International Core Equity

For the Period Ending: 9/30/2018

Portfolio Managers:
John C. Maxwell, CFA
Catherine L. Murray

Market Update

Broad international markets were up slightly more than 1% (in U.S. dollars) over the quarter. The U.S. dollar remained range bound versus a basket of other currencies over the period. The desynchronization of the global economy continued. The U.S. economy met high expectations and performed well, emerging-markets generally suffered with currency devaluation the main culprit (particularly for Turkey and Argentina), Europe muddled along, Japan performed well as earnings were strong, and China struggled as their deleveraging initiative and global trade war concerns hurt stocks in the quarter.

At quarter end, the U.S., Mexico and Canada established a new North American trade agreement coined USMCA. For the U.S., the trade focus is now squarely on China. The question is: Will the situation with China be similar to Mexico – a lot of nasty rhetoric but ultimately a trade deal is reached? We no longer believe a substantive trade deal will be signed. There may be one-off agreements but a comprehensive trade pact seems unlikely given the many conflicting issues between the two nations.

The Nationalistic movement in Europe continued with the far-right garnering approximately 20% of the vote in major elections across the region, much more than expected coming into the year. The budget put forward by the euro-skeptic Italian government was out of line with European Union requirements. This has resulted in the Italian 10-year yield increasing to 3.14% from 1.6% before their election.

The quarter witnessed an additional rate increase by the U.S. Federal Reserve. The Federal Funds Rate now stands at 2.25%, with the 10-year Treasury at more than a 3% yield. Central banks in Europe, Switzerland and Japan are tapering, but they still seem at least six months away from starting to raise their current negative short rates. To offset the forces of deleveraging, China is introducing a combination of fiscal and monetary easing measures, though at this point the measures have been somewhat ineffective. Of note, the price of oil rose significantly in the quarter.

Portfolio Review

The Portfolio underperformed its benchmark for the quarter primarily due to poor stock selection. Poor selection in health care and industrials were key detractors, while stock selection in consumer discretionary and financials was strong.

Sector allocation was a positive contributor to performance for the period, with an underweight allocation to the poor performing real estate sector and overweight allocation to the strong performing energy sector benefiting performance. From a geographic standpoint, the Portfolio’s overweight allocation to China detracted from performance, while strong stock selection in Japan aided performance.

At the end of the quarter, we tactically removed the defensive overweight in the Portfolio as we are anticipating good news going into the U.S. mid-term elections. We expect to return to the more defensive positioning in the short term as the length of the current economic cycle and nationalism globally are concerning. The Portfolio maintains strong overweight allocations to energy and communications, with our largest underweights in health care, utilities and financials. Geographically, we are underweight developed Asia in favor of allocations to emerging markets.

With the heightened risk of nationalism, we have used forward currency contracts to the yen. As a result, our currency exposure to Japan is now in line with the index, while our stock exposure remains underweight.


Monetary, and in many places, fiscal policy remains very supportive for equity markets. That said, nationalism is on the rise virtually everywhere, led by the U.S. Going forward, geopolitics is likely to have a greater impact on asset performance than monetary policy. The question remains: How much longer will the cycle extend uninterrupted by looming risks? As a result, we are watching closely for signs of change and continue to seek stocks that should better withstand an economic downturn. If the trade war escalates and becomes irreversible, it would likely end the current cycle and be a detriment to equities. Outside of some emerging markets like Turkey, Brazil and China, asset prices have been relatively well behaved.

In much of the world, global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. Despite the majority of central banks tapering their asset purchases, virtually all countries are struggling with high levels of debt. As a result, we believe central banks will attempt to keep rates below nominal gross domestic product growth in order to monetize the debt and continue to stimulate their economies. As such, we believe there is a long-term cap on how high rates can go. Our base case is continued slow, deliberate exiting of quantitative easing and narrowing of negative interest rate policy globally.

We believe relative valuation remains supportive for international equities. We see relative value opportunities in emerging markets (especially China), energy/off-cycle commodity plays, internet related companies and increasingly in yield plays.

The opinions expressed are those of the portfolio manager(s) and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018 and are subject to change due to market conditions or other factors. Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted.
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Investment Team

John C. Maxwell, CFA

Senior Vice President, Portfolio Manager

Mr. Maxwell is co-portfolio manager of the firm’s International Core Equity investment strategy. He has held portfolio manager responsibilities for the firm’s International Core Equity strategy since 2006. He joined the firm in 1998 as an equity investment analyst and has held several roles in the firm. As an equity analyst he followed industries in the consumer discretionary, consumer staples, information technology and telecom services sectors.

Prior to joining the organization, Mr. Maxwell held positions with Fort Washington Investment Advisors, Procter & Gamble, and the White House Special Programs Office. He was a U.S. Army Reserve Officer.

Mr. Maxwell earned an MBA with an emphasis in Finance from The Johnson School at Cornell University and a BS in Mechanical Engineering from the University of Kentucky.

Catherine L. Murray

Senior Vice President, Portfolio Manager

Catherine Murray is co-portfolio manager of the International Core Equity investment strategy and was appointed this role in 2017. She had been the assistant portfolio manager on the product since 2014. She remains the firm’s international financial sector analyst, and previously was the firm’s global financial sector analyst.

Prior to joining the organization in 2011, Ms. Murray had significant roles as both a sell-side and buy-side financial sector analyst. She was a managing director of JP Morgan and a senior sell-side banking industry analyst at JP Morgan Securities where she followed Latin American, U.S. regional and money center banks. She was an Institutional Investor (II) ranked analyst in two banking industry categories, and achieved the top II ranking as a Latin America banks analyst. Ms. Murray also was a managing director and senior financial services analyst at Neuberger Berman, and a financial sector strategist at WJB Capital.

Ms. Murray earned an MBA from the Wharton School, University of Pennsylvania, majoring in Finance and a BA in French and Business Administration from the College of St. Catherine in St. Paul, MN.

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