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 industrials, financials, and information technology contributed the most to performance relative to the Index. Portfolio holdings in health care, real estate, and utilities offset a portion of the performance. Relative performance for the month can be mostly attributed to stock selection. The top contributor to performance was marine transportation services provider, Yang Ming Marine Transport Corp. (Taiwan). Additional top contributors included fiber products manufacturer, Hyosung TNC Corp. (South Korea), online consumer finance platform, FinVolution Group (China), marine transportation and logistics solutions provider, SITC International Holdings Co., Ltd. (Hong Kong), and mining industry crushing service provider, Mineral Resources Ltd. (Australia). The largest detractor from performance was online gambling company Kindred Group Plc (Sweden). Additional top detractors included insurance group, ASR Nederland NV (Netherlands), steel & iron distribution company, EVRAZ Plc (United Kingdom), rubber products company, Kossan Rubber Industries Bhd. (Malaysia), and forest products company, Canfor (Canada).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of June 30, the Small Cap Growth Index traded at a 23.5x forward price-to-earnings multiple compared to 13.1x for the Small Cap Value Index, a 79% premium. This stands just a shade below the all-time high premium of 83% at the end of 2020. Especially following value’s poor performance in June, we believe there is far more “catching up” to come.

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.

International smaller cap equities have historically 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. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term EPS growth trend. Even so, international small cap stocks (14.0x NTM P/E) are currently trading at a discount to large cap stocks (14.3x) despite having superior growth prospects. FY1 and FY2 estimates show expected earnings growth of 22% for the MSCI ACWI ex USA Small Cap Index vs. 9% for the MSCI ACWI ex USA Large Cap Index, following stronger small cap projected earnings growth from FY0 to FY1 as well.

International Value Select

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, transportation, software & services, and insurance industry groups, along with an overweight position in the banks industry group, detracted from relative performance. Holdings in the commercial & professional services industry group, as well as an overweight position in the technology hardware & equipment industry group and an underweight position in the telecommunication services, media & entertainment, and retailing industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included banking & financial services company, UniCredit S.p.A. (Italy), travel & tourism information technology provider, Amadeus IT Group SA (Spain), life insurer, Prudential Plc (United Kingdom), and retail bank, CaixaBank SA (Spain). The top contributor to return was pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland). Other notable contributors included pharmaceutical producer, Novartis AG (Switzerland), business software & services provider, SAP SE (Germany), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), and beverage producer, Pernod Ricard SA (France).

Investment outlook

Despite the past 15-month surge in equity markets, amplified by the recovery in cyclical stocks from November 2020 vaccine announcements, we believe attractive valuations remain. With delayed and uneven opening of economies globally, several of the, in our view, high quality aerospace, aviation, travel, and hospitality-oriented stocks have only partially reflected the recovery ahead. We observe significant pent up demand for such services, yet travelers still face uncertainty in certain locations and face burdensome Covid-19-related protocols. As vaccinations proliferate, we believe even the most cautious of governments will likely open their respective borders, compelled by economic necessity. In addition to late-stage pandemic stocks, we are also finding what we believe is market underpricing in companies undergoing operational restructuring and in some traditionally defensive sectors such as utilities (those in transition to renewable energy) and healthcare (European pharmaceutical giants with potentially valuable drug pipelines). Companies in the defensive categories tend to generate cash flows surplus to their operating and investment needs (free cash flow), and thus can pay shareholders to wait for prices to reflect what we estimate will be good news. We believe companies less dependent on earnings realization far out in the future should provide a natural hedge in the portfolio to the prospect of rising interest rates, a function of bond markets reflecting economic growth and inflation. If history is any guide, the side effect of higher discount rates and bond market competition should translate into compression of the most speculative of market multiples.

International Opportunities

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, transportation, software & services, banks, and insurance industry groups detracted from relative performance. Holdings in the consumer durables & apparel 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 services and telecommunication services industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included banking & financial services company, UniCredit S.p.A. (Italy), travel & tourism information technology provider, Amadeus IT Group SA (Spain), life insurer, Prudential Plc (United Kingdom), and airline, AIR Canada (Canada). The top contributor to return was pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland). Other notable contributors included pharmaceutical producer, Novartis AG (Switzerland), internet commerce company, Alibaba Group Holding Ltd. (Hong Kong), Kakao Corp. (South Korea), and technology services & consulting company, Infosys Ltd. (India).

Investment outlook

Despite the past 15-month surge in equity markets, amplified by the recovery in cyclical stocks from November 2020 vaccine announcements, we believe attractive valuations remain. With delayed and uneven opening of economies globally, several of the, in our view, high quality developed market aerospace, aviation, travel, and hospitality-oriented stocks have only partially reflected the recovery ahead. We observe significant pent up demand for such services, yet travelers still face uncertainty in certain locations and face burdensome Covid-19-related protocols. As vaccinations proliferate, we believe even the most cautious of governments will likely open their respective borders, compelled by economic necessity. In addition to late-stage pandemic stocks, we are also finding what we believe is market underpricing in developed market companies undergoing operational restructuring and in some traditionally defensive sectors such as utilities (those in transition to renewable energy) and healthcare (European pharmaceutical giants with potentially valuable drug pipelines). Companies in the defensive categories tend to generate cash flows surplus to their operating and investment needs (free cash flow), and thus can pay shareholders to wait for prices to reflect what we estimate will be good news. We believe companies less dependent on earnings realization far out in the future should provide a natural hedge in the portfolio to the prospect of rising interest rates, a function of bond markets reflecting economic growth and inflation. If history is any guide, the side effect of higher discount rates and bond market competition should translate into compression of the most speculative of market multiples.

In the EM portion of the Portfolio, we continue to emphasize value factors in our multi-factor investment process. The largest potential headwind for EM value stocks relates to Covid-19 vaccine distribution challenges or efficacy issues against developing virus variants. However, with the MSCI EM Value Index trading at a 52% discount to the MSCI EM Growth Index on a next-twelve-month price-to-earnings basis, we believe that value stocks offer compelling risk-adjusted return potential.

Emerging Markets Equity

Portfolio attribution

The Portfolio outperformed the Index in June 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 bottom-up growth and price momentum factors were positive indicators in June. Our valuation and competitive strength factors were negative indicators during the month. Of our top-down factors, sector was a negative indicator while macroeconomic, country, and currency were positive.

Investment outlook

Within EM, earnings upgrades have been strongest in materials, energy, and industrials. The improving expectations for these cyclical sectors reflect analyst optimism that economies will continue to reopen as vaccine distribution progresses. The materials sector represents one of the Portfolio’s largest overweight positions due to attractive growth and price momentum characteristics. Information technology, the Portfolio’s largest sector overweight, also includes stocks with compelling growth and price momentum attributes. From a country perspective, growth upgrades were particularly strong in Poland, Russia, and Saudi Arabia. South Africa, Indonesia, and China had the weakest net upgrades. The Chinese government is paring back stimulus measures and some of the country’s largest companies are facing elevated regulatory risks as well as increasing spending needs to fund new growth drivers.

We continue to emphasize value factors in our multi-factor investment process. The largest potential headwind for EM value stocks relates to Covid-19 vaccine distribution challenges or efficacy issues against developing virus variants. However, with the MSCI EM Value Index trading at a 52% discount to the MSCI EM Growth Index on a next-twelve-month price-to-earnings basis, we believe that value stocks offer compelling risk-adjusted return potential.

Global Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the software & services, consumer services, technology hardware & equipment, and materials industry groups, along with an overweight position in the insurance industry group, detracted from relative performance. Holdings in the energy industry group, as well as an underweight position in the telecommunication services, food beverage & tobacco, household & personal products, and health care equipment & services industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included travel & tourism technology company, Sabre Corp. (United States), specialty chemicals manufacturer, Ashland Global Holdings, Inc. (United States), online travel agency, Booking Holdings, Inc. (United States), and financial services technology company, Fiserv, Inc. (United States). The top contributor to return was pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland). Other notable contributors included technology conglomerate, Alphabet Inc. (United States), business services provider, Concentrix Corp. (United States), oil exploration & production company, ConocoPhillips (United States), and HVAC manufacturer, Carrier Global Corp. (United States).

Investment outlook

Despite the past 15-month surge in equity markets, amplified by the recovery in cyclical stocks from November 2020 vaccine announcements, we believe attractive valuations remain. With delayed and uneven opening of economies globally, several of the, in our view, high quality aerospace, aviation, travel, and hospitality-oriented stocks have only partially reflected the recovery ahead. We observe significant pent up demand for such services, yet travelers still face uncertainty in certain locations and face burdensome Covid-19-related protocols. As vaccinations proliferate, we believe even the most cautious of governments will likely open their respective borders, compelled by economic necessity. In addition to late-stage pandemic stocks, we are also finding what we believe is market underpricing in companies undergoing operational restructuring and in some traditionally defensive sectors such as utilities (those in transition to renewable energy) and healthcare (European pharmaceutical giants with potentially valuable drug pipelines). Companies in the defensive categories tend to generate cash flows surplus to their operating and investment needs (free cash flow), and thus can pay shareholders to wait for prices to reflect what we estimate will be good news. We believe companies less dependent on earnings realization far out in the future should provide a natural hedge in the portfolio to the prospect of rising interest rates, a function of bond markets reflecting economic growth and inflation. If history is any guide, the side effect of higher discount rates and bond market competition should translate into compression of the most speculative of market multiples.

International Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, transportation, software & services, and insurance industry groups, along with an overweight position in the banks industry group, detracted from relative performance. Holdings in the consumer durables & apparel and commercial & professional services industry groups, as well as an overweight position in the technology hardware & equipment industry group and an underweight position in the telecommunication services and media & entertainment industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included banking & financial services company, UniCredit S.p.A.(Italy), travel & tourism information technology provider, Amadeus IT Group SA (Spain), life insurer, Prudential Plc (United Kingdom), and airline, AIR Canada (Canada). The top contributor to return was pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland). Other notable contributors included pharmaceutical producer, Novartis AG (Switzerland), business software & services provider, SAP SE (Germany), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), and beverage producer, Pernod Ricard SA (France).

Investment outlook

Despite the past 15-month surge in equity markets, amplified by the recovery in cyclical stocks from November 2020 vaccine announcements, we believe attractive valuations remain. With delayed and uneven opening of economies globally, several of the, in our view, high quality aerospace, aviation, travel, and hospitality-oriented stocks have only partially reflected the recovery ahead. We observe significant pent up demand for such services, yet travelers still face uncertainty in certain locations and face burdensome Covid-19-related protocols. As vaccinations proliferate, we believe even the most cautious of governments will likely open their respective borders, compelled by economic necessity. In addition to late-stage pandemic stocks, we are also finding what we believe is market underpricing in companies undergoing operational restructuring and in some traditionally defensive sectors such as utilities (those in transition to renewable energy) and healthcare (European pharmaceutical giants with potentially valuable drug pipelines). Companies in the defensive categories tend to generate cash flows surplus to their operating and investment needs (free cash flow), and thus can pay shareholders to wait for prices to reflect what we estimate will be good news. We believe companies less dependent on earnings realization far out in the future should provide a natural hedge in the portfolio to the prospect of rising interest rates, a function of bond markets reflecting economic growth and inflation. If history is any guide, the side effect of higher discount rates and bond market competition should translate into compression of the most speculative of market multiples.

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