focus on investment-grade securities that provide steady cash flow for the Fund which we see as a positive contribution to performance for the Fund over the coming year as volatility continues to dominate markets.

We expect the market to continue to be volatile as it deals with the myriad of issues listed earlier. Given the substantial pullback in the market during the first calendar quarter of 2022, we would expect some of the issues to be “priced in” to the market which could allow the market to move higher, albeit with swings in both directions.

The Fund invests primarily in fixed-income securities, including, but not limited to, corporate bonds, mortgage-backed securities and government and agency bonds and notes, subject to the limitations of the Fund’s values-based screening policies. The Fund’s investments may include U.S. dollar-denominated instruments issued in the U.S. by foreign banks and branches and foreign corporations. Other security types may include fixed-rate preferred stock and municipal bonds. Normally, the Fund will invest at least 80% (measured at the time of investment) of the value of its net assets, plus the amount of any borrowings for investment purposes, either directly or through other investment companies, in these types of instruments. (Any such other investment company will also have a policy to invest at least 80% of the value of its net assets, plus the amount of any borrowings for investment purposes, in such instruments.)

In order to construct the most appropriate portfolio to realize the Fund’s objective, portfolio management will seek to balance three primary portfolio characteristics: duration, yield curve structure and sector allocations. When making investment decisions, portfolio management will also consider a company’s values-based characteristics.

The reporting period was quite volatile with the rise and fall of the Covid Omicron variant, the start of the Russia-Ukraine conflict, the Fed ending its overly accommodative phase and increasing the fed funds rate, the dramatic underperformance of high growth stocks, and a slowing economy all amongst other issues.  The volatility within small caps was even more pronounced.  Our focus on high quality, growing businesses with strong balance sheets allowed us to outperform during the tough quarter.

Negative contributors to relative performance included InMode and Health Catalyst.  InMode, a manufacturer of minimally invasive aesthetic medical devices, declined 72.9% during the period.  Despite two strong earnings reports with revenue growth higher than 30% in both quarters and announcing a buyback, the stock traded off all quarter like many other high growth “long duration” stocks.  Health Catalyst, a data and analytics software provider for the healthcare industry, suffered the same fate as InMode. Despite reporting solid fundamentals, it was down 66.2% for the time period.  There is no change to our fundamental investment thesis with either company, so we expect them to recover as we move forward.  Vocera Communications and Renewable Energy were our top positive contributors.  Vocera Communications, a communications and patient monitoring technology service provider for hospitals and healthcare settings, was acquired by Stryker.  It returned 35.8% for the reporting period.  Renewable Energy, who manufactures renewable and bio-diesel, was acquired by Chevron.  It returned 23.5% for the time period.  Despite the acquisition of Renewable Energy, the Fund's long term underweight of the energy sector cost 50 bp of performance during the period.  We generally don’t like commodity investments given the high capital intensity, lack of pricing power, and cyclical nature of their industries.

We expect the market to continue to be volatile as it deals with the myriad of issues listed earlier.  Given the substantial pullback in the market during the first calendar quarter of 2022, we would expect some of the issues to be “priced in” to the market which could allow the market to move higher, albeit with swings in both directions.

The Fund’s principal investment strategy is to invest in a portfolio of small-cap growth securities, subject to the limitations of the Fund’s values-based screening policies. Under normal market conditions, the Fund invests at least 80% of its assets in securities of small-cap companies. The Fund’s benchmark is the Russell 2000 Growth Index. The Fund invests primarily in equity securities. The Fund may also invest in other investment companies and up to 15% of its net assets in real estate investment trusts.

The Fund invests primarily in securities that are considered by portfolio management to have potential for earnings or revenue growth. The security selection process is based on a three-step process that includes fundamental, valuation and timeliness analysis. Portfolio management considers selling a security if the investment thesis for owning the security is no longer valid, the stock reaches its price target or timeliness factors indicate that the risk/return characteristics of the stock are viewed in the market as no longer attractive.

Portfolio management may consider, among other factors, a company’s valuation, financial strength, growth potential, competitive position in its industry, projected future earnings, cash flows and dividends when deciding whether to buy or sell investments. In making investment decisions, portfolio management will also consider a company’s values-based characteristics.

On October 29, 2021, the Fund changed its blended style structure from 60% large-cap core, 30% large-cap growth stocks, and 10% large-cap value stocks to an allocation that is 100% large-cap core. At the same time, the Fund implemented a strategy to upweight companies that rank at the top of portfolio managment's values-focused composite rankings.  At year end, the Fund upweighted 72 companies by 10bp each.

Prior to October 29, 2021, the Fund utilized a tilting strategy.  During that period, growth outperformed and value underperformed the cap-weighted counterpart, contributing to the Fund’s outperformance.  Overall, the allocation towards value and growth added 292bp to performance when compared to the S&P 500. The tilt towards growth (versus the neutral scenario) added 84bp.

Performance of the Fund can also be affected by the Fund’s values-based screening policies. For the period ended April 30, 2022, the values-based screening policies had a negative performance impact on the Fund, subtracting 100bp. Not owning companies such as General Electric (embryonic stem cell research), down 28.73%, Las Vegas Sands (gambling), down 42.16%, and Penn National (gambling), down 58.97% added 14 bp to performance. Conversely, not owning companies such as Johnson & Johnson (embryonic stem cell research), up 13.73%, UnitedHealth Group (abortion), up 29.26%, and Pfizer (embryonic stem cell research), up 31.52%, negatively impacted performance by 66 bp.

While COVID-19 fears have seemed to fade into the background for the market, they have been replaced by even larger fears over rapidly increasing inflation, continued supply chain issues, the Fed raising rates, a slowing economy, and the Russia/Ukraine conflict.  Some of these issues can be resolved or reduced in the near term, in our opinion, while others might drag on for some time.  While we continue to expect the market to remain volatile as it grapples with all the issues, we do expect the market may be able to climb the wall of worry as the issues “peak” or resolve themselves.

Effective October 29, 2021, the Fund’s investment strategy was changed, as described below, and the Fund was renamed from Steward Large Cap Enhanced Index Fund to Steward Values-Focused Large Cap Enhanced Index Fund.

Prior Investment Strategy

The Fund pursues its objective by seeking to enhance its performance over that of its primary benchmark index by 1) changing the relative weighting in the Fund’s portfolio of growth versus value style securities in the index (style tilt) and 2) utilizing computer-aided, quantitative analysis of valuation, growth, dividend, yield, industry and other factors to attempt to compensate for the exclusion of certain index securities due to the Fund’s values-based screening policies. Under normal circumstances, the Fund will invest at least 80% of its assets in the securities of companies included in the Fund’s benchmark.

Current Investment Strategy

Under normal circumstances, the Fund will invest at least 80% of its assets in the securities of large-cap companies included in the Fund’s benchmark index that pass the Fund’s values-based screens. The Fund is an actively managed fund. The Fund’s investments are allocated in an attempt to match the weightings of the benchmark index, subject to the limitations of the Fund’s values-based screening policies and the reallocation of a portion of each screened security’s weighting in the benchmark index among certain remaining securities of companies that portfolio management believes exhibit positive values-based characteristics. Such values-based characteristics include, but are not limited to, companies that support respect for life, traditional family values, fair treatment of employees, respect for the environment, positive engagement with the communities in which they operate and the promotion of justice.

On October 29, 2021, the Fund changed its blended style structure from 60% small/mid-cap core, 30% small/mid-cap growth stocks, and 10% small/mid-cap value stocks to an allocation that is 100% small/mid-cap core. At the same time, the Fund implemented a strategy to upweight companies that rank at the top of portfolio management's values-focused composite rankings.  At year end, the Fund upweighted 30 companies by 10 bp each.

Prior to October 29, 2021, the Fund utilized a tilting strategy.  During that period, growth outperformed and value underperformed the cap-weighted counterpart, contributing to the Fund’s outperformance.  Overall, the allocation towards value and growth added 127 basis points to performance when compared to the S&P 1000. The tilt towards growth (versus the neutral scenario) detracted 12 basis points.

Performance of the Fund can also be affected by the Fund’s values-based screening policies. For the period ended April 30, 2022, the values-based screening policies had a positive performance impact on the Fund, adding 15 basis points. Not owning companies such as Boston Beer (alcohol), down 69.17%, Brinker International (alcohol), down 45.88%, and Cheesecake Factory (alcohol), down 41.03%, added 28 basis points to performance. Conversely, not owning companies such as Murphy USA (tobacco, alcohol), up 68.69%, Tenet Healthcare (abortion), up 22.36%, and Charles River Labs (embryonic stem cell research), up 11.27%, negatively impacted performance by 18 basis points.

The market spent the better part of the last two years focused on COVID-19 and its impacts, but looking forward, the market is focused on more issues.  Some are carryovers like supply chain issues, while others are newer such as inflation, a slowing economy, the Fed raising interest rates, and the Russia/Ukraine conflict.  Moving forward, we expect the market to be volatile as data points scare or assuage the market fears.  Despite the volatility, we believe the market can drift higher as these issues are resolved or at least perceived to peak.  Small and mid-caps have underperformed over the last year on the pullback.  Hopefully, they can recover more as the issues are resolved.

Effective October 29, 2021, the Fund’s investment strategy was changed, as described below, and the Fund was renamed from Steward Small-Mid Cap Enhanced Index Fund to Steward Values-Focused Small-Mid Cap Enhanced Index Fund.

Prior Investment Strategy

The Fund pursues its objective by seeking to enhance its performance over that of its benchmark index by 1) changing the relative weighting in the Fund’s portfolio of growth versus value style securities in the index (style tilt) and 2) utilizing computer-aided, quantitative analysis of valuation, growth, dividend, yield, industry and other factors to attempt to compensate for the exclusion of certain index securities due to the Fund’s values-based screening policies. Under normal circumstances, the Fund will invest at least 80% of its assets in the securities of companies included in the Fund’s benchmark.

Current Investment Strategy

Under normal circumstances, the Fund will invest at least 80% of its assets in the securities of small- to mid-cap companies included in the Fund’s benchmark index that pass the Fund’s values-based screens. The Fund is an actively managed fund. The Fund’s investments are allocated in an attempt to match the weightings of the benchmark index, subject to the limitations of the Fund’s values-based screening policies and the reallocation of a portion of each screened security’s weighting in the benchmark index among certain remaining securities of companies that portfolio management believes exhibit positive values-based characteristics. Such values-based characteristics include, but are not limited to, companies that support respect for life, traditional family values, fair treatment of employees, respect for the environment, positive engagement with the communities in which they operate and the promotion of justice.