Market Sector Update

• In the final quarter of 2019, global emerging markets were the best performing areas of the world. Following a turbulent third quarter in which concerns about deteriorating trade negotiations led to declines in emerging market equities, significant progress toward a “phase one” U.S.-China trade deal lifted a major overhang suppressing these stocks. Accommodative monetary policy and signs of improving global economic trends in certain regions also drove the rally.
• With the exception of India, all major emerging market countries posted double-digit returns in the fourth quarter. For the second quarter in a row, Taiwan was the best-performing major market. This largely reflected renewed confidence based on improvements in the global technology supply chain. India is facing challenges primarily isolated within its non-bank financial corporation sector, which led to a market that lagged peers.
• China, the largest emerging market economy, posted a 15.1% gain as the country’s technology bellwethers, along with some new up-and-coming technology players, drove significant gains. Brazil continued to move ahead with beneficial policy decisions both at the political and economic level. The current regime’s decisions are manifesting in economic improvement.
• China ended the year up 24.5% in U.S. dollar terms. While the sentiment surrounding China was under constant pressure over the year, investors were able to overlook the trade disputes and reward the many domestically oriented companies with robust sales growth and positive long-term prospects.
• Another strong quarter for Russia solidified its top spot among the emerging markets for the year. Oil’s recovery as well as some key corporate governance improvements helped this market in the quarter.
• For 2019, Russia was up over 50% in U.S. dollar terms. Entering 2019 it was the cheapest equity market in the world and had the most undervalued currency. The sanctions that had previously weighed on the economy were offset by a transformative year. Corporate governance improvements, better shareholder practices such as dividends and buybacks, and solid companies that the market had severely undervalued represented an opportunity that benefitted investors holding outsized exposure.
• Tensions in the Middle East flared again to close the year. The conflict had not escalated to worrying levels by year end, but it will be closely watched as 2020 progresses.

Portfolio Strategy

• The Fund had a double-digit positive return in the quarter and outperformed its benchmark.
• Returns were driven primarily by stock selection. Country and sector allocation, via an overweight to consumer discretionary, overweight to Russia and underweight to Thailand, also provided some tailwind. Stock selections in communication services and energy were strongest.
• The top contributors on a relative basis were BeiGene Ltd., a Chinese biologics company; Yandex N.V., the Russian internet search engine and technology platform; and JD.com, Inc., the second-largest Chinese e-commerce company.
• The main performance detractors were an overweight to Vietnam and stock selection in South Korea. Positions in Hyundai Motor Co., Vinhomes JSC and MercadoLibre, Inc., detracted from relative performance.
• To end 2019, the Fund remained overweight to Russia and Brazil where we believe there is significant opportunity both at a political/regulatory level and in the companies in which we invest. Our largest underweight remains in Taiwan where, aside from our core investment in Taiwan Semiconductor Manufacturing Co. Ltd., we don’t find many high conviction opportunities.

Outlook

• Emerging market equities enter 2020 with a different fundamental backdrop than 2019. At the beginning of 2019, emerging markets were depressed as investors assigned a significant risk premium to an area of the world facing unknowns including a trade war, elections in India and many more. As these threats have eased, the market appreciation has erased the “easy money” opportunities we believe we found during the year.
• We believe potential opportunities remain, we also think acute attention to stock picking will be important. The historical valuation discount is not as extreme as it was one year ago. However, within the context of the entire globe, the emerging markets lagged in 2019. We believe they continue to offer attractive relative opportunities.
• We expect to continue to hold many of our core positions as we believe they represent long-term opportunities among their peers globally. At the same time, we began the process of looking for companies that we think present attractive value. One example is Fuyao Glass Industry Group Co. Ltd., a Chinese auto glass company with facilities in China and the U.S. that operates in an industry we believe to be at or near a cyclical bottom.
• The macro picture appears to be improving or showing signs of near-term improvement across much of the globe. Within emerging markets, progress in trade negotiations between the U.S. and China is positive in many respects. In addition, we think accommodative monetary policy and regulatory changes are brightening the outlook.
• We believe emerging market equities present continued potential opportunities for long-term investors. While valuations have risen, we think there are many compelling investment opportunities and the region may be the strongest growth area of the world in the future. The underlying secular themes that drive much of the bottom-up focus are still attractive to us, and we believe the innovation from this part of the world rivals the global peer group. We will continue to employ our differentiated approach in seeking attractive investments for the Fund.

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 Dec. 31, 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 12/31/2019: Samsung Electronics Co. Ltd., 7.07%; Taiwan Semiconductor Manufacturing Co. Ltd., 6.50%; Tencent Holdings Ltd., 6.40%; Alibaba Group Holding Ltd. ADR, 6.23%; Reliance Industries Ltd., 3.43%; Petroleo Brasileiro S.A.. 3.39%; Yandex N.V., Class A, 3.08%; JD.com, Inc. ADR, 2.44%; Capitec Bank Holdings Ltd., 2.37%; Sberbank of Russia PJSC ADR, 2.32%.

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.