Market Sector Update

• International equity markets moved sharply higher in the first quarter as economies continued to re-open and vaccinations gained pace across the developed world. The restoration of economic activity, combined with massive fiscal and monetary support from governments and central banks, further buttressed value stocks’ strong recovery.
• Investors’ expectations of a powerful rebound in consumer spending led to positive returns in every sector except health care, with highly cyclical consumer discretionary and financial stocks boasting the best returns.

Portfolio Strategy

• The Fund posted positive performance and outperformed its benchmark index for the quarter. German automaker, Volkswagen AG, contributed the most to returns, buoyed by its positive results as well as increased investor faith in its transition to an electric vehicle world. Also contributing significantly was European and U.S. industrial distribution player Rexel S.A., which continued to benefit from a pick-up in business activity, while maintaining cost discipline. Financials were mostly strong across the board, but Dutch lender, ING Groep N.V., was the top performer thanks to its strong recovery and acceleration of capital return. Despite most positions being up in the quarter, a few names detracted from the broadly positive results. Oil services company, John Wood Group plc, was down following tepid revenue and cash flow guidance for 2021. Brazilian brewer, Ambev S.A., fell due to increased macro concerns and a falling currency as most of the company’s costs are denominated in U.S. dollars, with revenues in Brazilian real. Swiss pharmaceutical giant, Roche Holdings AG, Genusscheine, was also down after reporting a sub-standard set of quarterly results and issuing uninspiring guidance.
• During the quarter, we added telecom equipment company Nokia Oyj. Japanese tire manufacturer Bridgestone, and wealth manager Julius Baer Group Ltd. to the portfolio. Nokia has fallen behind peers Huawei and Ericsson in 5G in recent years, shedding market share in the process. In response to the poor results and declining stock price, the company eliminated its dividend and replaced its Chairman and CEO. Going forward, Nokia will look to close the gap in 5G and retain (or eventually gain) wireless market share as its other businesses are performing broadly in-line. Bridgestone Corp. is currently underearning for a multitude of reasons – most notably from the effects of the pandemic. We believe the company’s management team has a credible plan to bridge the gap between current earnings, which are cyclically depressed, and our estimate of normal earnings. In addition to an industry-wide recovery in tire volumes, we expect Bridgestone’s longer-term earnings to benefit from management’s focus on simplifying the company after decades of expansion. Julius Baer has a relatively consistent history of growth in assets under management, margin resilience, and capital return. Going forward, we anticipate less merger and acquisition activity and slower advisor recruitment to support the company’s cash flow.
• We also took advantage of relative weakness to add to positions in Ambev S.A., U.K. grocer Tesco plc, Japanese regional bank Fukuoka Financial Group, Inc., and Roche Holdings AG, Genusscheine. Similarly, we trimmed outperformer shipping giant A.P. Moller - Maersk A/S as well as exited personal computer and server company Lenovo Group Ltd. and container and independent power producer China Resources Power Holdings Co. Ltd., whose future returns appear weak relative to history due to the evolution of power generation in China. We also exited telecom equipment manufacturer Ericsson – a relative winner thus far in the 5G race, and Italian lender UniCredit S.p.A., wherein we see increased government interference as both likely and potentially negative for the stock price.

Outlook

• We believe the portfolio is positioned for a recovery from the COVID-19 recession, with many value companies offering significant earnings growth potential off 2020’s low base, in part reflecting the aggressive restructuring initiatives that were taken by management teams to navigate the economic shutdowns. As such, the portfolio is most exposed to the cyclical financials and industrials sectors, and on a geographical basis, to developed nations that should benefit from relatively quicker vaccine rollouts. In the coming year, we expect market breadth to widen, as investors shift away from mega-cap growth names that benefitted from the work-from-home environment, to beatenup and forgotten cyclical stocks that typically outperform when economic conditions normalize. In the same vein, our research indicates that on average, value significantly outperforms the broad market during, and in the years following recessions, as economies recover. With that, we anticipate value, which is highly levered to economic expansion, to continue to outpace growth as we emerge from the downturn.
• We remain committed to discovering new opportunities where we see potential for significant valuation upside over the long term as we view the current valuation gap between growth and value stocks (which is still extremely wide by historical standards) as irrational and exploitable. We are confident in the positioning of the current portfolio given the robustness of the companies’ underlying franchises and balance sheets.

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 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: Rexel S.A. 4.2%; Volkswagen AG 3.3%; POSCO 3.1%; BASF Aktiengesellschaft 3.1%; Panasonic Corp. 3.0%; Compagnie Generale des Etablissements Michelin, Class B 2.9%; J Sainsbury plc 2.8%; Travis Perkins plc 2.8%; Honda Motor Co. Ltd. 2.8%; and ArcelorMittal 2.6%.

All information is based on Class I shares.

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. The value of a security believed by the Fund's manager to be undervalued may never reach what the manager believes to be its full value, or such security's value may decrease. These and other risks are more fully described in the Fund's prospectus.