Market Sector Update

• Emerging market equity returns were positive for the quarter but underperformed developed market equities. Returns were volatile with a mid-single-digit drawdown during May followed by a similar rebound in June as the U.S. Federal Reserve (Fed) signaled the beginning of a cycle of rate cuts.
• Russia showed the strongest returns for the quarter among the major emerging markets, up 28% in U.S. dollar terms. Many key companies there announced significant hikes in dividends and or share repurchases.
• China’s equity market had a very weak result in the quarter, posting a decline of just more than 5%. Continued concerns about trade negotiations with the U.S. were amplified when the U.S. proposed that the Chinese company Huawei – the world’s leader in 5G technology and the second-largest smartphone manufacturer – would no longer be able to purchase U.S.-supplied hardware and software. If enforced, this could cut Huawei’s revenues by tens of billions of dollars.
• The global trade continued to worsen as the U.S. threatened to extend the imposition of tariffs to trading partners including Mexico, the European Union (EU) and Japan. The uncertainty has led to confusion about where supply chains should be located on an optimal economic basis and also is affecting business capital expenditures.

Portfolio Strategy

• The Fund had a small negative return for the quarter and underperformed its benchmark.
• Performance was hurt by security selections in India and Vietnam as well as in the materials sector.
• The Fund benefitted from an overweight position relative to the benchmark in internet stocks in Latin America and Russia, and an overweight in financials in Brazil and Russia. Security selections in China and South Korea also were contributors.
• The largest country overweight positions at quarter-end were in Brazil, Russia and India. The Fund moved from an overweight in China to a modest underweight, with a continued emphasis on domestic consumption companies.
• The Fund’s largest sector overweights were in consumer discretionary, real estate and energy. The largest underweights were in consumer staples, materials and financials.

Outlook

• We continue to think the Fed will begin a rate-cut cycle in the near future. Global growth has slowed and we also expect further monetary easing by the European Central Bank as well as many emerging market central banks, including those in Brazil, Russia, India and China.
• We are fast approaching the 2020 U.S. presidential election, which we believe will be an important driver in the ongoing trade negotiations between the U.S. and China as well as with the EU. It is difficult to forecast a resolution that will be acceptable to President Donald Trump. The stakes remain high and we believe the issues could impact global growth rates for many years to come.
• While trade is important for China, it is a diverse and complex economy. We continue to find secular themes that offer potential investment opportunities. For instance, we believe China will spend more on health care as its population ages and shifts toward innovative drugs.
• The Fund’s overweight in Brazil assumes that the government will successfully pass a constitutional reform that brings significant savings on pensions. We think this will lead to meaningful interest rate cuts as well as a strengthening of the currency, and is likely to attract foreign direct investment in infrastructure projects, the privatization of stateowned enterprises and the energy sector.
• Prime Minister Narendra Modi of India defended his position in recent elections and his administration is back for another term. Macro indicators continue to point toward a weak consumption environment, partially as a result of problems at companies in the non-banking financial sector. The most recent fiscal budget lacks short-term stimulus measures but emphasizes long-term initiatives such as foreign direct investment and public-sector bank recapitalization. We think it provides a good backdrop for the economy to do well over the long term, as it is less correlated with global trade tensions even as the near term outlook is weak.
• We continue to believe valuations remain supportive for emerging market stocks. Low inflation across much of the globe allows for meaningful stimulus through fiscal and monetary initiatives. Despite macro challenges on the trade front, there are multiple long-duration themes driving emerging markets, which is where we believe investors should be focused. Trends including growth in internet/technology platforms, private banks taking market share in India, ecommerce and “fintech” reshaping commerce and innovation in health care continue to drive those industries and provide a good backdrop for stock picking.

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, 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.

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.