Market Sector Update

• Emerging markets (EM) began the year on strong footing. Volatility quickly wiped some of those gains from the benchmark index, resulting in a modest positive return for the quarter. The global sentiment shift away from many of the consumer and technology winners of 2020 was felt in EM as large benchmark stocks pulled back through much of the second half of the quarter. This rotation, largely sparked by rising global interest rates, benefited many cyclical industries.
• Underpinning much of the late quarter weakness in EM was a pullback in China, where several situations mounted. Local Chinese demand for Hong Kong listed stocks, via the stock connect, soured. These were some of the best performing and most sought-after companies in 2020. Stocks also sold off as the market continued to digest regulatory proposals from the Chinese government. Most important, perhaps, was rumblings that China is tightening liquidity in their financial system.
• Brazil also weighed on EM equities. The country has been ravaged by COVID-19, which they have struggled to control. This has led to disorder within the government. To make matters worse, increasing oil prices presented challenges to truckers as they had to endure higher diesel prices. As a result, President Bolsonaro intervened and put a new CEO at the helm of Petrobras, the state-controlled oil company. This government influence was not well received by investors.
• Commodity based countries, namely South Africa and Russia, performed well as commodity prices were up sharply. India was also a bright spot. While the country has been dealing with an increase in COVID-19 cases, economic activity held up relatively well. Also, as a country that manufactures vaccines, there is optimism they will get the virus under control.
• With commodities up during the quarter, materials was the top performing sector. Real estate and communication services also did well. Health care and consumer staples were negative as defensive stocks, overall, were weak. Consumer discretionary was down as autos, e-commerce and education stocks weighed on returns.
• Major EM currencies weakened in the quarter with Latin America and Eastern European countries experiencing the greatest drops in value.

Portfolio Strategy

• For the quarter, the Fund posted a positive return but slightly underperformed its benchmark. Detracting from performance was stock selection in energy and an overweight in consumer discretionary, while stock selection in health care and information technology was a positive contributor. Stock selection in South Korea and an underweight to Saudi Arabia also weighed on performance. Stock selection in China was strong.
• The top relative contributors to performance were BeiGene Ltd., a Chinese biologics company with a growing global presence, Freeport-McMoRan Copper & Gold, Inc., a U.S. based natural resources (primarily copper) company with significant operations in EM countries, and Taiwan Semiconductor Manufacturing Co. Ltd., the world’s leading semiconductor company.
• The three greatest detractors from performance was Midea Group Co. Ltd., a Chinese appliance manufacturer, Petroleo Brasileiro S.A., a Brazilian oil & gas producer, and MercadoLibre, Inc., an Argentina based e-commerce company with leading market share in Brazil.
• After 2020, where growth companies and COVID-19 winners led markets and drove significant outperformance in the portfolio, we were pleased to keep up with the benchmark through this market rotation. The valuation discipline embedded in our investment process was the governor that led to less exposure to companies that came under pressure in the quarter.
• The portfolio had net additions over the course of the quarter with seven new holdings and eliminating three. We added Fix Price Group Ltd., a Russia based dollar store that we believe is well positioned for significant growth. They have dominant market share in a sub-industry with a lot of room to expand store count. Fix Price runs an efficient retail model that has led to strong cash flow and high dividend payout. We sold Trip.com, a Chinese online travel booking company as the stock had recovered sharply. We are not confident the stock can sustain a higher multiple without the return of international travel, which is likely to take significant time.

Outlook

• While there is a lot of noise in global markets, we believe EM fundamentals are strong. On one hand, are the Asian economies that have weathered the storm well and equity market performance, over the last year, reflects this resilience. On the other hand, are the more fragile economies that have suffered more from the pandemic, or are more cyclical in nature, or both.
• In the case of China, South Korea and Taiwan, all of which have remained stable, they continue to provide compelling investment opportunities. While China is tightening liquidity in their monetary system, this is consistent with the goals they had put in place prior to the pandemic. China’s intent has been to deleverage and focus on more sustained drivers of growth. While this may slow gross domestic product (GDP) growth rates and, as a result, create headline risk in the near term, it does not mean individual companies can’t thrive. In the case of Taiwan and South Korea, companies in those countries are leaders in certain industries, have clear strategic advantages and, we believe, can bring shareholders value for many years.
• Brazil has struggled to temper the spread of the virus. A more cavalier approach to the virus has now left them a step behind, including not ordering vaccines with any sense of urgency. At the same time, Brazilian equities has significantly trailed broader EM and there are attractive pockets to invest in within that market.
• India is also in a precarious situation. However, as compared to Brazil, India is a manufacturer of COVID-19 vaccines. They also have more monetary and fiscal capacity to support their economy and financial markets. These two characteristics has brought and we believe should continue to provide more stability to India based equities.
• The pandemic is clearly not over as threats linger, but the heterogeneity of EM creates an environment where as one opportunity fades another emerges. Recent market reactions have opened the door in some areas and lagging markets in select countries leaves further room for valuations to rise when these countries, ultimately, get back on track. We remain committed to finding the perceived best companies with sustainable growth and discovering companies on the verge of positive cyclical inflection points.

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 March 31, 2021, 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 03/31/2021: Taiwan Semiconductor Manufacturing Co. Ltd., 8.2%; Samsung Electronics Co. Ltd. 7.3%; Tencent Holdings Ltd., 7.0%; Alibaba Group Holding Ltd. ADR, 4.7%; JD.com Inc. ADR 2.8%; Ling Ning Co. Ltd. 2.8%; Reliance Industries Ltd. 2.7%; MercadoLibre, Inc. 2.7%; ICICI Bank Ltd. 2.5%; and Midea Group Co. Ltd., Class A.

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. 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.