Market Sector Update

• Broad international markets were up slightly more than 1% (in U.S. dollars) over the quarter. The U.S. dollar remained range bound versus a basket of other currencies over the period. The desynchronization of the global economy continued. The U.S. economy met high expectations and performed well, emerging-markets generally suffered with currency devaluation the main culprit (particularly for Turkey and Argentina), Europe muddled along, Japan performed well as earnings were strong, and China struggled as their deleveraging initiative and global trade war concerns hurt stocks in the quarter.
• At quarter end, the U.S., Mexico and Canada established to a new North American trade agreement coined USMCA. For the U.S., the trade focus is now squarely on China. The question is: Will the situation with China be similar to Mexico – a lot of nasty rhetoric but ultimately a trade deal is reached? We no longer believe a substantive trade deal will be signed. There may be one-off agreements but a comprehensive trade pact seems unlikely given the many conflicting issues between the two nations.
• The Nationalistic movement in Europe continued with the far-right garnering approximately 20% of the vote in major elections across the region, much more than expected coming into the year. The budget put forward by the euroskeptic Italian government was out of line with European Union requirements. This has resulted in the Italian 10-year yield increasing to 3.14% from 1.6% before their election.
• The quarter witnessed an additional rate increase by the U.S. Federal Reserve. The Federal Funds Rate now stands at 2.25%, with the 10-year Treasury at more than a 3% yield. Central banks in Europe, Switzerland and Japan are tapering, but they still seem at least six months away from starting to raise their current negative short rates. To offset the forces of deleveraging, China is introducing a combination of fiscal and monetary easing measures, though at this point the measures have been somewhat ineffective. Of note, the price of oil rose significantly in the quarter.

Portfolio Strategy

• The Fund underperformed its benchmark for the quarter primarily due to poor stock selection. Poor selection in health care (led by an allocation to Bayer AG) and industrials were key detractors, while stock selection in consumer discretionary and financials was strong. Japanese auto manufacture Isuzu Motors Ltd. was a standout performer.
• Sector allocation was a positive contributor to performance for the period, with an underweight allocation to the poor performing real estate sector and overweight allocation to the strong performing energy sector benefitting performance. From a geographic standpoint, the Fund’s overweight allocation to China detracted from performance, while strong stock selection in Japan aided performance.
• At the end of the quarter, we tactically removed the defensive overweight in the Fund as we are anticipating good news going into the U.S. mid-term elections. We expect to return to the more defensive positioning in the short term as the length of the current economic cycle and nationalism globally are concerning. The Fund maintains strong overweight allocations to energy and communications, with our largest underweights in health care, utilities and financials. Geographically, we are underweight developed Asia in favor of allocations to emerging markets.
• With the heightened risk of nationalism, we have used forward currency contracts to the yen. As a result, our currency exposure to Japan is now in line with the index, while our stock exposure remains underweight.

Outlook

• Monetary, and in many places, fiscal policy remains very supportive for equity markets. That said, nationalism is on the rise virtually everywhere, led by the U.S. Going forward, geopolitics is likely to have a greater impact on asset performance than monetary policy. 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 an economic downturn. If the trade war escalates and becomes irreversible, it would likely end the current cycle and be a detriment to equities. Outside of some emerging markets like Turkey, Brazil and China, asset prices have been relatively well behaved.
• In much of the world, 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, 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 narrowing of negative interest rate policy globally.
• We believe relative valuation remains supportive for international equities. We see relative value opportunities in emerging markets (especially China), energy/off-cycle commodity plays, internet related companies 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 Sept. 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 09/30/2018: Total S.A. 2.5%, Orange S.A. 2.4%, SAP AG 2.2%, Nestle S.A., Registered Shares 2.1%, Roche Holdings AG, Genusscheine 2.1%, Subaru Corp. 2.0%, Isuzu Motors Ltd. 1.9%, Airbus SE 1.9%, Danone S.A. 1.8% and Bayer AG 1.8%.

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.