Market Sector Update

• In the second quarter, global markets staged an incredible recovery. After the first quarter where markets dove straight into an abyss and the world was facing the early stages of the COVID-19 virus, markets recovered on two overriding factors: 1) fiscal and monetary intervention, and 2) the hope that the virus is being contained enough for economic activity to increase.
• Developed international markets, as measured by the MSCI EAFE Index, were up 14.9% in the quarter. This rally was, generally, led by cyclicals. Materials, industrials, information technology and consumer discretionary were up significantly. Within information technology, the cyclical semiconductor industry was the strongest area of the sector, up more than 35%.
• The U.S. dollar provided a boost for U.S.-based investors as it weakened 2.3% against a basket of currencies. Government bond yields were mostly flat to down across the globe as aggressive easing was met with a risk-on sentiment by investors. Oil was up significantly as supply was cut across the world and manufacturing began to recover. Brent crude rallied 66.3%.

Portfolio Strategy

• The Fund significantly outperformed its benchmark, the MSCI EAFE Index, during the quarter as strong stock selection and country allocation more than offset poor sector allocation. Stock selection was positive in nine of the 11 sectors, with energy, financials and industrials being greatest contributors. Consumer staples and communication services were the two sectors that detracted from performance. On a country basis, stock selection in Japan, the U.K. and Australia contributed the most, while stock selection in Singapore and an underweight allocation to Italy detracted.
• On a stock basis, the top three relative contributors to performance were Newcrest Mining Ltd., Zozo, Inc. and Reliance Industries Ltd. Newcrest is an Australian gold mining company. The stock surged in the quarter as gold/gold miners were defensive plays in an uncertain economic environment stemming from the COVID-19 outbreak and with aggressive central bank expansion.
• Zozo, Inc. is the largest fashion e-commerce platform in Japan. The company benefited from the stay-at-home and shop-online environment. The stock’s recent surge also reflects the defensive nature of its business. We believe it still trades at about a 20% discount to global peers.
• Reliance Industries is a large India-based conglomerate with significant businesses in petrochemicals/refining, retailing and telecommunications with their Jio brand. The stock has been defensive during COVID-19 given its diverse business mix and improved balance sheet. We expect the stock to continue to appreciate as it shifts its business mix away from energy.
• The largest relative detractors were Wens Foodstuffs Group Co. Ltd., Class A, Seven & i Holdings Co. Ltd., and ASML Holding NV. Wens Foodstuffs Group is the largest pig farmer in China. The stock underperformed in the quarter mainly because its first quarter operating results were weaker than expected. We continue to believe that Wens should be a share gainer as the hog farming industry consolidates and becomes more institutional in China. We believe the stock trades at a 40%+ discount to peers.
• Seven & i, a Japanese holding company, manages convenience stores (7-Eleven brand) and various other supermarkets/stores in Japan. The stock continued to struggle in the quarter as COVID-19 caused declines in consumer discretionary purchases, increasing pressure on their core stores. We feel the stock trades at a 40% discount to its global peers and we continue to own it.
• The lack of exposure to ASML detracted from relative performance as the stock has a relatively large benchmark weight and was up nearly 40% for the quarter.
• The Fund has continued to migrate slightly more defensive. Generally, additions to the portfolio have been in perceived higher quality companies that we were able to purchase at relative discounts as markets have been volatile. Eliminated positions have generally been more cyclical in nature or faced unusual end-market pressure as a result of the unique effects COVID-19 is having on certain pockets of the economy.
• The Fund bought AIA Group Ltd., an insurance company with key end markets in China and Hong Kong. We believe the stock is trading at depressed valuations and has positive growth prospects. The Fund sold BP plc as it outperformed peers and we found perceived better prospects elsewhere.

Outlook

• World economies are still depressed and in flux. Countries are on different timelines in terms of both COVID-19 and economic activity. The near term is in the hands of the virus and the range of outcomes remains wide.
• The market’s ability to recover to these levels appears rooted in the belief governments and central banks will support the economy and liquidity for the foreseeable future as well as investors looking to 2021 and, perhaps, beyond to a normalized economic environment. Whether these beliefs come to fruition or are enough to support markets remains to be seen. There is inherent risk with this scenario.
• Government and monetary leaders are working hard to maintain the status quo of low inflation, low interest rates and to return to low growth. And the market’s behavior reflects this. Value stocks, while experiencing a bounce off the March lows, and occasionally gathering heads of steam, are still out of favor and will likely remain so until the belief that one of the characteristics of the aforementioned economic scenario may change. While this may be true for the market in aggregate, we believe this is an opportunistic environment for active investors regardless of style.
• U.S. elections, which have been overshadowed by a multitude of recent events, will enter center stage over the coming months. The market will try to handicap outcomes and how those outcomes will affect markets. It is difficult to invest on politics, but international relations have had an outsized impact on markets in recent years, so we will be monitoring this closely. A scenario of a democratic sweep in the U.S., which is a possibility at this time, may favor international markets over the U.S. as some of the recent corporate tax reform is at risk of being reversed.
• Overall, we believe the near future is still fuzzy. We remain focused on executing our strategy of discovering relative value opportunities across the middle of the valuation spectrum. We believe a focus on companies trading at a discount with strong future prospects is a sound approach to generate outperformance if economies recover and build in some margin of safety in the event more volatility ensues.

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, 2020, 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 06/30/2020: Nestle S.A., Registered Shares 2.6%, Roche Holdings AG, Genusscheine 2.5%, SAP AG 2.5%, Newcrest Mining Ltd. 2.0%, DNB ASA 2.0%, Airbus SE 1.9%, Legal & General Group plc 1.9%, Merck KGaA 1.8%, SPDR Gold Trust 1.8% and Anglo American plc 1.7%.

All information is based on Class I shares. The MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Markets countries’ around the world, excluding the US and Canada. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.