Market Sector Update

• Against the backdrop of trade tensions and slowing global growth, emerging market equity returns were negative in the quarter. A substantial drawdown in July and August was partially offset by a market rebound in September. Loose monetary policy from most central banks coincided with notable stimulus programs that drove a rally in several major emerging market countries, including South Korea, Taiwan and India.
• Taiwan was the best-performing emerging market in the quarter, up over 5% in U.S. dollar terms. Sentiment surrounding Taiwan improved as investors focused on the likelihood that its technology sector will benefit from the U.S.-China trade dispute as parts of the technology supply chain relocate to the area.
• China’s equity market was down 4.7% during the quarter as the ongoing trade war continued to weigh on economic activity. Resolution of the trade war remained uncertain, with progress constantly met by setbacks. As a result, capital investment and manufacturing – key components of China’s economy – have suffered. Economic growth has been supported by consumer spending, which has not yet been severely disrupted.
• At the end of the quarter, the U.S. government attacked China’s economy with a new weapon: a possible limit on access to U.S. investor capital. While still in early days, this situation may create near-term volatility as it is highlighted in the media.
• Brazil’s positive structural transformation was met with market volatility during the quarter. The financials sector suffered most, and the currency was down roughly 7%. Brazil cut interest rates and continued to make progress toward fiscal responsibility.
• Overall, geopolitics remained a focal point of global stock markets. Brexit, tariffs, unrest in the Middle East and global geopolitics remain at the center of day-to-day market sentiment.

Portfolio Strategy

• The Fund had a negative return during the quarter and slightly underperformed the negative return of its benchmark.
• From a sector attribution standpoint, underperformance was mainly a result of stock selections in consumer discretionary, led by a pullback in online giant MercadoLibre, Inc., and in communication services, driven by the Indian media company Zee Entertainment Enterprises Ltd.
• Underperformance was slightly offset by stock selections within industrials, where Korea Shipbuilding & Offshore Engineering Co. Ltd. and Rumo S.A. – a Brazilian rail company – performed well on a relative basis.
• Within country attribution, stock selection was poor in Brazil, where Banco do Brasil S.A. and MercadoLibre were detractors from performance. However, the Fund’s exposure to real estate company Vinhomes JSC in Vietnam, which is an “off benchmark” holding, contributed to performance as it had a strong gain in the quarter.
• The Fund continued to be overweight relative to the benchmark in India, Brazil and Russia. These overweight allocations were mainly a result of bottom-up stock selection, although macro observations and analysis also added to our conviction. This was particularly the case in Brazil, where we believe a once-in-a-generation transformation at the fiscal and economic level will provide an additional tailwind to the market and to companies on which we focus.
• In China, which is the largest country weighting in the benchmark and in the Fund, we are focused on companies oriented to the domestic economy. These businesses are less directly impacted by the trade war and continue to benefit from secular growth.
• The largest sector overweight in the Fund is in consumer discretionary. Consumers continue to be the greatest secular growth drivers in emerging markets, and as a result we find many attractive investment opportunities within this sector.

Outlook

• There is a lack of direction in the market as investors struggle with a slowing global economy and political volatility around the world. In this environment, we remain committed to investing in companies that we believe have fundamentally superior businesses and thematic tailwinds to support long-term growth.
• We think central banks will continue with accommodative policies, both in developed and emerging market countries. In addition to lower rates, there have been stimulus measures implemented to combat slowing growth in major emerging markets, such as India and China. Both countries remain committed to supporting economic growth.
• The U.S.-China trade war is central to much of the recent deterioration in economic activity. The outcome is unpredictable, but it is clear that both sides of the negotiation want to find a resolution, even if it is only temporary.
• While China faces clear headwinds, it is home to companies that are leading in innovation across multiple sectors. It also is committed to long-term growth and continued advancement of its population. We believe consumer wealth creation will be a growth driver and investment opportunity for many years.
• India’s economy has been weak in 2019. Consumption has been challenged as issues in the non-banking financial sector have weighed on the overall environment. Loan growth has been a key driver of economic activity, but it has slowed as lenders have been less willing to expand their balance sheets. That said, India is insulated from the trade war and has been able to focus on addressing these issues without many distractions. India took action during the quarter to drive business activity, including cutting the corporate tax rate. We took the volatility as an opportunity to add exposure at a discount.
• In Brazil, we continue to follow the dramatic policy transformation now underway. While this evolution won’t be seamless, we have confidence that the government will execute its plan to fix the fiscal budget through pension reform and privatize some state-owned businesses. We think this will provide a tailwind and a significant opportunity, which is reflected in the Fund’s overweight to Brazil.
• We believe attractive valuations and quality companies offer long-term growth potential in emerging markets. While there are macro headwinds from the trade war, monetary and fiscal initiatives are supporting markets. More importantly, we believe the secular trends and themes that underpin the companies in the Fund are sustainable despite any geopolitical overhang.

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 Sept. 30, 2019, 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.

All information is based on Class I shares.

Top 10 equity holdings as a percent of net assets as of 09/30/2019: Samsung Electronics Co. Ltd., 6.65%; Alibaba Group Holdings Ltd. ADR, 6.30%; Tencent Holdings Ltd., 5.83%; Taiwan Semiconductor Manufacturing Co. Ltd., 5.74%; Petroleo Brasileiro S.A., 3.52%; Reliance Industries Ltd., 3.29%; MercadoLibre, Inc., 3.24%; Hyundai Motor Co., 2.81%; Yandex N.V., Class A, 2.76%; Branco do Brasil S.A., 2.35%.

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.