Portfolio attribution

On a gross return basis, Fund holdings in the emerging Asia region detracted from relative performance, primarily attributable to negative stock selection in Taiwan and China. In emerging Europe, Middle East, and Africa (“EMEA”), an underweight position in Poland detracted from relative performance. Stock selection in Brazil contributed to relative performance in emerging Latin America. From a sector perspective, information technology, industrials, and health care were the largest detractors from relative performance. Consumer discretionary and materials were the top contributors to relative performance in October. The largest stock-level detractors from relative performance included overweight positions in oil & gas producer, PetroChina Co., Ltd. (China), construction equipment manufacturer, Hyundai Doosan Infracore Co., Ltd. (South Korea), and electrical equipment and machinery component manufacturer, LS Corp. (South Korea). The top stock-level contributors to relative performance included overweight positions in bank, Banco do Brasil SA (Brazil), and bank, China Construction Bank Corp. (China), as well as an underweight position in steelmaker, POSCO Holdings Inc. (South Korea).

Economic outlook

In its September meeting, the US Federal Reserve (“Fed”) left its target interest rate unchanged. However, the yield on the 10-Year US Treasury Note continued to march higher in October, which is helping the Fed achieve its objective of slowing the economy. US inflation appears to be moderating and, while the non-farm payroll report exceeded expectations, it appears that most of the gains came from either government or part-time jobs. We believe the backdrop of slowing inflation, a modestly cooling US job market, and a flattening US yield curve will provide a tailwind for EM stocks. Most EM currencies rebounded in October. While depreciating EM currencies generally improve export competitiveness for EM countries, the capital flight out of depreciating currencies has historically been a larger driver of EM stock returns in US dollars. Therefore, a rebound of most EM currencies relative to the US dollar should be a positive for many EM stocks.

In China, the largest country within the EM index, authorities announced the approval of 1 trillion yuan in additional Treasury bonds in 2023. The issuance equals approximately 0.8% of China’s gross domestic product and the funds will be used to rebuild areas impacted by recent floods and to improve urban infrastructure. In addition to accommodative monetary policy and measures aimed at supporting the ailing property market, this is the latest action designed to stimulate the economy. We are overweight Chinese stocks in the portfolio due in part to attractive valuations, particularly in the interactive media and consumer discretionary industries.

Investment outlook

After appearing less attractive for much of the year, earnings growth upgrades for EM equities are becoming more attractive relative to those in ex-US developed markets. Within EM, the energy sector is experiencing the most net upgrades, buoyed by rising oil prices. Asian information technology stocks also have strong net upgrades, due primarily to an improving outlook for large semiconductor stocks. On the negative side, materials stocks are experiencing the most net downgrades due to lackluster demand for most commodities. In the Fund, we are underweight materials stocks due primarily to unattractive growth characteristics. Industrials stocks also have net downgrades, primarily in China and South Korea. In export-oriented South Korea, the downgrades reflect the slowing global economy. In China, the net downgrades are due to both internal and external factors. Within EM, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Fund’s allocation to small cap stocks was near the high end of the historical range at month-end.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the Fund holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. Any securities identified and described in this report do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Diversification does not protect against market loss. Current and future holdings are subject to risk. The Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund's gains or losses. Investing in ETFs is subject to the risks of the underlying funds. International and emerging markets investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic or political instability in other nations. Emerging markets and smaller companies involve additional risks and higher volatility.