Market Sector Update

• Non-U.S. equity markets fell sharply in the first quarter as COVID-19 spread across the globe and economic activity came to a screeching halt in many parts of the world. Investors reacted to the unprecedented public health crisis, which is quickly morphing into an economic crisis, by fleeing to perceived safety. Businesses viewed as economically sensitive bore the brunt of the sell off, with many stocks declining by more than 40% in March alone.
• Every sector of the market suffered losses during the quarter with energy and financials down the most. The simultaneous collapse in demand and supply discipline led to the lowest oil price of the last 20 years, pressuring the fundamentals of energy businesses. Expectations of sharp economic contraction and rising nonperforming assets drove the valuation of financials to extremely depressed levels despite the industry entering the current downturn with de-risked business models and strong capital positions.

Portfolio Strategy

• The Fund posted negative performance and underperformed its benchmark for the period. Our positions in financials, energy, and industrials were the top detractors in the quarter.
• Our largest individual detractors were John Wood Group Plc (U.K. oil service company), Rexel SA (French electrical distributor) and TechnipFMC plc (U.K. oil service company). Both John Wood Group and TechnipFMC reported inline to better-than-expected results. However, the oil price decline overshadowed company-specific positive developments. Given the diversity of John Wood Group’s operations and its asset light business model, we expect the company to weather the current industry downturn and stay profitable in a low oil price environment. Its balance sheet also benefited from the closing of asset sales in the first quarter. TechnipFMC has a large backlog that we believe provides downside support to revenue in the short and medium term. The net cash balance sheet position also provides financial flexibility in the current environment. Rexel’s revenue is expected to suffer a significant decline in the coming quarter due to the lockdown in its key U.S. and European markets. Based on our analysis, we believe the company has sufficient liquidity to weather a severe contraction in end demand for an extended period of time.
• Roche Holding Ag (Swiss biopharmaceutical company) and British American Tobacco Plc (U.K. tobacco firm) were the only positive contributors in the quarter benefiting from positive investor sentiment towards both health care and staples stocks. Roche’s specific development in COVID-19 related products also contributed.
• In the quarter, we initiated two new positions, Panasonic Corp. (Japanese industrial conglomerate) and Suzuki Corp. (Japanese automaker). Panasonic is going through a major restructuring to simplify its operations, exiting loss making businesses and refocusing the group on core segments. Suzuki is the dominant small car manufacturer in India where demand has declined significantly in the last 12 months. With a sustainable position in one of the most promising auto markets in the world and a strong balance sheet, we expect the company to benefit from the eventual recovery in the Indian auto market. We also added to our holdings in Michelin, Covestro, and John Wood Group in the quarter while trimming our exposures to relative outperformers such as Enel, Roche, and WPP.

Outlook

• We acknowledge the world is in uncharted waters, and the range of outcomes for our portfolio holdings is wider than normal. In times of stress in the economy, businesses that are cyclical in nature typically suffer significant share price declines, as investors chase safety, in the form of cash and cash substitutes. To the extent that they are in equity, they are in perceived safe havens such as low volatility defensive stocks or growth companies.
• Valuations in the portfolio have gotten to extreme levels, and we have focused our efforts in the past several weeks to first, assessing the liquidity and ability of our holdings to withstand a severe and sustained economic event, and second, rotating the portfolio from the names that have held up relatively well to the most compelling valuation opportunities.
• Researching and analyzing individual companies is what drives our investment decisions. We are investing where we see both opportunity for outsized returns and manageable risk. Likewise, we are avoiding companies where staying power is limited, and the risk of capital impairment is reasonably high. We are closely monitoring uncertainties and continue to vigorously assess any potential impact to the normal and stressed earnings estimates for our portfolio holdings.
• The massive flight to safety has led to some of the widest valuation dispersions of the last 50 years, and we believe our portfolio offers some of the most attractive valuations in our history. Our largest exposures remain to cyclical sectors – financials and industrials – where valuations are comparable if not lower to levels seen during the global financial crisis. Thus far we have found no positions in the portfolio that need to be liquidated to avoid permanent capital impairment. Instead we have chosen to trim certain positions that have outperformed and are now close to fair value in relative terms. We are putting more capital to work where we feel the share prices massively understate the staying power of the franchises involved.

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, 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 03/31/2020: Roche Holdings AG, Genusscheine 3.3%, Honda Motor Co. Ltd. 3.2%, A.P. Moller-Maersk A/S 3.0%, Schneider Electric S.A. 2.9%, Hitachi Metals Ltd. 2.8%, Rexel S.A. 2.8%, J Sainsbury plc 2.7%, Panasonic Corp. 2.3%, China Resources Power Holdings Co. Ltd. 2.3% and Wilmar International Ltd. 2.2%.

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.