A look back
After a good start to the year, the Fund has
been affected by volatility in 2019, with year-todate
performance adversely impacted by poor
performance during May. Over the month, the
risk-off environment stemming from deteriorating
trade negotiations between the U.S. and China
led to nondiscriminatory selling of equities
considered sensitive to trade regardless of
fundamentals. With that backdrop, cyclical sectors
underperformed more defensive-oriented sectors.
Despite the Fund maintaining a relatively neutral
allocation between cyclicals and defensives, stock
selection in the energy, industrials, financials
and consumer discretionary sectors negatively
impacted performance during the selloff. The Fund
underperformed its Morningstar Foreign Large
Blend category peers by nearly 2% in May. For
reference, the Fund outperformed its benchmark and
category average (ranking in the 39th percentile of
its peer group) from January through April.
Over the course of the year, the Fund has faced
headwinds resulting from its relative value
investment philosophy. Growth stocks have
outperformed value stocks for the year to date by a
significant margin. For example, the MSCI EAFE
Growth Index has outperformed the MSCI EAFE
Value Index by more than 700 basis points. As shown
in the chart below, the Fund currently places in the
bottom third of its Morningstar Foreign Large Blend
category when measured by its Morningstar Value-
Growth score. That score evaluates value factors
(i.e. price/book, price/sales, project price/earnings,
etc.) and growth factors (i.e. long-term projected
earnings growth, sales growth, cash flow growth,
etc.) to determine either a value or growth tilt. Higher
scores indicate a greater growth orientation, and as
the chart makes clear, the Fund’s value tilt relative to
peers has been prevalent over the past several years.
A tilt towards value
Past performance is not a guarantee of future results. Data provided from 04/30/2014
through 05/31/2019. Source: Morningstar Direct. A score of less than 50 indicates a value tilt
relative to peers.
Over the trailing three-year period, several factors have
presented meaningful headwinds:
- Growth significantly outperformed value. Given
our relative value process, we would typically expect
this market environment to be more challenging
for the Fund.
- Poor stock selection in a short list of select holdings
was highlighted by the significant decline of Teva
Pharmaceuticals Industries Ltd. in August 2017.
- Energy prices declined during the fourth quarter
of 2018 and the Fund maintained a significant
- The Fund was affected by the risk-off environment
in May 2019.
The view ahead
Shifts in central bank policy, the rise of nationalism,
the Brexit saga and trade negotiations — particularly
between the U.S. and China — are standout issues
affecting the current economic environment. Going
forward, we believe geopolitics will continue to have
a meaningful impact on asset values across the world.
The question remains: How much longer will the cycle
extend uninterrupted by looming risks? We continue to
seek stocks that exhibit more defensive characteristics.
As trade tensions have escalated between the U.S.
and China, the Fund has shifted to a slightly more
Despite the challenges, we believe pockets of
opportunity exist. In our view, there are attractive
valuations in cyclicals and value-oriented stocks,
including in emerging markets and China in particular.
At a fundamental level, we continue to be focused on
companies with perceived sustainable competitive
advantages, safe/high dividend yields and strong balance
sheets. We have sold or trimmed holdings where relative
valuation is not as attractive as well as several cyclical
holdings that could be impacted by global trade issues.
For example, AP Moller Maersk, a global shipping
conglomerate, was trimmed during May as it is directly
tied to global trade. While we still like the underlying
fundamental trends in this industry and believe they are
trading at attractive valuations, we feel the next twelve
months have more risks than opportunities. We believe
Wuliangye Yibin Co. Ltd, a Chinese spirits company, is
still well positioned to capture the Chinese consumers’
propensity to buy high-end spirits, but have trimmed the
holding into relative strength. We added Dollarama Inc.,
a Canadian dollar store company, during the month.
Dollar stores generally are defensive and Dollarama is
also positioned to grow as it expands store count and
increases the average price of items in its stores. We
believe we were able to buy Dollarama at an attractive
We have increased the Fund’s cash allocation to 8-10%.
We are utilizing cash to offset some of the higher beta
exposures in the portfolio.
This active approach has served us well over the
long term. As shown below, the Fund has a strong
track record of success, performing well relative to its
benchmark, the MSCI EAFE Index, and its Morningstar
Foreign Large Blend peers over the long term.
Seeks long-term outperformance relative to index and peers
Past performance is not a guarantee of future results. Data provided from 04/02/2007 (Class I share
inception date) through 05/31/2019. Charts above reflect batting averages (monthly rolling return data)
for the Class I shares of the Fund over the time periods shown. Source: Morningstar Direct.
High conviction ideas
As we move forward, our highest convictions include:
- Energy — As we move through 2019, the Fund
maintains an approximately 11% allocation to
energy compared to a 6% allocation for the
benchmark. While oil prices have declined, we
believe our holdings in the sector are priced as if
oil was considerably lower than its current price.
Many companies have been focused on improving
their balance sheets and cash flow. With that
backdrop, we think there are many attractively
valued stocks and believe these holdings offer
considerable upside. Seven Generations Energy Ltd.,
a Canadian holding that has weighed on the
portfolio, has been executing on its strategy and
we believe is positioned to rebound. As a result, we
would expect the Fund to perform well if energy
- Information technology — We believe companies
within this sector provide relative growth
opportunities in industries like semiconductors and
hardware storage, or stable growth opportunities
in companies focused on information technology
services and/or software development. SAP SE,
a German software company developing enterprise
software for businesses, has been successful
maintaining its legacy business as well as
growing its cloud-based software platform.
- Emerging markets (China) — We remain
constructive on emerging markets as we move
through 2019. In an effort to support the economy
for the remainder of the year, we expect China to
continue to add fiscal stimulus, lower the reserve
requirement ratio and be constructive on regulatory
policy. Chinese holding Wuliangye Yibin Co. Ltd.
has been a standout performer in the portfolio.
Despite a setback during the fourth quarter of 2018
on global trade/GDP growth fears, the stock strongly
recovered in 2019 and has been resilient through
the most recent period of volatility. Fundamentally,
its high revenue and income growth potential (30–
40% growth expectations in 2019) is propelled by
increasing demand for premium spirits as wealth
grows in China. With 100% of the company’s sales
in China, we believe the firm is less sensitive
to ongoing trade war concerns. We ended May
with an approximately 11% allocation to emerging
markets, with more than 8 percentage points of that
allocation invested in China.
Overall, the Fund is now more defensively positioned.
We believe the portfolio’s tilt towards low relative
valuations and increased cash allocation should lower
volatility of Fund returns and cushion returns during
times of market stress.
Past performance is no guarantee of future results. The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any
investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of
information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s
specific objectives, financial needs, risk tolerance and time horizon.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences
in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered
at all broker/dealers.
Top 10 equity holdings as a percent of net assets as of 05/31/2019: Nestle S.A., Registered Shares 3.0%, Total S.A. 2.8%, Roche Holdings AG, Genusscheine 2.8%, SAP AG 2.4%, Airbus SE 2.3%, Tokio Marine Holdings,
Inc. 1.9%, Unilever plc 1.9%, Orange S.A. 1.8%, Subaru Corp. 1.7% and Ferguson plc 1.7%.