Market Sector Update

• Emerging markets staged a strong rally in the second quarter as global investors moved back into risk assets. This shift back to equities was driven in part by fiscal and monetary stimulus by governments and central banks around the world as well as early signs of economies recovering off of very deep recessions.
• No market or economy has been immune to the effects of this health crisis, but some have shown greater ability to contain outbreaks. These countries are primarily China, South Korea and Taiwan. This has been a unique aspect to emerging markets as these countries have done better than anywhere in the world and, theoretically, should be best positioned to resume a relatively more normalized level of economic activity. From a performance standpoint, within emerging markets, these countries have also performed best year to date.
• Areas of the emerging markets that were down considerably in the first quarter regained a meaningful amount of value in the second quarter. That said, many are in deep negative territory year to date. These include countries that are still in the thick of the COVID-19 virus spread as well as those with energy dependency. Brazil, Russia, and South Africa are key markets that fit these profiles.
• Oil and other commodities recovered in the second quarter, which resulted in energy and materials to be two of the best performing sectors. More defensive sectors like utilities and consumer staples were up, but to a lesser extent. Financials was the worst performing sector as lower interest rates and slow economic activity remained a significant overhang on the sector.
• Emerging-market currencies stabilized in the quarter after a volatile first quarter. Overall, currencies were mixed with some weakening slightly and others appreciating marginally against the U.S. dollar.

Portfolio Strategy

• The Fund posted strong positive performance and outperformed its benchmark for the quarter. Performance was primarily driven by stock selection with sector allocation and country selection also a tailwind to performance.
• Specifically, stock selection in consumer discretionary (ecommerce holdings drove performance), energy and communication services was strong, while an underweight in financials and overweight to consumer discretionary benefited performance. Stock selection in China was also notably strong.
• The top relative contributors were MercadoLibre, Inc., an Argentinian ecommerce company with a majority of sales in Brazil; Meituan Dianping, Class B, a Chinese booking and food delivery app; and Reliance Industries Ltd., an Indian conglomerate with energy, consumer retail and telecommunications businesses. Certain business models are gaining market share through this pandemic and, largely, these businesses performed well.
• The largest detractor from performance was cash, which averaged just over 1.5% for the quarter. Stock selection in health care and an underweight to materials also detracted. Holdings in South Korea and South Africa were also weaker than the benchmark index.
• The greatest detractors from performance were three banks. They included Banco do Brasil S.A., a Brazilian bank that faces near- and mid-term headwinds (the position was eliminated during the quarter); Capitec Bank Holdings Ltd., a well-positioned South African bank whose stock was up slightly in the quarter, but continues to be depressed due to a weak economic environment; and ICICI Bank Ltd., an India-based bank that was up in the quarter, but lagged as the circumstances for banks in India is slowing their near-term growth potential.
• To end the quarter, the largest sector overweight in the Fund was to consumer discretionary. This reflects our conviction in companies with long-term competitive advantages that should thrive from the emerging-market consumer. The largest underweight in the Fund is financials. Regionally, the largest overweight is to China as we believe that remains a global hub for innovation and future corporate leaders within emerging markets. The largest underweight is to Taiwan.

Outlook

• Entering the third quarter, trends continue to accelerate, areas of the world continue on different paths with their ability to contain the virus, and a wide range of outcomes still exist. This is true for the world, but perhaps even more acute in emerging markets.
• While markets have rallied considerably off their March lows, year-to-date dispersion is significant. Equities in countries that have struggled to contain the virus still lag behind those that have it more under control. This is seen with a country like Brazil, which is still down nearly 39% this year and conversely in China, which is up 4% over the same period.
• At the same time, business models that have the ability to grow through or gain market share in this environment are outperforming those with more sensitivity to the economic slowdown. This is seen clearly as cyclical sectors like energy and financials are down more than 25%, but an industry like internet/direct marketing retail is up more than 10%.
• There is little reason to believe these characteristics will not continue as long as the virus suppresses pockets of economic activity. As active investors, this has and, we believe will, create opportunity to express conviction in companies that are well positioned and capitalize on the extreme volatility and market swings that this situation creates.
• The long-term opportunity in emerging markets, in our opinion, remains the most compelling in the world. The adoption of technology, innovative consumer platforms and need for quality health care is accelerating. We believe this will favor emerging markets as they are home to companies paving the way in these areas.
• The COVID-19 pandemic continues to be an unprecedented situation as it is the first of its kind in modern day. We are closely monitoring emerging markets and key trading partners in the U.S., Europe and regionally as consumption patterns are dispersed like never before. While the future is unclear, we believe emerging markets still present an opportunity on a relative basis when compared to other areas of the world.

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 current through June 30, 2020, 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. Past performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets as of 06/30/2020: Tencent Holdings Ltd., 9.9%; Taiwan Semiconductor Manufacturing Co. Ltd., 7.3%; Alibaba Group Holding Ltd. ADR, 6.9%; Samsung Electronics Co. Ltd., 6.9%; Reliance Industries Ltd., 4.3%; Meituan Dianping, Class B 3.6%, MercadoLibre, Inc. 3.5%; JD.com, Inc. ADR, 2.9%; Yandex N.V., Class A, 2.8%; and Hefei Meiya Optoelectronic Technology, Inc., A Shares 2.2%.

All information is based on Class I shares. The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. 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. To the extent the Fund invests a significant portion of its assets in a particular geographical region or country, conditions in that region or country will have a greater effect on Fund performance than they would in a more geographically diversified fund. 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.