Institutional Strategies

International Core Equity

The investment process utilizes both a top-down and bottom-up investment approach, combined with active risk management, to find what we believe are the best positioned companies with strong free cash flows that benefit from our top-down view and identified investment themes.

Investment Philosophy

As an active manager, our investment approach is best described as relative value, or seeking investments with valuations that appear inexpensive relative to their potential and/or to their global peers. Our valuation methodology is multi-faceted, as we strive to identify mispriced countries, currencies, sectors, markets and ultimately stocks with attractive relative valuations. We believe the core/blend strategy gives us the flexibility to position the portfolio across equity styles, which allows us to maximize returns across market cycles.

Investment Process

The investment process utilizes both a top-down and bottom-up investment approach, combined with active risk management, to find what we believe are the best positioned companies with strong free cash flows that benefit from our top-down view and identified investment themes.

Top-down approach: Macroeconomic analysis and theme creation
Foremost, we seek to determine where markets are in a particular economic business cycle, and then analyze their projected growth rates, currency outlook and geopolitical issues. In addition, we identify global themes that are intended to be long-term alpha generators. We also evaluate valuations across markets and sectors to identify potential dislocations and investment opportunities given market prices.

Bottom-up approach: Fundamental analysis focusing on valuations
In our bottom-up analysis, we search for securities we think should benefit from factors identified in our top-down view. Fundamental analysis focuses on cash flow generation, with an emphasis on companies with valuations that we believe do not yet reflect benefits from increasing sales growth and/or lower debt levels. Working with the firm’s global research team, investment theses are developed, and potential investment opportunities are evaluated utilizing a variety of valuation metrics that vary by region of the world and sector.

Risk management
The portfolio utilizes a variety of risk parameters in an attempt to manage risk in the portfolio. Parameters include security concentration limits, directional ranges for sector and country weights as well as aggregate cyclical/defensive weights relative to the portfolio’s benchmark.


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.

3 years, 5 years, 10 years annualized. Returns are presented on a dollar-weighted basis and may be impacted by ongoing market volatility. Past performance is no guarantee of future results. Please inquire for more current performance information.

Total Returns1,2,3

Average Annual Total Returns as of 9/30/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
International Core Equity - Gross 0.06%  -2.12% 2.34% 9.57% 6.71% 8.42%
International Core Equity - Net -0.16%  -2.74% 1.47% 8.65% 5.81% 7.50%
MSCI EAFE Index 1.35%  -1.43% 2.74% 9.23% 4.42% 5.38%

Calendar Year Returns1,2

  International Core Equity Gross International Core Equity Net MSCI EAFE Index
2017 24.30%  23.25%  25.03%
2016 2.57% 1.70% 1.00%
2015 0.25% -0.60% -0.81%
2014 2.46% 1.59% -4.90%
2013 26.30% 25.23% 22.78%
2012 14.91% 13.93% 17.32%
2011 -12.80% -13.54% -12.14%
2010 15.27% 14.30% 7.75%
2009 46.56% 45.32% 31.78%
2008 -40.50% -41.00% -43.38%

1International Core Equity composite is comprised of 3 accounts that had $7,941.4 million in total assets as of 9/30/18. • Returns reflect the reinvestment of all dividends and other earnings. Portfolio returns are net of all foreign reclaimable and nonreclaimable withholding taxes, if applicable. Withholding taxes are recognized on an accrual basis or cash basis depending on client and/or account type. Additional information regarding treatment of withholding taxes is available upon request. Returns shown gross of fees reflect the deduction of commissions paid, but are gross of all other expenses. Net-of-fees returns are calculated by deducting the highest applicable advisory fee from the monthly gross composite return. The actual fees paid by a client may vary based on assets under management and other factors. A client’s return will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Investment advisory fees are described in Part 2 of the ADV. Investment returns and the actual value of each client account will fluctuate, and at any given time an account could be worth more or less than the amount invested. • The benchmark selected for the composite is intended to provide a method to compare the composite’s performance to an index including securities that are generally similar to those that are included in the composite. However, composite holdings (and, accordingly, risk and volatility) may differ significantly from the securities tracked by its benchmark.

2MSCI EAFE is an unmanaged index comprised of securities that represent the securities markets in Europe, Australasia and the Far East. It is not possible to invest directly in an index. The MSCI information may only be used for your internal use, may not be reproduced or repurposed in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, salability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com) Source: MSCI.

3QTD return from July 1, 2018 through September 30, 2018.

Data as of 9/30/2018

10 Largest Holdings

as a % of total assets

Total SA (France) 2.54%
Orange SA (France)
2.41%
SAP SE (Germany)
2.20%
Nestle SA Regd (Switzerland) 2.08%
Roche Holdings AG, Genusscheine (Switzerland)
2.05%
Subaru Corp. (Japan) 1.99%
Isuzu Motors Ltd. (Japan)
1.99%
Airbus SE (France)
1.95%
Bayer AG (Germany) 1.81%
Danone SA (France) 1.80%

Country Allocation

as a % of equity assets

Japan 16.06%
United Kingdom
15.62%
France 13.71%
Switzerland 9.53%
Germany 8.60%
China 8.45%
Canada 3.76%
Netherlands 3.18%
Luxembourg
2.97%
Australia 2.81%
Hong Kong 2.49%
Sweden 1.48%
Ireland 1.47%
Korea 1.40%
Norway 1.22%
Spain 1.18%
Denmark 1.12%
Taiwan 1.07%
India  1.03%
United States  1.03%
Italy  0.96%
Brazil  0.87%

Sector Diversification

as a % of equity assets

Financials 16.51%
Industrials 14.31%
Consumer Staples 13.43%
Energy 11.96%
Consumer Discretionary 11.19%
Communication Services 9.90%
Information Technology
7.80%
Health Care 7.77%
Materials 6.60%
Real Estate  0.53%

Composite Composition1

Foreign Common Stock 96.66%
Domestic Common Stock  1.02%
Cash and Cash Equivalents 2.31%

Composite Total Assets1

Assets ($M) $7,941.4
Number of Accounts 3

Supplemental data: The International Core Equity holdings, sector diversification and country allocation data shown are 1 of the 3 composite accounts without client specific investment restrictions and may not be reflective of the International Core Equity composite as a whole or of any other International Core Equity account currently, or in the future, included in such composite. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

1International Core Equity composite is comprised of 3 accounts that had $7,941.4 million in total assets as of 9/30/18. • Returns reflect the reinvestment of all dividends and other earnings. Portfolio returns are net of all foreign reclaimable and nonreclaimable withholding taxes, if applicable. Withholding taxes are recognized on an accrual basis or cash basis depending on client and/or account type. Additional information regarding treatment of withholding taxes is available upon request. Returns shown gross of fees reflect the deduction of commissions paid, but are gross of all other expenses. Net-of-fees returns are calculated by deducting the highest applicable advisory fee from the monthly gross composite return. The actual fees paid by a client may vary based on assets under management and other factors. A client’s return will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Investment advisory fees are described in Part 2 of the ADV. Investment returns and the actual value of each client account will fluctuate, and at any given time an account could be worth more or less than the amount invested. • The benchmark selected for the composite is intended to provide a method to compare the composite’s performance to an index including securities that are generally similar to those that are included in the composite. However, composite holdings (and, accordingly, risk and volatility) may differ significantly from the securities tracked by its benchmark.

2MSCI EAFE is an unmanaged index comprised of securities that represent the securities markets in Europe, Australasia and the Far East. It is not possible to invest directly in an index. The MSCI information may only be used for your internal use, may not be reproduced or repurposed in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, salability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com) Source: MSCI.

3QTD return from July 1, 2018 through September 30, 2018.

As of 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.

Outlook

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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Key Features

Composite Performance History Since 1/1/2005 
Benchmark MSCI EAFE Index
Style Fundamental, Core: Growth and Value
Target Alpha Outperform the MSCI EAFE Index after expenses and fees over a full market cycle
Peer Universe EAFE Large Cap Core Equity
Typical Tracking Error 300-600 bps
Holdings Range Typically 60-80 positions. Holdings are generally 1-3% and limited to 5%.
Max Position Size 5%
Sector/Country

Directionally indicative ranges, based on weighting of sector or country.

20% Index weight - 0.5x to 1.5x weight
10% Index weight - 0.5x to 2.0x weight
5% Index weight - 0.0x to 3.0x weight

Emerging Markets Direct exposure up to 15%, generally 10% or less
Aggregate Risk Control Overlay Monitor cyclical vs. defensive sectors in relation to benchmark.
Currency Hedging Minimal and view incorporated in stock selection process. Currency hedging is typically initiated through foreign currency contracts for downside risk protection. 
Investment Vehicles Institutional Separate Account
Collective Investment Trust
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio