Market Sector Update

• Broad international markets were down slightly more than 1% (in U.S. dollars) over the quarter. In local currency, broad international markets were up slightly more than 3%, though the appreciation of the U.S. dollar more than offset those gains. The relative health of the U.S. economy drove the currency strength, as U.S. economic data generally exceeded expectations. On the other hand, economic data out of Japan and Europe was generally weaker than expected, while Chinese economic strength materially deteriorated in June.
• Geopolitical threats and concerns heavily influenced stock performance during the quarter, with none more significant than the ongoing trade war concerns initiated by the Trump Administration, particularly with China. There is no doubt the U.S. wants serious and material concessions. While an all-out trade war remains unlikely, we believe achieving concessions will require economic pain, posturing and time.
• We believe local country nationalism in the European Union remains concerning. For instance, the new Italian government is headed by a coalition of two parties that are Euro-skeptics, an environment that could induce increased instability to the region. Additionally, the lingering uncertainty on the future of the Korean peninsula remains a significant risk, including for China-U.S. tariff discussions. Significant tensions on several fronts also continue in the Middle East, with the U.S. re-imposing sanctions on Iran on May 8. In aggregate, we feel these geopolitical threats are only somewhat priced into the markets.
• As anticipated, the U.S. Federal Reserve (Fed) raised rates in June and we expect two additional rate increases in 2018. U.S. wage inflation has held steady around 2.75%, somewhat assuaging the inflation fears that hurt performance in the first quarter. In other regions, rate policies remain mixed. We expect the U.K. to increase rates, China to continue deleveraging (albeit likely at a slower pace than previously expected), and the Bank of Japan as well as the European Central Bank are likely to continue tapering through year end with a long glide path to normalizing short-term rates. Overall, we anticipate less inflation in most developed international markets relative to the U.S.

Portfolio Strategy

• The Fund performed in line with the benchmark for the quarter, with sector allocation driving relative performance. The Fund’s large overweight to the strong-performing energy sector as well as an underweight allocation to the poor-performing financials sector drove relative gains. Top individual contributors to performance for the period included Suncor Energy, Inc., Babcock International Group plc and Total S.A.
• Stock selection was a detractor to performance and was driven by Japanese cyclicals (Isuzu Motors Ltd. and Subaru Corp.) and the Fund’s exposure to emerging-market holdings. Both of these allocations are highly correlated with global growth, and a slightly deteriorating economic backdrop and trade war rhetoric hurt their performance.
• During the quarter, the Fund maintained an overweight allocation to defensive sectors relative to the index given increased volatility and strong cyclical performance over the last two years. The Fund maintains strong overweights to energy and telecommunications, with our largest underweights to health care and consumer discretionary.
• At quarter end, the Fund had no active currencies hedges and remained fully invested, with cash about 3% of the Fund.

Outlook

• Despite perceived risks to equity markets, we continue to believe global economic growth is solid today, supported by monetary and fiscal policy. In addition, we believe corporate tax relief in a number of countries (the U.S., France and Japan) as well as infrastructure spending should help support the current market cycle. That said, the current economic cycle is in its 10th year – long by any standard. The question remains: How much longer will the cycle extend uninterrupted by looming risks? As a result, we are watching closely for signs of change and continue to seek stocks that should better withstand a downturn. If the trade war escalates and becomes irreversible, it would likely end the current cycle and be a detriment for equities.
• Global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. Despite the majority of central banks tapering their asset purchases, we believe virtually all countries are struggling with high levels of debt. As a result, we believe central banks will attempt to keep rates below nominal gross domestic product growth in order to monetize the debt and continue to stimulate their economies. As such, we believe there is a long-term cap on how high rates can go. Our base case is continued slow, deliberate exiting of quantitative easing and reversing of negative interest rate policy globally.
• We believe relative valuation remains supportive for international equities, while absolute valuations are less attractive. We see relative value opportunities in emerging markets (especially China), energy/off-cycle commodity plays, companies linked to internet expansion and increasingly in yield plays.

The opinions expressed are those of the Fund’s managers regarding Class I shares 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.

Top 10 Equity Holdings as a percent of net assets as of 06/30/2018: Total S.A. 3.6%, Koninklijke Ahold Delhaize N.V. 2.5%, Orange S.A. 2.3%, SAP AG 2.0%, Bayer AG 1.9%, Danone S.A. 1.9%, Roche Holdings AG, Genusscheine 1.9%, Isuzu Motors Ltd. 1.8%, Airbus SE 1.8% and Ferguson plc 1.7%.

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.