International Small Cap

Portfolio attribution

The Portfolio underperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs four bottom-up factor categories – valuation, earnings growth, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics.

From a sector perspective, Portfolio holdings in health care, communication services, and real estate detracted the most from performance relative to the Index. Portfolio holdings in the industrials, consumer staples, and consumer discretionary sectors offset a portion of the underperformance. Relative performance for the month can be mostly attributed to stock selection. The largest detractor from performance was biopharmaceutical company, Pharma Mar SA (Spain). Additional top detractors included rubber products company, Kossan Rubber Industries Bhd. (Malaysia), pharmaceutical company, Granules India Ltd.(India), video game developer, GungHo Online Entertainment, Inc. (Japan), and professional and social networking company, Mixi, Inc. (Japan). Top contributor to performance was transportation service provider, Yang Ming Marine Transport Corp.(Taiwan). Additional top contributors included food distributor, Metcash Ltd. (Australia), solar energy company, Daqo New Energy (China), steel & iron distribution company, EVRAZ Plc (United Kingdom), and mining industry service provider, Mineral Resources Ltd. (Australia).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average, and they were under significant pressure in 2020. As of December 31, the Small Cap Growth Index traded at a 25.2x forward price-to-earnings multiple compared to 13.8x for the Small Cap Value Index. This 83% premium is the highest it has been over the last 15 years. We believe that value’s relative performance should improve as inflation expectations increase, the yield curve steepens, and COVID-19 uncertainty continues to abate.

While value receives the largest weight on average, the sheer breadth of the international small cap universe means that the typical tradeoffs in portfolio characteristics do not necessarily apply. In addition to value, we look for favorable growth, momentum, and quality characteristics. We believe that at most points in time our portfolio has exhibited more attractive metrics relative to the Index across all factor categories simultaneously. Smaller cap equities are currently exhibiting a higher long-term earnings-per-share growth trend than larger cap equities.
Additionally, international smaller cap equities have exhibited greater valuation dispersion than larger cap equities on both a forward-earnings-yield basis and a price-to-book value basis, indicating more information content in valuation ratios for these equities. This characteristic has allowed us to construct a portfolio with lower valuation ratios relative to the Index without, in our view, compromising quality.

In December, we added new Competitive Strength factors to supplement our existing Financial Strength alpha factors. After extensive research, we found that an industry’s competitive landscape and a company’s position within it have been closely linked to changes in profitability and, ultimately, a stock’s return potential. These new alpha factors examine current levels and longer-term trends in a broad range of metrics relevant to competitive strength: margins, returns, competition, industry structure, market share, and balance sheet strength.

International Value Select

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the technology hardware & equipment, media & entertainment, semiconductors & semi equipment, capital goods, and transportation industry groups contributed to relative performance. Holdings in the banks, materials, utilities, and food beverage & tobacco industry groups, along with an underweight position in the consumer durables & apparel industry group, offset some of the outperformance compared to the Index. The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included internet services provider, Baidu – ADR (China), products & services provider for the electronic components industry, SK hynix, Inc. (South Korea), automobile manufacturer, Volkswagen AG (Germany), and jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). The largest detractor was banking & financial services company, UniCredit S.p.A. (Italy). Additional notable detractors included financial services provider, ING Groep NV (Netherlands), pharmaceutical giant, Sanofi (France), toll road & car parks concessions operator, Vinci (France), and diesel & natural gas engine supplier, Wärtsilä Oyj Abp (Finland).

Investment outlook

As economies return to normal in 2021, we expect the narrow concentration of performance in global indices—as well as the value-growth spread—to reverse. We believe that the rally in economically sensitive stocks should continue in 2021, amplified by those companies who have used this crisis to eliminate excess cost and boost efficiency, resulting in increased profitability as revenues recover. We have deliberately emphasized these companies engaging in operational restructuring. As profitability recovers, so should free cash flow. We are optimistic that companies will return surplus cash to shareholders in the form of dividends and share buybacks in 2021, an important component of total return. We believe the consequences of record high levels of fiscal and monetary stimulus will, at some stage, feed into the real economy.A value-focused portfolio remains, in our view, one of the few ways to hedge higher interest rates and/or inflation.

International Opportunities

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, pharmaceuticals & biotechnology, transportation, food beverage & tobacco, and utilities industry groups detracted from relative performance. Holdings in the automobiles & components and media & entertainment industry groups, as well as an underweight position in the household & personal products, telecommunication services, and real estate industry groups, offset some of the underperformance compared to the Index. The largest detractor was banking & financial services company, UniCredit S.p.A. (Italy). Additional notable detractors included financial services provider, ING Groep NV (Netherlands), pharmaceutical giant, Sanofi (France), airline, AIR Canada (Canada), and bank, China Construction Bank Corp. (Hong Kong). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included automobile manufacturer, Volkswagen AG (Germany), integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan), diversified chemicals manufacturer, BASF SE (Germany), and internet services provider, Baidu – ADR (China).

Investment outlook

As economies return to normal in 2021, we expect the narrow concentration of performance in global indices—as well as the value-growth spread—to reverse. We believe that the rally in economically sensitive stocks should continue in 2021, amplified by those companies who have used this crisis to eliminate excess cost and boost efficiency, resulting in increased profitability as revenues recover. In our fundamental research process, we have deliberately emphasized these companies engaging in operational restructuring. As profitability recovers, so should free cash flow. We are optimistic that companies will return surplus cash to shareholders in the form of dividends and share buybacks in 2021, an important component of total return. We believe the consequences of record high levels of fiscal and monetary stimulus will, at some stage, feed into the real economy. A value-focused portfolio remains, in our view, one of the few ways to hedge higher interest rates and/or inflation.

In the EM portion of the Portfolio, we continue to emphasize value factors in our process. After underperforming in 2019, the MSCI Emerging Markets Value Index again lagged the MSCI Emerging Markets Growth Index in 2020. The MSCI Emerging Markets Value Index is trading near record low valuations based on both price-to-earnings and price-to-book value ratios. Looking forward, we believe that EM value stocks are poised to rebound given the valuation discount and the anticipated resumption of global growth in 2021.

Emerging Markets Equity

Portfolio attribution

The Portfolio outperformed the Index in December 2020. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Portfolio’s investable universe. Our bottom-upprice momentum and growth factors were positive indicators in December. Our valuation factor was a negative indicator during the month. In December, we added a new competitive strength bottom-upfactor category to our alpha model. After extensive research, we found that an industry’s competitive landscape and a company’s position within it have been closely linked to changes in profitability and, ultimately, a stock’s return potential. These new alpha factors examine current levels and longer-term trends in a broad range of metrics relevant to competitive strength: margins, returns, competition, industry structure, market share, and balance sheet strength. Of our top-down factors, country and macroeconomic were positive indicators while sector and currency were negative.

Investment outlook

Earnings growth prospects have continued to improve for many EM companies. Earnings growth upgrades have exceeded downgrades in every sector except for real estate. In the Portfolio, we are underweight real estate stocks due to unfavorable earnings growth and price momentum characteristics. On the positive side, the information technology, materials, and communication services sectors have experienced the strongest net upgrades. Information technology companies continue to benefit from increased technological adoption during the pandemic, strong demand related to 5G, and the latest iPhone upgrade cycle. Like information technology, communication services stocks have also benefitted from strong demand due to the pandemic and 5G expansion. Materials stocks have been buoyed by more stable commodity prices due to the resumption of global growth and US dollar weakness. Financial services companies, which faced growth challenges in 2020, experienced strong net upgrades. Analysts anticipate an earnings upswing for these companies as economic growth begins to normalize in 2021. While growth is one input in our multi-factor investment approach, we continue to emphasize value factors in our process. After underperforming in 2019, the MSCI Emerging Markets Value Index again lagged the MSCI Emerging Markets Growth Index in 2020. The MSCI Emerging Markets Value Index is trading near record low valuations based on both price-to-earnings and price-to-book value ratios. Looking forward, we believe that EM value stocks are poised to rebound given the valuation discount and the anticipated resumption of global growth in 2021.

Global Value Equity

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the media & entertainment, capital goods, semiconductors & semi equipment, software & services, and retailing industry groups contributed to relative performance. Holdings in the banks, insurance, pharmaceuticals & biotechnology, transportation, and energy industry groups offset some of the outperformance compared to the Index. The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included internet services provider, Baidu – ADR (China), media & entertainment conglomerate, The Walt Disney Co. (United States), products & services provider for the electronic components industry, SK hynix, Inc. (South Korea), and Concentrix Corp. (United States). The largest detractor was banking & financial services company, UniCredit S.p.A. (Italy). Additional notable detractors included airline, AIR Canada (Canada), financial services provider, ING Groep NV (Netherlands), pharmaceutical giant, Sanofi (France), and mortgage insurance provider, Essent Group (United States).

Investment outlook

As economies return to normal in 2021, we expect the narrow concentration of performance in global indices—as well as the value-growth spread—to reverse. We believe that the rally in economically sensitive stocks should continue in 2021, amplified by those companies who have used this crisis to eliminate excess cost and boost efficiency, resulting in increased profitability as revenues recover. We have deliberately emphasized these companies engaging in operational restructuring. As profitability recovers, so should free cash flow. We are optimistic that companies will return surplus cash to shareholders in the form of dividends and share buybacks in 2021, an important component of total return. We believe the consequences of record high levels of fiscal and monetary stimulus will, at some stage, feed into the real economy.A value-focused portfolio remains, in our view, one of the few ways to hedge higher interest rates and/or inflation.

International Value Equity

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the technology hardware & equipment, media & entertainment, semiconductors & semi equipment, and capital goods industry groups, as well as an underweight position in the household & personal products industry group, contributed to relative performance. Holdings in the banks, materials, and utilities industry groups, along with an overweight position in the transportation industry group and an underweight position in the consumer durables & apparel industry group, offset some of the outperformance compared to the Index. The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd.(South Korea). Other notable contributors included internet services provider, Baidu – ADR (China), products & services provider for the electronic components industry, SK hynix, Inc. (South Korea), automobile manufacturer, Volkswagen AG (Germany), and jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). The largest detractor was banking & financial services company, UniCredit S.p.A. (Italy). Additional notable detractors included financial services provider, ING Groep NV (Netherlands), pharmaceutical giant, Sanofi (France), airline, AIR Canada (Canada), and toll road & car parks concessions operator, Vinci (France).

Investment outlook

As economies return to normal in 2021, we expect the narrow concentration of performance in global indices—as well as the value-growth spread—to reverse. We believe that the rally in economically sensitive stocks should continue in 2021, amplified by those companies who have used this crisis to eliminate excess cost and boost efficiency, resulting in increased profitability as revenues recover. We have deliberately emphasized these companies engaging in operational restructuring. As profitability recovers, so should free cash flow. We are optimistic that companies will return surplus cash to shareholders in the form of dividends and share buybacks in 2021, an important component of total return. We believe the consequences of record high levels of fiscal and monetary stimulus will, at some stage, feed into the real economy.A value-focused portfolio remains, in our view, one of the few ways to hedge higher interest rates and/or inflation.

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