Market Sector Update

• Non-U.S. developed equity markets rebounded from the pandemic-induced plunge, turning in one of the best quarters in decades. As economies started reopening and economic activity showed signs of life, investor sentiment improved from the late-March trough. Value stocks continued to underperform the general market, leading to one of the widest six-month performance gaps we have ever measured between value and growth in non-U.S. markets.

Portfolio Strategy

• The Fund posted positive performance and outperformed its benchmark index for the quarter. The top individual contributors were Rexel S.A. (French electrical distributor), A.P. Moller - Maersk A/S (Danish container shipper) and Amundi S.A. (French asset manager). Rexel, the top contributor, reported earnings reflecting good business momentum pre-COVID-19, and took aggressive action to cope with the shutdown-related revenue shock. Given its strong operational and financial base, we believe Rexel is well positioned to recover as economies reopen. Maersk reported better-than-expected earnings, benefiting from company-specific operational improvement and industry pricing discipline. The first quarter’s year-on-year earnings improvement was notable given industry challenges ranging from pandemic related disruption to marine fuel regulation changes. Amundi’s earnings reflected resilient fund flows, particularly in the retail channel. The strong second quarter global market rebound directly benefits Amundi, the leading asset manager in Europe.
• The top individual detractors in the quarter were HSBC Holdings plc (U.K.-based Asian lender), Standard Chartered plc (U.K.-based Asian and emerging markets lender) and J Sainsbury plc (U.K. grocer). The passing of the Hong Kong security law raised uncertainty about the long-term economic trajectory of this important market for both HSBC and Standard Chartered. Sainsbury was lower as U.K. grocer valuation, which proved defensive in the first quarter as businesses boomed due to lockdown-related hoarding and panic buying, did not participate in the market rally and came under modest pressure in the U.K. as Brexit-related uncertainty impacted investor sentiment.
• We initiated a new position in Komatsu Ltd., the Japanese construction and mining equipment company. Komatsu is the second largest heavy equipment company behind Caterpillar. Komatsu’s earnings have been under pressure due to mining-related spending cuts and construction activities that were severely restricted during lockdowns in various countries. We view the company as an example of a well-run, defendable, and solidly capitalized franchise whose earnings should rebound strongly when end-market activities recover. We also initiated positions in Galaxy Entertainment Group (Macau gaming operator). We also swapped our position in Dai-ichi Mutual Life Insurance Co. for T&D Holdings Inc. on valuation and added to our holdings in ING Groep and Covestro AG. To fund these purchases, we exited our position in Telecom Italia S.p.A. and trimmed exposure to Fujitsu Ltd. and Schneider Electric S.A. on relative performance.

Outlook

• Even though some economies have opened up, the world remains in uncharted waters, and the range of outcomes for our portfolio holdings is wider than normal. Valuations remain at extreme levels even after the second quarter rebound.
• Our portfolio positions remain heavily skewed towards industries where economic pains from the pandemic are having a meaningful impact in the short term, and where we see significant opportunities for valuation upside over the long term given the quality of the underlying franchise and balance sheet.

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, 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 06/30/2020: Rexel S.A. 4.1%, A.P. Moller-Maersk A/S 3.8%, Hitachi Metals Ltd. 3.1%, Roche Holdings AG, Genusscheine 3.1%, Covestro AG 2.8%, BASF Aktiengesellschaft 2.8%, Honda Motor Co. Ltd. 2.8%, Compagnie Generale des Etablissements Michelin, Class B 2.8%, Panasonic Corp. 2.5% and Travis Perkins plc 2.3%.

All information is based on Class I shares.

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. 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.