International Small Cap

Portfolio attribution

The Portfolio outperformed 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 consumer discretionary, industrials, and information technology contributed the most to performance relative to the Index. Portfolio holdings in the materials sector offset a portion of the outperformance; otherwise holdings in the energy and communication services sectors contributed the least. Relative performance for the month can be mostly attributed to stock selection. The largest contributor to performance was textile manufacturer, Hyosung TNC Corp. (South Korea). Additional top contributors included marine transportation services provider, Yang Ming Marine Transport Corp. (Taiwan), transportation and logistics solutions provider, SITC International Holdings Co., Ltd. (Hong Kong), retailer, JB Hi-Fi Ltd. (Australia), and semiconductor services provider, BE Semiconductor Industries NV (Netherlands). The largest detractor from performance was solar energy company, Daqo New Energy (China). Additional top detractors included plastics & polymers manufacturer, Korea Petrochemical Ind. Co., Ltd. (South Korea), rubber product producer, Sri Trang Agro-Industry Public Co. Ltd. (Thailand), rubber product producer, Kossan Rubber Industries Bhd.(Malaysia), and mortgage lender, Indiabulls Housing Finance Ltd. (India).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Although value was under significant pressure in 2020, it has proven resilient in recent months. We believe there is far more “catching up” to come. Macroeconomic data is becoming increasingly supportive of value outperformance according to historical relationships. Higher interest rates favor value stocks since increasing discount rates will penalize longer duration growth stocks whose cash flows are expected farther in the future. Increasing inflation expectations and a steepening yield curve directly benefit financials (via net interest margins) but also support industrials and other cyclicals via strengthening growth expectations. Recovering commodity prices also signal improving growth prospects and directly benefit the materials and energy sectors. As of March 31, the Small Cap Growth Index traded at a 24.1x forward price-to-earnings multiple compared to 14.0x for the Small Cap Value Index, a 73% premium. We believe that value’s relative performance should improve as inflation expectations increase, the yield curve steepens, Covid-19 vaccine distribution accelerates, and economies reopen.

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 many 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-bookvalue 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.

International Value Select

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to country allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the pharmaceuticals & biotechnology, automobiles & components, banks, materials, and insurance industry groups contributed to relative performance. Holdings in the capital goods, semiconductors & semi equipment, technology hardware & equipment, diversified financials, and transportation industry groups offset some of the outperformance compared to the Index. The top contributor to return was automobile manufacturer, Volkswagen AG (Germany). Other notable contributors included financial services provider, ING Groep NV (Netherlands), Takeda Pharmaceutical Co., Ltd. (Japan), banking & financial services company, Barclays Plc (United Kingdom), and British American Tobacco plc (United Kingdom). The largest detractor was financial services provider, Credit Suisse Group AG (Switzerland). Additional notable detractors included products & services provider for the electronic components industry, SK hynix, Inc.(South Korea), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom), and internet services provider, Baidu, Inc. – ADR (China).

Investment outlook

With vaccination rates accelerating, investors turned their attention to undervalued stocks that were sharply sold off when the pandemic accelerated a year ago. Value stocks outpaced their growth peers during the first quarter, largely led by cyclical sectors such as industrials, materials, consumer discretionary, financials, and the more economically sensitive portion of technology. As high-quality cyclical stocks re-rate upward, we are using this opportunity to lower portfolio risk, measured as prospective volatility versus the benchmark. Consistent with prior market recoveries, stocks in economically defensive industries lag the overall markets. Several of these low beta stocks have risen to the top half of our risk-adjusted return ranking, making them potentially attractive portfolio candidates. A common theme for many of our portfolio companies, whether cyclical or defensive, is operational restructuring. We believe companies with experienced management teams can prove to the market that they have used the crisis to reduce expenses and boost efficiency. In our view, this effort should enhance operating leverage and facilitate higher levels of profitability from these well-positioned companies. As free cash flow rises, we believe companies will return capital to shareholders in the form of dividends and share buybacks, providing a critical boost to total return.

International Opportunities

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to country allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the automobiles & components, pharmaceuticals & biotechnology, materials, banks, and insurance industry groups contributed to relative performance. Holdings in the capital goods, semiconductors & semi equipment, diversified financials, technology hardware & equipment, and consumer durables & apparel industry groups offset some of the outperformance compared to the Index. The top contributor to return was automobile manufacturer, Volkswagen AG (Germany). Other notable contributors included financial services provider, ING Groep NV (Netherlands), banking & financial services company, Barclays Plc (United Kingdom), British American Tobacco plc (United Kingdom), and Takeda Pharmaceutical Co., Ltd. (Japan). The largest detractor was financial services provider, Credit Suisse Group AG (Switzerland). Additional notable detractors included online services company, Tencent Holdings Ltd. (China), internet services provider, Baidu, Inc. – ADR (China), integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan).

Investment outlook

With vaccination rates accelerating, investors turned their attention to undervalued developed market stocks that were sharply sold off when the pandemic accelerated a year ago. Value stocks outpaced their growth peers during the first quarter, largely led by cyclical sectors such as industrials, materials, consumer discretionary, financials, and the more economically sensitive portion of technology. As high-quality cyclical stocks re-rate upward, we are using this opportunity to lower portfolio risk, measured as prospective volatility versus the benchmark. Consistent with prior market recoveries, stocks in economically defensive industries lag the overall markets. Several of these low beta stocks have risen to the top half of our risk-adjusted return ranking, making them potentially attractive portfolio candidates from a fundamental research perspective. A common theme for many of our developed market portfolio companies, whether cyclical or defensive, is operational restructuring. We believe companies with experienced management teams can prove to the market that they have used the crisis to reduce expenses and boost efficiency. In our view, this effort should enhance operating leverage and facilitate higher levels of profitability from these well-positioned companies. As free cash flow rises, we believe companies will return capital to shareholders in the form of dividends and share buybacks, providing a critical boost to total return.

Like their developed market counterparts, EM value stocks outperformed EM growth during the first quarter, buoyed by steepening global yield curves, the reopening of economies, and the Covid-19 vaccine rollout. Despite this outperformance, EM value stocks trade at a sizable discount to growth stocks. We emphasize value factors in our multi-factor investment process and we believe the value rebound is poised to continue as economic activity accelerates.

Emerging Markets Equity

Portfolio attribution

The Portfolio outperformed the Index in March 2021. 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 valuation factor was a positive indicator in March and it was our strongest performing bottom-up indicator during the first quarter. Our bottom-up growth, price momentum, and competitive strength factors were also positive indicators during the month. Of our top-down factors, macroeconomic, country, and sector factors were positive indicators while currency was negative in March.

Investment outlook

Within EM, earnings growth upgrades have generally been strongest in cyclical sectors, particularly materials, energy, and information technology, according to analyst estimates. Growth upgrades for these sectors reflect analysts’ optimism that economies will continue to reopen and activity will normalize. We are overweight materials and information technology stocks in the Portfolio due to attractive growth and price momentum characteristics. We are modestly underweight energy stocks in the Portfolio due to valuation considerations. From a country perspective, net earnings growth upgrades were strongest in Russia, Saudi Arabia, Brazil, and Taiwan. Chinese stocks experienced net earnings downgrades relative to other countries. In China, banks and other cyclical stocks have experienced net upgrades. However, China’s large internet companies, which dominate the Index, have experienced muted analyst revisions. Many of these companies did well during the Covid-19 pandemic and have not benefited from the economic reopening to the same extent many cyclical stocks have. China’s large internet companies have also been negatively affected by the ongoing regulatory investigation into anti-competitive practices. We are underweight Chinese stocks in the Portfolio due primarily to valuation and growth considerations.

Buoyed by steepening global yield curves, the reopening of economies, and the Covid-19 vaccine rollout, EM value stocks outperformed during the month and the quarter. The MSCI EM Value Index outpaced the MSCI EM Growth Index by 3.7% in the first quarter in local currency terms. Despite this outperformance, EM value stocks trade at a sizable discount to growth stocks. We emphasize value factors in our multi-factor investment process and we believe the value rebound is poised to continue as economic activity accelerates.

Global Value Equity

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the software & services, automobiles & components, insurance, pharmaceuticals & biotechnology,and utilities industry groups contributed to relative performance. Holdings in the semiconductors & semi equipment, technology hardware & equipment, and capital goods industry groups, along with an overweight position in the consumer services industry group and an underweight position in the food beverage & tobacco industry group, offset some of the outperformance compared to the Index. The top contributor to return was automobile manufacturer, Volkswagen AG (Germany). Other notable contributors included business services provider, Concentrix Corp. (United States), mortgage insurance provider, Essent Group (United States), utilities provider, Exelon Corp. (United States), and HVAC manufacturer, Carrier Global Corp. (United States). The largest detractor was products & services provider for the electronic components industry, SK hynix, Inc. (South Korea). Additional notable detractors included jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), semiconductor company, Infineon Technologies AG (Germany), and airliner manufacturer, Airbus SE (France).

Investment outlook

With vaccination rates accelerating, investors turned their attention to undervalued stocks that were sharply sold off when the pandemic accelerated a year ago. Value stocks outpaced their growth peers during the first quarter, largely led by cyclical sectors such as industrials, materials, consumer discretionary, financials, and the more economically sensitive portion of technology. As high-quality cyclical stocks re-rate upward, we are using this opportunity to lower portfolio risk, measured as prospective volatility versus the benchmark. Consistent with prior market recoveries, stocks in economically defensive industries lag the overall markets. Several of these low beta stocks have risen to the top half of our risk-adjusted return ranking, making them potentially attractive portfolio candidates. A common theme for many of our portfolio companies, whether cyclical or defensive, is operational restructuring. We believe companies with experienced management teams can prove to the market that they have used the crisis to reduce expenses and boost efficiency. In our view, this effort should enhance operating leverage and facilitate higher levels of profitability from these well-positioned companies. As free cash flow rises, we believe companies will return capital to shareholders in the form of dividends and share buybacks, providing a critical boost to total return.

International Value Equity

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to country allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the pharmaceuticals & biotechnology, automobiles & components, banks, materials, and insurance industry groups contributed to relative performance. Holdings in the capital goods, semiconductors & semi equipment, technology hardware & equipment, diversified financials, and media & entertainment industry groups offset some of the outperformance compared to the Index. The top contributor to return was automobile manufacturer, Volkswagen AG (Germany). Other notable contributors included financial services provider, ING Groep NV (Netherlands), banking & financial services company, Barclays Plc (United Kingdom), Takeda Pharmaceutical Co., Ltd. (Japan), and British American Tobacco plc (United Kingdom). The largest detractor was financial services provider, Credit Suisse Group AG (Switzerland). Additional notable detractors included products & services provider for the electronic components industry, SK hynix, Inc.(South Korea), jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), and internet services provider, Baidu, Inc. – ADR (China).

Investment outlook

With vaccination rates accelerating, investors turned their attention to undervalued stocks that were sharply sold off when the pandemic accelerated a year ago. Value stocks outpaced their growth peers during the first quarter, largely led by cyclical sectors such as industrials, materials, consumer discretionary, financials, and the more economically sensitive portion of technology. As high-quality cyclical stocks re-rate upward, we are using this opportunity to lower portfolio risk, measured as prospective volatility versus the benchmark. Consistent with prior market recoveries, stocks in economically defensive industries lag the overall markets. Several of these low beta stocks have risen to the top half of our risk-adjusted return ranking, making them potentially attractive portfolio candidates. A common theme for many of our portfolio companies, whether cyclical or defensive, is operational restructuring. We believe companies with experienced management teams can prove to the market that they have used the crisis to reduce expenses and boost efficiency. In our view, this effort should enhance operating leverage and facilitate higher levels of profitability from these well-positioned companies. As free cash flow rises, we believe companies will return capital to shareholders in the form of dividends and share buybacks, providing a critical boost to total return.

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