International Core Equity

For the Period Ending: 12/31/2018

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

Market Update

Broad international markets were down approximately 12.5% in U.S. dollars over the quarter. The U.S. dollar appreciated about 1% relative to a basket of other currencies. Escalating trade tensions between the U.S. and China, uncertainty surrounding the ongoing Brexit negotiations, populism in France highlighted by yellow vests activism, and concerns over the pace of rate hikes in the U.S. provided a sour backdrop for equity markets. Understandably, earnings revisions turned decidedly negative.

In early December, the U.S. and China agreed to trade negotiations rather than ratcheting up tariffs. We believe additional agreements will be reached, though a comprehensive trade pact seems unlikely given many conflicting issues between the two nations. In the U.K., British Prime Minister Theresa May survived a no confidence vote, and while tensions surrounding Brexit negotiations remain high, we believe a soft Brexit remains likely. Whether it is trade, protests or border walls, populism and nationalism are on the rise around the world.

The quarter witnessed an additional rate increase by the U.S. Federal Reserve, increasing the Federal Funds Rate to 2.5%. The 10-year U.S. Treasury yield closed the year at approximately 2.7%, a significant move from the 3.2% levels of November. At the end of the quarter, the European Central Bank (ECB) ceased their asset purchase program, while the Swedish Central Bank, often considered a harbinger for the ECB, raised rates 25 basis points. China’s central bank stated a desire to maintain prudent monetary policy and keep the yuan stable while offering “reasonably ample” liquidity to the market.

Brent crude finished the quarter at $53.80, down almost 40% from its early October high. Excess U.S. supply concerns and lower global demand from an extended cycle drove the surprising swoon.

Portfolio Review

The Portfolio underperformed its benchmark for the quarter primarily due to poor stock selection in the energy, health care and industrials sectors. As oil prices receded over the quarter, the Portfolio’s substantial (approximately 5%) overweight allocation to energy and poor stock selection accounted for more than half of the Portfolio’s relative underperformance. Allocations to Canadian energy companies were top detractors for the period.

Geographically, the Portfolio’s holdings in developing markets (approximately a 12% allocation) detracted from performance. Despite the setback, we continue to see relative value opportunities in emerging markets, especially China.

In an effort to provide support in down markets, we increased the Portfolio’s cash allocation from 3% to 5%.


There are a number of factors we are carefully monitoring in the current economic environment. Shift in central bank policy, the rise of nationalism and ongoing trade negotiations between the U.S. and China are standout concerns. Going forward, we believe 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. While we think U.S.-China trade tensions will persist, we expect some positive agreements in 2019 that will provide relief to the market.

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. 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. Unfortunately, this may result in many economies heading into the next economic downturn with very easy monetary policies.

We believe relative valuation remains supportive for international equities. We see relative value opportunities in emerging markets (especially China), energy, internet-related companies and in many cyclicals that we view as more stable than average.

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 December 31, 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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