Market Sector Update

• Broad international markets were up approximately 3.5% in U.S. dollars, despite several headwinds. The U.S. dollar depreciated approximately 1% relative to a basket of other currencies. The quarter was marked by increasingly accommodative central banks, a deteriorating geopolitical backdrop and a very narrow equity market led by quality growth stocks. Earnings revisions were again negative in the quarter.
• With regards to monetary policy, the U.S. Federal Reserve (Fed) is expected to cut the federal funds rate by 25 basis points in July, with the anticipation of at least one additional cut by year end. Consensus expectations are the European Central Bank and Bank of Japan are prepared to further loosen monetary policy and to add stimulus in an attempt to ensure the euro and yen do not appreciate relative to the U.S. dollar. However, both countries are already running negative rates, so it is hard to imagine they can “out ease” the Fed. In China, the enactment of minor fiscal policy changes was insufficient to overcome the weight of U.S. trade issues.
• Global economic data was generally weak for the quarter, as the continuation of trade wars weighed heavily on the markets. In early May, U.S.-China trade negotiations deteriorated and the U.S. increased tariffs from 10% to 25% on $200 billion of Chinese goods. On a positive note, at quarter end, the U.S. and China agreed to resume trade discussions. In Europe, which has been experiencing little growth, trade negotiations with the U.S. seem to be moving in a negative direction, which will be a key issue to monitor as we move forward.
• Brent crude was volatile in the quarter, exceeding $72 then falling below $60. Brent crude ended the quarter at $64.74, down 3% from its previous quarter-end price.
• With a backdrop of dovish central banks, poor economic growth and trade frictions, 10-year bond yields continued their precipitous fall in the quarter. Most 10-year bonds around the world are at the bottom end of their two-year range. For perspective, the U.S. 10-year yield was 2% at quarter end, down 40 basis points (bps) in the quarter and down 123 bps from its November high.

Portfolio Strategy

• The Fund posted positive performance but underperformed its benchmark for the quarter. The Fund outperformed the benchmark during April and June, but performance was adversely impacted in May. In May, the risk-off environment stemming from deteriorating trade negotiations between the U.S. and China led to nondiscriminatory selling of equities considered sensitive to trade regardless of fundamentals. Despite the Fund maintaining a relatively neutral allocation between cyclicals and defensives in the quarter, stock selection was the main driver of underperformance as select holdings in energy, consumer discretionary and financials performed poorly.
• Stock selection benefitted relative performance in health care and materials for the quarter. In aggregate, sector allocation played a minimal role in relative performance, providing a slight tailwind to performance for the period.
• Geographically, the Fund’s underweight allocation to Japan was a key contributor to relative performance for the period. Holdings in the U.K. (led by Imperial Tobacco Group plc) and Canada (led by Seven Generations Energy Ltd.) were a detriment to performance for the period.
• Over the quarter, the Fund continued to face headwinds resulting from its relative value investment philosophy. For perspective, growth-oriented equities outperformed their value-oriented peers by more than 400 basis points over the quarter. In short, the Fund’s value tilt was a detriment to performance. Above mentioned value stocks Seven Generations Energy Ltd. and Imperial Tobacco Group plc were top detractors, while growth-oriented holdings (Wuliangye Yibin Co. Ltd., SAP AG and Adidas AG) were strong relative contributors to performance.
• We have maintained our forward currency contract to the Japanese yen, neutralizing our stock underweight allocation on a currency basis. Additionally, we have maintained our currency hedge to the Chinese yuan, offsetting our direct investments exposure in China.
• Given increased uncertainties on several fronts (trade, monetary policy, etc.), we have increased the Fund’s cash allocation to 8%. We are utilizing cash to offset some of the higher beta exposures in the portfolio and to provide support in down markets.

Outlook

• Shifts in central bank policy, the rise of nationalism, the Brexit saga and trade negotiations – particularly between the U.S. and China – are standout issues affecting the current economic environment. Going forward, we believe geopolitics will continue to have a meaningful impact on asset values across the world. 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. While we think U.S.-China trade tensions will persist, we expect some positive agreements in 2019, in line with market expectations.
• 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. 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 to monetize debt and continue to stimulate their economies. As such, we believe there is a long-term cap on how high rates can go so long as central banks maintain control.
• We believe relative valuation remains supportive for international equities. We see relative value opportunities in emerging markets (especially China), energy, internet-related companies and in many cyclicals that we view as more stable than appreciated.

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, 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 06/30/2019: Nestle S.A., Registered Shares 2.8%, Total S.A. 2.8%, SAP AG 2.6%, Roche Holdings AG, Genusscheine 2.6%, Airbus SE 2.4%, Tokio Marine Holdings, Inc. 1.8%, Unilever plc 1.8%, Orange S.A. 1.8%, Alibaba Group Holding Ltd. ADR 1.8% and Subaru Corp. 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.