Market Sector Update

• On the heels of generally positive news, international markets rallied in November and December to end the year on a high note. The MSCI EAFE Index closed the year up 5.4% and 58.6% above its March low. The fourth quarter rally was led by cyclicals and “re-opening” stocks as the world began to set its sights on the end of the global pandemic.
• Developed international markets, as measured by the Fund’s benchmark index, were up 16.1% in the quarter. Gains were led by financials, energy and pockets of consumer cyclicals. Financials, which is a significant weight in the index, rallied off increased expectations of higher inflation and interest rates. A slight uptick in rates would be perceived as a significant tailwind for financials.
• The U.S. dollar continued its descent against major foreign currencies. Government bond yields were volatile in Europe as they spiked in November before ending the quarter mostly flat to slightly down. The Japan government 10- year yield edged up slightly but remains close to zero. Oil rallied sharply during the quarter.
• Lastly, after years of posturing, delays, bluffs and rounds of negotiations, the U.K. avoided a hard Brexit. It came down to the wire, but we believe a crisis was averted.

Portfolio Strategy

• The Fund slightly underperformed its benchmark during the quarter. While the portfolio’s exposure to cyclicals helped, positioning within consumer discretionary proved to be a headwind as ecommerce and luxury goods holdings underperformed. The Fund’s materials stocks also struggled to keep up as gold was a laggard. Industrials, financials and energy holdings were key contributors during the quarter. Weak stock selection in Germany, Japan and Australia were mostly offset by strong performance in France, South Korea and Canada.
• At the individual stock level, top relative contributors were Airbus SE, Samsung Electronics Co. Ltd., and Seven Generations Energy Ltd. Airbus, a French aerospace and defense company, rebounded as the expectations of a reopening and recovery in travel took shape. The company has a dominant market position in a global duopoly and is also the beneficiary of long-term travel trends. Samsung, a South Korea based semiconductor and diversified electronics manufacturer, had strong quarterly results as they gained share in several areas of their business and indicated a near term recovery for their key semiconductor end markets. The company is dominant in memory chips (DRAM), which we believe is on the cusp of a recovery, and is a share gainer in other segments. Seven Generations, a Canadian oil and gas producer, benefitted from higher commodity prices during the quarter. We believe Seven Generations is a low-cost producer with a strong management team who has managed the company well through this crisis. The stock has traded at a steep discount, which has rewarded investors through this oil price recovery.
• The largest relative detractors were Alibaba Group Holding Ltd., Newcrest Mining Ltd., and SAP AG. Alibaba, the largest Chinese ecommerce company, faced several negative catalysts during the quarter. Ant Group, the financial technology firm which Alibaba has 33% ownership in, delayed its initial public offering and faces regulatory changes which will likely lower the valuation for Ant. Through their significant stake, this hurt Alibaba. Also, like most ecommerce companies around the world, Alibaba faces potential regulatory challenges. While this may impact Alibaba to a certain extent, the long-term structural story is still intact. Newcrest, Australia’s largest gold miner, saw flat gold prices during the quarter and softer-than-expected output. The company is a low-cost producer, continues to work on new projects and trades at a discount to its relative relationship to the price of gold. SAP, a German software company, accelerated their move to the cloud to drive long-term growth at the expense of near-term profits. We lowered our weighting as these transitions can be messy. That said, we still believe that, long term, they have strong prospects within enterprise software – a perceived attractive space.
• We believe the crisis has continued to create investment opportunities across a number of cyclical industries. During the quarter, we initiated a new position Persimmon plc, a U.K. based homebuilder. In our view, the backdrop for U.K. homebuilding is strong as the market has been underbuilt for decades. While building sites in the U.K. are limited, Persimmon has quality cheap land and executes well. During the quarter we sold Novo Nordisk, a Danish pharma company, on the threat of competition in Novo’s key diabetes franchise.

Outlook

• The future has become clearer with respect to COVID-19, but many lingering side effects remain, and new factors have entered the equation. Government bond yields are near historic lows and corporate bond yields have dropped to levels unheard of. What are the implications? Massive amounts of stimulus have been pumped into system, does this spark inflation when the global economy is back on solid ground? 2020 propelled a further valuation discrepancy between value and growth. Will this gap narrow?
• These scenarios, largely intertwined, carry significance for markets moving forward. Investors have been complacent to anchor in growth stocks without hesitation and embrace greed. This greed has overpowered the possibility of disruption to the status quo. The world has lived with low rates and low growth for so long that the simple idea of anything but this environment appears to many as an impossibility. Yet, we may be at the point where a reality check is on the horizon. Timing cannot be known for sure, but given the environment and valuations, the performance division of value versus growth could finally begin to re-converge. The risk/reward trade-off, in our opinion, favors a value bias within our core approach. Government bonds with near zero yields, we believe, have no upside and most asset classes that are priced off Government bonds likely have a similar reward profile. For us, we can buy and focus on international value and core stocks that appear to have a real absolute return potential– that is where we are focusing our efforts.
• We believe 2021 should mark the beginning of a return to normalcy for our daily lives, but this may mean a shift for investors. We have spent much of the last year tweaking the portfolio to best capture this while focusing on perceived quality companies and maintaining a balance of cyclical and defensive stocks. We are steadfast in our portfolio’s themes, bottom-up analysis and valuation discipline. The combination of which, we feel, will reward patient investors.

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 Dec. 31, 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 12/31/2020: Merck KGaA 2.7%, Roche Holdings AG, Genusscheine 2.7%, Samsung Electronic Co. Ltd. 2.2%, DNB ASA 2.1%, Airbus SE 2.0%, Legal & General Group plc 2.0%, AIA Group Ltd. 1.8%, Carrefour S.A. 1.8%, WPP Group plc 1.8% and ENGIE 1.6%.

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.

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. 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.