We think there are ample catalysts for ongoing corporate earnings growth. Growth appears to be
broadening to more cyclical parts of the economy, such as manufacturing, as well as outside the U.S.
The political climate – including the outcome of the remaining elections across Europe and President
Donald Trump’s political agenda – is evolving. We think it will be difficult to predict Trump’s next move,
but think tax reform is likely to remain on the agenda this year.
Steady economic growth
The U.S. economy showed weakness in the first quarter,
but that is typical in the first quarter of each year and
the economy seems to be rebounding. We’re watching
closely for any changes in the corporate tax structure and
any indication of an infrastructure plan that could have
any near-term impact. Beyond the actual passage of any
legislation, we’re watching for any short-term impact on
business confidence, which has been important since the
U.S. presidential election last year.
Economic stimulus in China has faded somewhat as a
market factor this year. That is due in part to the Chinese
government trying to balance infrastructure-driven
stimulus and its housing market with a restructuring of the
economy, state-owned enterprises (SOEs) and commodity oriented
SOEs, and lately the financials market and the
“shadow banking” system in China. The government
appears to be focused on balancing controls on these areas
with its growth plans, and that process is worrying the
markets a little now.
We added to holdings in a couple of Chinese banks in
addition to a more general increase in the financial sector
position. Our largest holding in China remains AIA Group
Ltd., a Hong Kong-based insurance company. Overall
demand for insurance products in China, Hong Kong
and other Asian markets remains strong. The Shanghai
government recently published a five-year plan that
included a push toward increased insurance penetration
there, so we believe the backdrop is good for that long-term
holding in the Fund.
We have shifted more exposure in the Fund to Europe,
where we still are finding pockets of relative value. We
think a key question is how rapidly Europe’s economy can
continue to rebound, especially if China’s economy slows a
bit. More importantly, we are alert to what that may mean
for the European Central Bank and its quantitative easing
policy, the value of the euro versus the U.S. dollar and
dollar strength in general.
A look at sectors
We have added to the Fund’s holdings in the industrials
sector through a number of new positions. In the last
several years, most industrials exposure was in aerospace,
defense and some transportation stocks. We have
broadened our exposure over the last several months,
focusing on areas in which valuations have yet to discount
sustained improvement. In our view, a number of large
companies based in Europe that have products in multiple
industries now offer a more attractive valuation while
providing similar end markets and geographic exposure.
We think the broader geographic and end-market mix
may be useful if global economic growth becomes less
synchronized in the future.
After positive performance in 2016, we think the energy
sector may be settling into a consolidation phase. The
Organization of Petroleum Exporting Countries (OPEC)
and non-member oil producers led by Russia agreed at a
meeting May 25 to extend the production cuts they agreed
to last year until March 2018. The oil-producing countries
seek to reduce what they consider a global glut of crude
oil that has sharply pressured prices – and producers’
revenues – during the past three years. OPEC’s cuts have helped push oil above $50 a barrel this year. The price rise this
year also has prompted renewed activity from U.S. shale oil
producers, who are not part of the agreement to hold the line
on production. We think this agreement may allow the energy
sector to find a price bottom and start to consolidate.
What happens when consumers in China and India demand more oil?
Our strategy still is to focus on what we consider high-quality,
low-cost companies. We continue to favor the large oil services
companies that can grow earnings through volume growth,
pricing increases and high incremental margins. In general, we
think crude oil is likely to remain around $55 per barrel for an
The Fund’s primary exposure in the energy sector has been
through the North American exploration and production
(E&P) companies. We look for companies that have good
exposure to the key resource areas, particularly the Permian
Basin. We also look for the operators that have low costs and
the ability to develop those resources. We think those factors
are key in an environment that has an inventory overhang
that may take time to fully resolve. That adds to the focus on
companies that can continue to get growth production in a
We have maintained the Fund’s exposure to the two largest oil
services companies, Halliburton Co. and Schlumberger Ltd.
These companies had to give up pricing during the financial
downturn. As activity increases, we think they will be able to
increase prices and growth.
In retail, we believe disruption will continue from online,
mobile e-commerce businesses. That clearly is reaching
critical levels in the U.S. but also is gaining acceptance even in
emerging markets. Disruptors in the portfolio include Amazon,
Inc., Alibaba Group Holding Ltd. and MercadoLibre, Inc. The
last two have the added benefit of low penetration rates in
China and Latin America, which leads us to believe there still
is a long fairway of potential opportunities.
Amazon captured nearly one-quarter of recent retail sales growth
The composition of the Fund’s portfolio looks a bit different
when compared with holdings in late 2016. We have increased
the allocation to domestic equities to nearly 54% of assets and
international equities to 20%. We reduced the gold allocation
from 8% to 5%. We also have made changes in the fixed
income components of the portfolio. We rotated from about
a 7% allocation to U.S. Treasuries into a 3.5% position in
Treasury Inflation Protected Securities; moved to nearly 7% in
emerging markets sovereign debt, specifically in Mexico and
Brazil; and reduced the corporate bonds allocation to nearly
9.5%. The large changes in the corporate bond and equity
allocations primarily are because of the transaction related to
the Fund’s Formula One holdings, as described below.
Update on private investments
During the past seven quarters, we have had opportunities to
manage down the size of the illiquid private investments held
by the Fund. The private investments have become less of a
performance headwind recently, compared with prior quarters.
A key positive development was related to our largest illiquid
private investment, the equity and loan notes issued by Delta
Topco Limited, the parent company of Formula One.
The acquisition of Delta Topco Limited by Liberty Media
Corporation was announced in the third quarter of 2016 and
the acquisition closed early in 2017. The Fund received a
combination of cash, approximately $55 million in principal
amount of exchangeable redeemable loan notes due July 23,
2019, issued by Delta Topco Limited and restricted shares of
Liberty Media Corporation’s Series C Liberty Formula One
non-voting common stock (FWONK). On May 24, 2017, we had the opportunity to sell about one-half of the Fund’s total
position in FWONK shares.
This year, we also sold our private investment in Ithaca
Holdings, LLC, a worldwide music management business,
which is one of the underlying positions within Series I
of Media Group Holdings, LLC. The remaining private
investments within Media Group Holdings, LLC now comprise
less than 1% of the Fund’s assets under management.
Past performance is no guarantee of future results. 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 May 2017, 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.
Diversification does not guarantee a gain or protect against loss in a declining market. It is a method to reduce risk.
Top 10 Equity Holdings as a percent of net assets as of 04/30/2017: Liberty Media Corp., Class C, 6.04%; JPMorgan Chase & Co., 2.36%; Microsoft Corp., 2.09%; Kraft Heinz Co., 2.04%; Citigroup Inc., 1.96%; Philip Morris
International, Inc., 1.90%; Adobe Systems, Inc., 1.77%; AIA Group Ltd., 1.73%; Halliburton Co., 1.64%; Pfizer, Inc., 1.63%.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. The Fund may allocate from 0 to 100% of its assets between stocks, bonds and short-term instruments of issuers
around the globe, as well as investments in precious metals and investments with exposure to various foreign securities. 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. Fixed-income securities are subject to interest-rate
risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may
focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. The Fund may seek to hedge market risk on various securities, increase exposure to various markets,
manage exposure to various foreign currencies, precious metals and various markets, and seek to hedge certain event risks on positions held by the Fund via the use of derivative instruments. Such investments involve
additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Investing in
commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets
for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings. 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.