Market Sector Update

• While the global economy hangs in limbo, the stock market marches forward. It is difficult to put the world into perspective. On one hand, many stocks are near all-time highs and some high-grade corporate debt issuers have even issued bonds at negative yields. On the other hand, many quality companies have been devastated by the global pandemic, even though in many cases they are well-positioned for the long term. Such conditions strongly suggest that prudent investors should remain diversified.
• Developed international markets, as measured by the Fund’s benchmark index, were up 4.8% in the quarter. This rally was driven by industrials, materials and consumer discretionary. Much of this was a bid behind global growth reaccelerating on stimulus plans. A small subset of companies (COVID-19 beneficiaries) also performed well. Financials and energy were the only two sectors in negative territory for the quarter.
• The U.S. dollar depreciated relative to a basket of major foreign currencies, continuing to provide this long-awaited tailwind to U.S. dollar-based investors. Government bond yields were mixed with further declines in certain countries like Germany and France, but higher in others like the U.K. and Japan. Oil ended the quarter flat.

Portfolio Strategy

• The Fund underperformed its benchmark for the quarter. Strong stock selection in consumer discretionary and the benefit of an underweight allocation to financials was offset by poor stock selection in consumer staples and communication services as well as an overweight allocation to energy. The Fund’s overweight to emerging markets helped, but stock selection in Japan and the U.K. hindered results.
• On a stock basis, top relative contributors to performance were Alibaba Group Holding Ltd., Merck KGaA and Reliance Industries. Alibaba, a Chinese ecommerce and technology business, continues to thrive in this environment as they gain market share. It is a high-quality investment in a growing Chinese consumer market with product innovation and multiple ways for the company to succeed. Merck KGaA is a German chemicals and pharmaceuticals company serving a wide and diverse end market. The company’s key business segments have had solid growth, despite the global economic environment, including their therapeutics, life sciences tools and semiconductor materials. They are a strong free-cash-flow generator and trade at a discount to 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 Suncor Energy, Inc., Legal & General Group plc and Bayer AG. Suncor is a Canadian integrated oil company that has come under pressure as the downstream segment of the business has not been as defensive as it has historically. Suncor has shown they have the ability to weather this period, however, we continue to monitor the company. Legal & General is a U.K.-based financial services firm with a diverse set of products and services in asset management and insurance. They are a high-quality operator with a strong balance sheet. The market has been concerned about how Brexit, COVID-19 and the potential for higher rates and inflation could increase the company’s credit risk. With this said, we are comfortable with their credit risk and this remains a high conviction investment. Bayer is a German health care and agriculture company that has been in the spotlight for several years due to a highly public lawsuit related to their Roundup product. While the lawsuit is likely coming to a conclusion in the near term, the market is focused on COVID-19 related headwinds, which we believe are transitory.
• The Fund has taken the opportunity during this crisis to shift the portfolio toward companies offering perceived more attractive relative valuations. Such companies, including higher quality growth and defensive names as well as cyclicals. The Fund added several new positions during the quarter, including Canada Goose, an outerwear apparel company with strong brand power. Eliminated from the portfolio was Hong Kong Exchanges, the operator of securities exchanges in Hong Kong, as the company’s recent success propelled its share price to our valuation target.

Outlook

• International markets are currently faced with an abundance of question marks. COVID-19 remains the greatest wildcard, with the range of economic outcomes still wide. Upcoming U.S. elections may also be a source of volatility and Brexit negotiations are quietly ongoing. While these important unknowns remain as an overhang, equity valuations arguably don’t reflect the risk they present.
• The market continues to look toward governments and central banks as the ultimate backstop, pricing in high conviction that they will step in as needed and normalization will return in 2021. Along with hope and these assumptions, equity indices are also buoyed by the small subset of COVID-19 winners. These business models are better positioned through this environment but, for the most part, are also setting record valuations.
• We believe this presents opportunity. Through the rubble, there are companies underappreciated and overlooked despite their ability to maintain respectable levels of revenue and cash flow. They also have balance sheets to weather this period of time. While they may be overlooked because they are not in one of the “high-profile” industries, we expect their ability to generate attractive shareholder returns will ultimately be recognized.
• We continue to execute on our strategy of investing in companies that offer perceived attractive relative value and compelling long-term risk/reward. We expect central banks will continue to be supportive, and governments will, ultimately, use all available resources to help their economies. With extreme valuations in the bond market and the continued narrowing of equity leadership, something will have to give. Whether that is in 2020 or in five years from now is difficult to tell, but without knowing, we are comfortable that our approach provides our investors an important exposure and value proposition.

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 September 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 09/30/2020: SAP AG 2.5%, Roche Holdings AG, Genusscheine 2.5%, Nestle S.A., Registered Shares 2.5%, Merck KGaA 2.3%, DNB ASA 2.0%, Newcrest Mining Ltd. 2.0%, Anglo American plc 1.9%, Schneider Electric S.A. 1.9%, Airbus SE 1.8% and Carrefour S.A. 1.7%.

Diversification does not ensure a profit or protect against loss in a declining market.

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.