Market Sector Update

• Emerging market equity returns overall were negative for the quarter and underperformed developed market equities. Emerging and developed equity markets continued to see significant volatility during the quarter. Brazil was the worst-performing major emerging market country – down more than 26% in U.S. dollar terms for the quarter – after a national trucker’s strike shut down the economy. By comparison, China’s market was down 3.5% and Russia’s market was down about 6% in dollar terms.
• Tariffs and the potential for global trade wars impacted emerging markets. Tariffs were imposed on steel and aluminum shipments to the U.S. from a wide range of trading partners. Most of the affected nations retaliated by imposing their own tariffs on a broad range of U.S. goods. It is unclear what the end-game strategy is for the Trump administration related to trade, which has added to market uncertainty. Just after the quarter ended, the U.S. placed additional tariffs on goods from China and China retaliated with matching tariffs on a wide range of U.S. agricultural and other products. However, despite the trade fears, so far the economic activity remained firm across the globe.
• Oil prices continued to show strength during the quarter and boosted returns in the energy and materials sectors. The U.S. dollar strengthened against all emerging market currencies, which contributed more than one-half of the quarter’s negative returns.
• Sanctions on Russia and headline risks from the trade issues added to market volatility. Tensions related to the issue of nuclear weapons on the Korean Peninsula cooled during the quarter although they were not resolved despite a faceto- face meeting between President Donald Trump and North Korea’s supreme leader, Kim Jong-un.

Portfolio Strategy

• The Fund had a negative return for the quarter and underperformed its benchmark index. Key detractors from performance were the overweight positions versus the benchmark in Brazil, China and Russia.
• The Fund’s recent performance reflected macro events during the second quarter and mainly reflected the negative impact of:
  • A significantly overweight position to Brazil compared to the benchmark index – We steadily reduced exposure to Brazil during the last six months and the Fund now is only slightly overweight compared to the benchmark.
  • Fears of a widening trade war with China – A combined 60% of the Fund’s benchmark index is from China, South Korea and Taiwan. While these are strong and growing economies, concerns about the imposition of tariffs by the U.S. on China and other trading partners have hurt emerging markets. About 35% of the Fund is allocated to China and we believe the U.S. and China ultimately will resolve the trade issues. While we do not think the issue poses a long-term threat to emerging markets or the Fund, we recognize the headline risk from the very public negotiating process.
  • An overweight position to Russia compared to the benchmark index – The Russian market fell during the quarter because of the impact of economic sanctions imposed beginning in April. Russia was one of the best-performing emerging markets in the first quarter, but the sanctions caused a steep sell-off and currency depreciation. We have reduced exposure to Russia and cut the Fund overweight position in half. We still view Russia attractively given oil prices and the valuations of the companies we invest in there.
• Key contributors to performance were an underweight position to South Africa and a modest overweight to India.
• At quarter end, the Fund’s largest sector overweight positions were in information technology and real estate, while the largest underweights were in financials, telecommunication services and consumer staples.
• The largest overweight country exposures were to China, Russia and India. The largest country and regional underweights were to Taiwan, South Africa and the member states of the Association of Southeast Asian Nations (ASEAN).

Outlook

• We believe global trade policies and geopolitical (issues related to Iran and the Korean Peninsula) as well as central bank policies of the European Union (EU), Japan and the U.S. will be the key macro variables for emerging markets equities, fixed income and currencies. We think global economic growth will continue and believe that recent signs of reacceleration in the EU and Japan will be positive factors for emerging market equities and currencies.
• There were strong revenue and earnings revisions in 2017 for most key emerging market countries and sectors. We believe these trends have continued this year. The outlook for emerging market earnings and revenue growth is positive. Earnings per share – or “bottom-line growth” – are forecast to grow at a rate in the mid-teens in U.S. dollar terms. We believe valuations still are attractive, with price/earnings ratios below historical averages for this point in the economic cycle both on an absolute basis and relative to the developed world.
• We remain bullish on the energy and materials sectors. Global crude oil inventories have rebalanced, and Saudi Arabia and Russia have announced plans to increase production to try to put a lid on further price increases. China continues to shut down capacity in many basic industries, which is likely to benefit many emerging market miners and basic industry participants.
• We believe that despite the vocal public rhetoric surrounding trade, eventually world leaders will not pursue a mutually destructive paths. As long as the world can avoid the threat of trade wars, we believe emerging markets across Asia will have solid economic growth rates and benefit from demographic tailwinds. Asia has an estimated 50% of the world's Millennials, which we think offers potential for companies providing the goods and services they seek.
• U.S. tax reform legislation enacted earlier this year is likely to be another positive for emerging markets, as we expect capital expenditures to increase in both emerging and developed markets as a result.
• The Fund continues to find growth opportunities in “new economy” industries such as those related to the internet, technology hardware, new energy vehicles and biosimilars/biotechnology. We also believe the financial services sector is likely to remain a high-growth segment in most emerging markets.

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, 2018, 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.

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.