Q2 2021: The Bumpy Road Back - Homestead Funds

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Q2 2021: The Bumpy Road Back

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Mark Santero: Hi, this is Mark Santero with the Homestead Funds. We are pleased to present to our shareholders
the second quarter market review, what we've entitled “The Bumpy Road Back.”
As I said, this is Mark, and I'm president and CEO of the Homestead Funds and RE Advisers, who is the investment
manager of the Homestead Funds. With me today, I have two of our senior portfolio managers: From the fixed-
income team is Mauricio Agudelo, and from our equity team, Jim Polk. Both will be discussing the portfolios that
they oversee in the Homestead lineup.
As usual, our agenda is pretty straightforward. We'll first go over the macro-economic conditions and factors that
we experienced in the second quarter. We'll then have a fund absolute and relative performance review for both
the fixed-income and equity funds that RE Advisers actively manages. And then we'll go into those portfolios —
the drivers of returns. And then last but not least, what's ahead: an outlook and fund positioning going into the
third quarter of 2021.
So, without further ado, I'm going to turn it over to Jim Polk first to discuss the bumpy road back from an equity
perspective. Take it away, Jim.

Jim Polk: Thank you very much. And thanks, everybody, for joining us. There were really three overarching themes
in the second quarter that affected the equity markets.
The first was the reopening of the economy, right? Lots of pent-up demand that existed out there from being
shut in. People really wanted to go back out. Then the question really was, how fast were they going? We went
from buying stuff for our homes — furniture, stuff like that — to going out to restaurants or more experiential
things. You saw air travel pick up, and so you really had a reopening piece, and what really is affecting it is the
slope of that, right? And we'll talk about this later, but how fast is that really going to happen? And so you have a
reopening economy, but there are some bottlenecks, labor shortages.
The second big overarching theme was inflation and whether or not that was going to be temporary or not, but
we're certainly starting to see that. And in fact, anecdotally, just the other day on the news, I saw that used car
prices and some used car models are actually more expensive than new cars. And why would that be? Well,
because it's taking longer to get a new car because some of the semiconductor chips that would go into it are
facing bottlenecks and there are shortages. So, you're seeing inflationary aspects to the economy as well.
And then the third is really just the Fed and how accommodative they will be from a monetary policy. They've
been talking about — I'm sure Mauricio will go into greater detail — but basically they've been talking about
inflationary being temporary. And the question the markets have — the equity markets have certainly — is, for
how long will they be accommodative?
And with that, actually, I will turn it over to Mauricio.

Mauricio Agudelo: Thank you, Jim. For the fixed-income market, we saw bond prices rebounded during the
second quarter after peaking at the end of March. These generated positive returns for fixed income. For

instance, the 10-year yield closed at 1.47% at the end of June versus 1.74% at the end of March. The move largely
reflects an adjustment in inflation expectations down the road and the transitory nature of some of the higher-
than-expected inflation prints as you just discussed, Jim, that we saw in April, May and June.
The economy continues to recover and reopen. The vaccination program helped decrease the number of cases,
hospitalizations and deaths; however, we have seen more recently that the Delta variant in particular is driving
cases back up in communities with low vaccination rates. And this is certainly cause for concern for the markets
and will be a source of increased volatility until we get the virus under control. Federal, state and local
governments continue to emphasize to our communities the importance of getting vaccinated for a safe
reopening of the economy. And with that, let me hand it back to you, Mark.

Mark Santero: Thank you, Jim. Thank you, Mauricio. Rather than keep going, why don't I just hand it right back to
you, Mauricio, and if you can review the fixed-income portfolios, starting with the Short-Term Bond Fund.

Mauricio Agudelo: Absolutely. For the second quarter, the Short-Term Bond Fund had a really strong quarter,
returning 0.51% versus 0.3% for the benchmark. And this brings the fund slightly ahead of the benchmark year to
date through the end of June.
So now the factors that worked positively into performance: our overweight allocation to corporates, in particular
financials and industrials, and additionally, our ABS [asset-backed securities] exposure; that was also a positive
contributor.
Our yield curve positioning benefited during the quarter due to the flattening of the curve — in this case, the two-
year Treasury yield versus the five-year Treasury yield. This is something that actually detracted in the first
quarter and it came back in the second quarter.
What didn't work? Our underweight allocation to Treasuries and agencies. This was a detractor during the
quarter. Next slide, please [slide 8].
If we look into the portfolio positioning, the fund continues to be overweight corporates and ABS while we are
underweight Treasuries. Additionally, the fund's duration is shorter than the benchmark as we see the potential
for higher rates down the road.
Next, if we go into the Intermediate Bond Fund performance for the quarter, the fund also had a strong quarter,
outperforming the benchmark by 42 basis points and bringing total outperformance year to date by 80 basis
points or 0.8% through the end of June. What worked? Similar to Short-Term Bond, our exposure to corporates,
financials and industrials, and our agency and ABS allocation also contributed to performance.
What didn't work? Underweight allocation to Treasuries; this detracted from performance, followed by utilities.
And last but not least, CMBS [commercial mortgage-backed securities] and sovereigns — these two sectors where
we have zero exposure given valuations.
Finally, in terms of portfolio positioning, similar to Short-Term Bond Fund, we continue to favor the corporate
market, and that's reflected in our overweight positioning. We are also overweight asset-backed securities.
And the other side, we are underweight Treasuries and MBS [mortgage-backed securities]. The duration of the
fund is also shorter than the benchmark. We view this currently as a defensive strategy versus the possibility of
higher rates in the medium term. Thank you, Mark.

Mark Santero: Thank you, Mauricio. Before I turn it over to Jim to go over the equity performance for the quarter,
I wanted to take a brief moment to introduce the Rural America Growth & Income Fund, the 10th fund in the
Homestead lineup that was launched on May 1st of this year. This is a truly unique product as far as we view

homesteadfunds.com | 800.258.3030                                                                         2

what's available in the marketplace. The fund is a combination of equity and fixed-income securities that
contribute to rural economies — where our members reside. The fund invests in companies meeting at least one
of the three criteria: At least 10% of a company's total revenue is derived from or committed to, key economic
drivers of rural America; the company's headquarters or material business operations are in the areas served by
NRECA member cooperatives; and, or last, the company's headquarters and material business operations are
located in a rural area, which includes a county where at least 50% of the population lives in a rural area as
defined by the U.S. Census Bureau.
This is an actively managed portfolio that combines Mauricio's team and Jim's team on the fixed-income and
equity side. When we researched creating this portfolio, it's truly to the roots of NRECA in our member
communities we see the activity in the economies, and we wanted to create a fund in those securities, those
companies, those credit structures, that contribute to the rural economy — hence the Rural America Growth &
Income Fund. Its benchmark is a mixed-asset target allocation between growth funds and fixed-income funds. You
see our ticker symbol — and at least 30% of the assets have to be in either asset class. And currently right now
we're about 60% in equities and 40% in fixed-income securities.
We look forward to sharing more with you on the Rural America Growth & Income Fund as the fund matures.
So now I'm going to back over to Jim to go over our equity performance, starting with the Value Fund. Jim?

Jim Polk: Great — thanks, Mark. So, if you look at the performance of the fund, you'll see that we actually had a
decent quarter. We outperformed the benchmark by about 130 basis points. But as I said initially, there was this
reopening of the economy trade, so it was really more the economically sensitive sectors that did well, so notably
energy, real estate and financials; they all outperformed in the large-cap value universe. Now, we happen to be
underweight those three sectors, and that hurt our performance slightly.
However, our stock selection, our stock picking, in technology in particular, which is a sector that we have a really
long-term positive viewpoint of and have had for a long time, more than outweighed these other sectors. And so
companies like NVIDIA, which are related to semiconductors for the data center and gaming, or Alphabet, with
their search engine, both were standout names in the quarter.
You'll see that we really do continue to have that overweighting in health care, which we really like; tech, which
we really like; industrials, which we also really like for the long term. Where we tend to be underweight are the
utility sector, the energy sector, where we think there's less good long-term prospects. Now that doesn't mean
that you can't own them here and there, but we really like the other three sectors much better.
And then finally, when you look at the valuation metrics, you know, what we really strive for is to have sort of a
higher-quality — you put it all together — a higher-quality portfolio that trades comparably to, if not below, the
Russell 1000 Value. You can see we're a cheaper portfolio to the benchmark with sort of higher returns on equity.
And that's where we like to be.
When you look at the small-cap performance, again, we outperformed in the quarter in Small Company, up 5.4%
versus 4.3%. But here was a little bit more of a mixed bag in terms of the economic cyclical sectors that were
doing well: Energy and real estate did very well, but industrials and financials did not. And for Small Company, we
would make the argument that there's a lot more stock selection that goes there than sector allocation, and in
any given quarter that could be the case. And so just broadly speaking for the fund, our underweight in telecom
services and energy actually detracted from performance, but stock selection, in this case in the health care
sector, was particularly strong this quarter.
We also benefited from several takeouts. So, Core-Mark, a long-term holder, was taken out. QTS, which had a
data center REIT [real estate investment trust], and Extended Stay, which is a long-term lodging company, were all
taken out. And you would think over time that we will benefit from that. It's always lumpy, but it's always nice
when you get a takeout.

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Like the Value Fund, our sector weightings tend to be skewed, our overweights tend to be skewed, to the health
care, technology and industrial sectors where we think there's long-term value. And I would just say, I would just
point out, our valuation metrics are slightly above the benchmark, but we believe that because of some of the
names that we don't own, it skews that a little bit — but again, some sort of higher-quality valuation that's
comparable to the benchmark. And with that, I'll turn it back to Mark.

Mark Santero: Thank you, Mauricio. Thank you, Jim. We've had the opportunity to review our portfolios and what
happened in the second quarter and year to date. But as I'm sure given the bumpy road back that we've
discussed, what lies ahead?
I will share that, back in January, our first bullet point on the market outlook was there were going to be volatile
markets. And we've certainly experienced that throughout the first half of the year. Equity and fixed-income
markets, as Mauricio and Jim point out, were volatile. And, what's going to happen going forward? And as
Mauricio said, a lot of that is going to be predicated upon how we handle the pandemic. The recovery came back
strong and fast in the second quarter, almost a quarter earlier than anticipated. And that was because of the
vaccine rollout and the aggressiveness the U.S. took with Pfizer and Moderna and Johnson & Johnson.
So what is ahead? A lot of talk about inflation. I'm going to ask Mauricio to address inflation and then Treasuries,
and then ask Jim to close it out for us. So Mauricio, please?

Mauricio Agudelo: Yes, Mark. As we have seen this year, we have seen a recent uptick in inflation, and I want to
point our audience to this chart [slide 22] because we’ve been here before to a certain degree. It's really easy to
get caught between the headlines day to day and the panic about inflation ticking higher than expected. And we
are certainly keeping a close eye on that. Even the Fed expressed at the last meeting that this uptick is transitory,
and we tend to agree with this assessment. That being, in the last meeting, the Fed did acknowledge that perhaps
some of this upward pressure prices may last a bit longer than anticipated.
We still have a lot of supply/demand imbalances, as Jim pointed at the opening of this discussion, in the global
economy due to the uneven rollout of vaccines and the nature of the reopening.
Next, I’ll discuss the volatility that we have experienced in the Treasury market in particular.
As we see here [slide 23], this is the MOVE Index and basically reflects the volatility by tracking a basket of over-
the-counter options on U.S. Treasury notes and bonds. We continue to expect this degree of volatility to persist.
There are a few dynamics at play as investors reassess the outlook and the potential impact of COVID-19 variants.
We still believe that vaccinations remain a critical component to contain the virus, reduce transmission and
protect our communities.
Our goal is to position the portfolios to sustain some of this volatility in the Treasury market. We will make tactical
shifts to take advantage of these locations in the yield curve when they occur. That being said, we remain
confident in the economic recovery and the long-term prospects. Jim, anything to add on your end?

Jim Polk: Thank you, Mauricio. I'll add just a couple of things. The word that comes to mind for me is noise, right?
We’ve got a lot of noise going on. What's the pace of the recovery look like? What is really the sustainable
number for inflation? We agree on the equity side with you, Mauricio, and the fixed-income team; we think it's
transitory, but what is the right number? So we think until we sort through all of that, the markets are going to
remain volatile. We are of the belief that we are still in a long-term bull market. We think markets don't just end
of old age, they end because you go through a significant tightening cycle and that's because of inflation;
therefore, inflation is temporary. You're not going to see that cycle, even though the Fed might raise rates a little
bit. They're not going to end it so much to end the bull market.

homesteadfunds.com | 800.258.3030                                                                            4

And so we tend to be relatively positive and constructive on the markets going forward. And so what we think is
over the next, I don't know, several quarters, we could see this kind of situation where the market’s just trying to
figure it out. We’d also suggest that we're in the summertime — people are going on vacation, they're doing
something with their family, et cetera — and so there's less liquidity in the market. So anything could have an
oversize move one way or the other.
What we would also say finally is that for us on the equity side, I think Mauricio says it on the fixed-income side as
well, we think we're positioned for the long term; we are making long-term investments in what we think are
really solid companies that we can own for a while, and we'll have good quarters and bad quarters, but over time
we think we're going to have really strong performance, and that's because we're exposed to better companies
and we're not trying to whip them around with every little wiggle in the market. And so with that, I'll turn it back
to Mark.

Mark Santero: Thank you, Jim. Thank you, Mauricio. I appreciate you sharing your thoughts on what lies ahead
and sharing your perspectives on the second-quarter performance of our funds. I want to thank again our
shareholders, our cooperative leadership, for being investors in the Homestead Funds. We appreciate your
support and trust in RE Advisers.
And if you'd like any more information or further dialogue on positioning of the funds, please feel free to give me
a call or send me an email. And again, we wish everybody stays safe and have a pleasant end to the summer.
Enjoy, everybody, and thanks again.

As of June 30, 2021, Alphabet, Inc. represents 4.9% and NVIDIA represents 1.83% of the Value Fund’s portfolio.
As of June 30, 2021, QTS Realty Trust and Extended Stay America represents 0.0% of the Small-Company Stock
Fund portfolio. Core-Mark, which was acquired by Performance Food Group represents 1.37% of the Small-
Company Stock Fund portfolio.

Asset-backed securities (ABS) are bonds or notes backed by financial assets.
Basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One
basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a
financial instrument
Commercial mortgage-backed securities (CMBS) are fixed-income investment products that are backed by
mortgages on commercial properties rather than residential real estate.
Duration is the weighted average of the times until those fixed cash flows are received.
Mortgage-backed securities (MBS) are an investment similar to a bond that is made up of a bundle of home loans
bought from the banks that issued them.
Real estate investment trust (REIT) is a company that owns, operates or finances income-generating real estate.
Return on equity is a measure of the profitability of a business in relation to the equity, also known as net assets
or assets minus liabilities.
Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book
ratios and lower forecasted growth values.
ICE BofA U.S. Bond Market Option Volatility Estimate Index (MOVE), formerly known as the Merrill Lynch Option
Volatility Estimate Index, measures U.S. bond market yield volatility by tracking a basket of over-the-counter
options on U.S. Treasury notes and bonds.

homesteadfunds.com | 800.258.3030                                                                           5

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to
help manage investment risk.

Investing in mutual funds involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
Investors should carefully consider fund objectives, risks, charges and expenses before investing. The prospectus
contains this and other information and should be read carefully before you invest. To obtain a prospectus, call
800.258.3030 or download a PDF of it at homesteadfunds.com.
This presentation is for informational purposes only and should not be considered as investing advice or a
recommendation of any particular security, strategy or investment product. This presentation contains opinions
of the speaker but not necessarily those of Homestead Funds or its subsidiaries. The speaker's opinions are
subject to change without notice.
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The value of U.S. government securities can decrease due to changes in interest rates or changes to the financial
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Equity securities generally have greater price volatility than fixed-income securities and are subject to issuer risk
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are subject to the risk that returns on stocks within the style category will trail returns of stocks representing
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Homestead Funds’ investment advisor and/or administrator, RE Advisers Corporation, and distributor, RE
Investment Corporation, are indirect wholly owned subsidiaries of NRECA. 07/2021

homesteadfunds.com | 800.258.3030                                                                               6