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. Returns to our value factors were negative in March following a particularly strong performance earlier in the year, particularly in January. Nevertheless, they were the best-performing factor group in the first quarter and over the last twelve months. The strategy’s earnings growth alpha factors had positive returns in March and Q1, and they are the second best-performing factor group over the past twelve months. Our technical factors delivered the highest returns in March and positive returns for the first quarter. Our competitive strength factor category delivered negative returns for the month and the quarter. These factors have a quality tilt to them but offer good diversification to other bottom-up factors, particularly value. Our macroeconomic and country aggregate factors delivered negative returns in March as countries exhibiting superior metrics (such as Japan and the Ireland) underperformed those with relatively weaker macroeconomic characteristics (such as Brazil and Australia). For the quarter, our macroeconomic factors had positive returns due, in part, to correct calls in the Middle East while country aggregate returns were negative due, in part, to incorrect calls in Latin America. All factor group returns remain positive from inception of the Strategy (10/20/14) to the end of March.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite the value rally earlier in the first quarter, the MSCI ACWI ex USA Small Cap Growth Index (“Small Cap Growth Index”) still traded at a 18.6x forward price-to-earnings multiple compared to 10.9x for the MSCI ACWI ex USA Small Cap Value Index (“Small Cap Value Index”), a 72% premium. Based on recent hawkish comments, the U.S. Federal Reserve (“Fed”) may seek to raise policy rates and reduce the size of its balance sheet more aggressively than previously thought. It is seeking to reduce inflation expectations without significantly damaging economic growth. If successful, higher interest rates should continue to pressure longer-duration growth stocks and favor value stocks.

International Value Select

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, materials, capital goods, utilities, and household & personal products industry groups detracted from relative performance. Holdings in the insurance and food & staples retailing industry groups, as well as an overweight position in the pharmaceuticals & biotechnology industry group and an underweight position in the retailing and consumer durables & apparel 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 diversified chemicals manufacturer, BASF SE (Germany), banking & financial services company, Barclays Plc (United Kingdom), electric, gas & renewables power generation & distribution company, Enel SpA (Italy), and automobile manufacturer, Volkswagen AG (Germany). The top contributor to return was pharmaceuticals & chemicals company, Bayer AG (Germany). Other notable contributors included pharmaceutical company, AstraZeneca Plc (United Kingdom), insurer, AXA SA (France), financial services company, Zurich Insurance Group (Switzerland), and pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland).

Investment outlook

After a very strong start to the year, equity markets’ reactions to Russia’s invasion of Ukraine weighed heavily on portfolio performance in the second half of the quarter. The Russian attack triggered sell-offs in what we see as high-quality portfolio companies, presenting us with a chance to lower average costs. The subsequent “risk-off” sentiment led to the selling of cyclical stocks, notably those in the Covid recovery category, such as travel, aerospace, leisure, and hospitality. We believe markets are pricing in a second-order effect that assumes that the additional inflation caused by the invasion will be met by severe monetary tightening and negative real gross domestic product growth in most non-commodity exporting countries. In our view, even if Europe tumbles into recession, many of its financial and industrial sector stocks (the most cyclical) increasingly discount such an outcome. Traditionally, buying cyclical stocks into a recession has often proven fruitful given their sizable outperformance as markets look forward and anticipate economic recovery. After such an enormous flood of global monetary expansion, capped by the pandemic period, many market participants appear to have forgotten about cycles. We remember them vividly and have started positioning client portfolios to potentially take advantage of the future recovery.

International Opportunities

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, materials, capital goods, utilities, and diversified financials industry groups detracted from performance relative to the Index. Holdings in the insurance and food beverage & tobacco industry groups, as well as an overweight position in the pharmaceuticals & biotechnology industry group and an underweight position in the consumer durables & apparel and media & entertainment industry groups, offset some of the underperformance versus the Index. The largest detractor from absolute performance was banking & financial services company, UniCredit S.p.A. (Italy). Other notable detractors included diversified chemicals manufacturer, BASF SE (Germany), banking & financial services company, Barclays Plc (United Kingdom), consumer staples giant, Unilever (United Kingdom), and electric, gas & renewables power generation & distribution company, Enel SpA (Italy). The top contributor to return was pharmaceutical company, AstraZeneca Plc (United Kingdom). Additional top contributors included pharmaceuticals & chemicals company, Bayer AG (Germany), insurer, AXA SA (France), pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland), and financial services company, Zurich Insurance Group (Switzerland).

Investment outlook

After a very strong start to the year, equity markets’ reactions to Russia’s invasion of Ukraine weighed heavily on portfolio performance in the second half of the quarter. The Russian attack triggered sell-offs in what we see as high-quality developed market portfolio companies, presenting us with a chance to lower average costs. The subsequent “risk-off” sentiment led to the selling of developed cyclical stocks, notably those in the Covid recovery category, such as travel, aerospace, leisure, and hospitality. We believe markets are pricing in a second-order effect that assumes that the additional inflation caused by the invasion will be met by severe monetary tightening and negative real gross domestic product growth in most non-commodity exporting countries. In our view, even if Europe tumbles into recession, many of its financial and industrial sector stocks (the most cyclical) increasingly discount such an outcome. Traditionally, buying cyclical stocks into a recession has often proven fruitful given their sizable outperformance as markets look forward and anticipate economic recovery. After such an enormous flood of global monetary expansion, capped by the pandemic period, many market participants appear to have forgotten about cycles. We remember them vividly and have started positioning client portfolios to potentially take advantage of the future recovery.

Regarding the EM portion of the Portfolio, earnings growth upgrades for EM equities continue to lag those in developed markets. EM sectors with the weakest earnings upgrades were communication services, consumer discretionary, and real estate. All three sectors are dominated by Chinese stocks, which have been negatively impacted by the country’s Covid-19 containment policies. The sectors with the strongest earnings upgrades were energy, information technology, and materials. Russia is a significant exporter of energy and materials. The Russia-Ukraine conflict has limited supply in these sectors, driving up prices. From a country perspective, the major EM countries with the strongest net earnings upgrades were Turkey, Mexico, and Indonesia. The countries with the weakest net upgrades include China, Poland, and India. Covid-19 policies are weighing on Chinese companies’ growth prospects and Indian companies have been adversely impacted by rising oil prices. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. We believe that rising interest rates globally should provide a tailwind for select EM value stocks, particularly if global growth headwinds remain manageable.

Emerging Markets Equity

Portfolio attribution

The Portfolio underperformed the Index in March 2022. 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-up price momentum and growth factors were positive indicators during the month while valuation and competitive strength were negative. Of our top-down factors, our sector factor was positive. Our macroeconomic, currency, and country factors were negative indicators in March. The largest stock-level detractors from relative performance included underweight positions in internet commerce company, Alibaba Group Holding Ltd. (China), diversified metals & mining operator, Vale SA (Brazil), and energy & industrials holding company, Reliance Industries Ltd. (India), as well as overweight positions in semiconductor engineer, MediaTek, Inc. (Taiwan) and container shipping company, Cosco Shipping Holdings Co (China). The greatest stock-level contributors to relative performance included overweight positions in multinational food processing company, JBS SA (Brazil), bank, Banco do Brasil SA (Brazil), mining & transportation company, Grupo Mexico S.A.B. de C.V. (Mexico), technology services & consulting company, Infosys Ltd. (India), and pharmaceutical company, Sun Pharmaceutical Industries Ltd. (India).

Investment outlook

Earnings growth upgrades for EM equities continue to lag those in developed markets. EM sectors with the weakest earnings upgrades were communication services, consumer discretionary, and real estate. All three sectors are dominated by Chinese stocks, which have been negatively impacted by the country’s Covid-19 containment policies. The sectors with the strongest earnings upgrades were energy, information technology, and materials. Russia is a significant exporter of energy and materials. The Russia-Ukraine conflict has limited supply in these sectors, driving up prices. From a country perspective, the major EM countries with the strongest net earnings upgrades were Turkey, Mexico, and Indonesia. Turkish companies, particularly those in the export sector, should likely benefit from the Turkish lira’s depreciation. Mexican companies should be less susceptible to a global slowdown given the country’s trade linkages with the US and Indonesia tends to benefit from higher commodity prices. The countries with the weakest net upgrades include China, Poland, and India. Covid-19 policies are weighing on Chinese companies’ growth prospects and Indian companies have been adversely impacted by rising oil prices. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. We believe that rising interest rates globally should provide a tailwind for select EM value stocks, particularly if global growth headwinds remain manageable.

Global Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, capital goods, consumer services, materials, and utilities industry groups detracted from relative performance. Holdings in the commercial & professional services, semiconductors & semi equipment, and media & entertainment industry groups, as well as an underweight position in the consumer durables & apparel and food beverage & tobacco industry groups, offset some of the underperformance compared to the Index. The largest detractor was business services provider, Concentrix Corp. (United States). Additional notable detractors included banking & financial services company, UniCredit S.p.A. (Italy), airport & rail station concessionaire, SSP Group Plc (United Kingdom), casino & resort company, Las Vegas Sands Corp. (United States), and diversified chemicals manufacturer, BASF SE (Germany). The top contributor to return was online travel agency, Booking Holdings, Inc. (United States). Other notable contributors included energy supermajor, Shell (United Kingdom), insurer, AXA SA (France), Waste Management, Inc. (United States), and pharmaceutical producer, Novartis AG (Switzerland).

Investment outlook

After a very strong start to the year, equity markets’ reactions to Russia’s invasion of Ukraine weighed heavily on portfolio performance in the second half of the quarter. The Russian attack triggered sell-offs in what we see as high-quality portfolio companies, presenting us with a chance to lower average costs. The subsequent “risk-off” sentiment led to the selling of cyclical stocks, notably those in the Covid recovery category, such as travel, aerospace, leisure, and hospitality. We believe markets are pricing in a second-order effect that assumes that the additional inflation caused by the invasion will be met by severe monetary tightening and negative real gross domestic product growth in most non-commodity exporting countries. In our view, even if Europe tumbles into recession, many of its financial and industrial sector stocks (the most cyclical) increasingly discount such an outcome. Traditionally, buying cyclical stocks into a recession has often proven fruitful given their sizable outperformance as markets look forward and anticipate economic recovery. After such an enormous flood of global monetary expansion, capped by the pandemic period, many market participants appear to have forgotten about cycles. We remember them vividly and have started positioning client portfolios to potentially take advantage of the future recovery.

International Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, materials, capital goods, utilities, and household & personal products industry groups detracted from relative performance. Holdings in the insurance and food & staples retailing industry groups, as well as an overweight position in the pharmaceuticals & biotechnology industry group and an underweight position in the consumer durables & apparel and media & entertainment 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 diversified chemicals manufacturer, BASF SE (Germany), banking & financial services company, Barclays Plc (United Kingdom), consumer staples giant, Unilever (United Kingdom), and electric, gas & renewables power generation & distribution company, Enel SpA (Italy). The top contributor to return was pharmaceuticals & chemicals company, Bayer AG (Germany). Other notable contributors included pharmaceutical company, AstraZeneca Plc (United Kingdom), insurer, AXA SA (France), pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland), and financial services company, Zurich Insurance Group (Switzerland).

Investment outlook

After a very strong start to the year, equity markets’ reactions to Russia’s invasion of Ukraine weighed heavily on portfolio performance in the second half of the quarter. The Russian attack triggered sell-offs in what we see as high-quality portfolio companies, presenting us with a chance to lower average costs. The subsequent “risk-off” sentiment led to the selling of cyclical stocks, notably those in the Covid recovery category, such as travel, aerospace, leisure, and hospitality. We believe markets are pricing in a second-order effect that assumes that the additional inflation caused by the invasion will be met by severe monetary tightening and negative real gross domestic product growth in most non-commodity exporting countries. In our view, even if Europe tumbles into recession, many of its financial and industrial sector stocks (the most cyclical) increasingly discount such an outcome. Traditionally, buying cyclical stocks into a recession has often proven fruitful given their sizable outperformance as markets look forward and anticipate economic recovery. After such an enormous flood of global monetary expansion, capped by the pandemic period, many market participants appear to have forgotten about cycles. We remember them vividly and have started positioning client portfolios to potentially take advantage of the future recovery.