Market Sector Update

• International markets showed a clear rotation of leadership in the first quarter as defensive sectors trailed the more economically sensitive areas of the economy. While it was volatile throughout, the quarter ended with the MSCI EAFE Index up 3.5%. Investors were focused on rates, reopening, and the potential for what an overheating global economy may do to inflation. This was the spark behind the shift back to cyclicals.
• As such, energy, financials, and consumer cyclicals drove market returns while the more defensive health care, utilities and consumer staples lagged. The latter were negative for the period. The U.K., Europe and developed Asia Pacific countries experienced the greatest gains, while Japan was relatively weak.
• In the spotlight was U.S. monetary policy and President Biden’s new administration’s fiscal packages, both lending to increased investor expectations for inflation. The Biden administration signed a new $1.9 trillion stimulus plan into place and presented a historic infrastructure bill. Between money already spent, approved, and likely to be approved by the U.S. government, it appears the U.S. will top what was spent during World War II (inflation adjusted), but over a much smaller timeframe. At the same time, the U.S. Federal Reserve (Fed) remains dovish, the global economy is perceived to be spring loaded for a significant snap back, and supply chain disruptions are causing major shortages across the globe. This is a recipe for inflation that the market recognizes but may be underestimating.
• The U.S. dollar reversed course and appreciated against a major basket of currencies, primarily driven by yen and euro weakness as the British pound appreciated. Bond yields spiked across the globe in anticipation of inflationary pressure and the impact it may have on central bank policy. Commodities continued to rally, led by industrial metals and oil, while precious metals declined.

Portfolio Strategy

• The Fund significantly outperformed the index over the quarter. The portfolio’s posture, which favors companies trading at an attractive relative valuation, accompanied with a slight tilt toward cyclicals (vs. defensive stocks), benefited our investors. Generally, positive contributions were distributed across most sectors, with consumer discretionary, energy, and health care helping the most. Financials, information technology and real estate detracted from performance. From a country standpoint, Japan, Canada, the U.K and Europe were positive relative contributors to performance. On the other hand, Brazil and Taiwan dragged on performance.
• At a stock level, Volkswagen AG, Canada Goose Holdings, Inc., and Seven Generations Energy Ltd. were the top contributors. Volkswagen, a German auto manufacturer, had good quarterly results and impressed investors with their progress in electric vehicles where they plan to manufacture their own batteries and become a real competitor to Tesla. Canada Goose is a Toronto-based outerwear company known for their luxury down jackets. Their e-commerce business has offset traditional retail weakness. Additionally, they had strong sales into China, and are having early success diversifying into three-season apparel. Seven Generations, a Canadian energy company, was up with the broader energy complex as oil prices appreciated significantly.
• The largest relative detractors were gold, Deutsche Wohnen AG and Ubisoft Entertainment S.A. Gold, for which there are several possible reasons it has been weak recently, has been one of the best assets during periods of inflation. We believe it should act as a ballast in the portfolio with key reasons it could strengthen, such as higher inflation, fiscal and monetary policy, and increased demand for physical gold, such as jewelry as the global recovery takes hold. Deutsche Wohnen, a German real estate developer and manager, was under pressure throughout the quarter as the government mandated rent freeze weighed on margins. However, rental demand is strong, and we believe Deutsche Wohnen has a high-quality portfolio in major cities within Germany. Ubisoft, a French videogame designer, was down despite strong growth after announcing they will delay certain new releases and experience likely margin pressure. We sold the position during the quarter.
• While the market recovery has inflated valuations across many industries, we continue to find perceived unique opportunities. We bought SK Telecom Co. Ltd., a South Korean conglomerate, during the quarter. In South Korea, we believe several of their large conglomerates currently offer significant value. For SK Telecom, we believe more than 100% of the value is in SK Hynix, where they own more than 20% of shares. Their legacy business is the leading telecom provider in South Korea where they are already invested in 5G. There is also potential for gains due to the country lifting temporary securities regulations that have weighed on shares. We sold Ubisoft as the valuation did not justify the near-term weakness to fundamentals.

Outlook

• Despite the recent market rotation, we believe there is a deep underappreciation by investors for the magnitude of economic growth and inflationary pressures ahead. Generally, investors have not fully adopted the idea that stocks outside of what has been in favor for the greater part of the last decade will relinquish the spotlight. However, we believe the many signs of a sustained market shift are present.
• The level of spending by governments around the world, particularly in the U.S., is at unprecedented levels. Additionally, central banks continue to support capital markets and are signaling low rates for the foreseeable future. The Fed has communicated a persistent dovish approach toward interest rate policy. This also has great potential to perpetuate inflation, particularly if they manipulate the curve to keep the 10-year rate at 2%.
• Another inflationary pressure, although difficult to handicap its duration, is a shortage within the global supply chain, particularly within semiconductors. With semiconductor shortages around the world, many everyday goods, particularly autos, are experiencing manufacturing delays. Low supplies will lead to higher prices. When also considering higher commodity prices, in turn, raw material costs of everything we consume from food to clothes to electronics and beyond could go up. Meanwhile, the global economy is opening and consumers’ propensity to spend is high after a year of clamping down on social activities.
• We believe these events should drive tremendous economic growth, which is generally good for early cycle equities. This leads us to be particularly optimistic about pockets of equities consistent with our investment style. After years of being underappreciated, international equities may be a great area of the world to find relative value. This, coupled with our investment style, which we believe is well positioned to take advantage of many of the currents carrying the market forward, may support a continued shift in our favor.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, 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 03/31/2021: Merck KGaA 2.4%; Volkswagen AG 2.3%; Roche Holdings AG, Genusscheine 2.1%; Carrefour S.A. 2.0%; Airbus SE 2.0%; WPP Group plc 1.9%; Samsung Electronics Co. Ltd. 1.8%; Legal & General Group plc 1.8%; DNB ASA 1.7%; and ENGIE 1.7%.

The MSCI EAFE Index is an equity index which captures large- and mid-cap representation across 21 developed market countries around the world, excluding the U.S. and Canada. With 915 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. It is not possible to invest directly in an index.

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. To the extent the Fund invests a significant portion of its assets in a particular geographical region or country, economic, political, social and environmental conditions in that region or country will have a greater effect on Fund performance than they would in a more geographically diversified equity fund and the Fund’s performance may be more volatile than the performance of a more geographically diversified fund. 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.