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. He is a CFA charterholder.

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, Minn.

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 6/30/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
International Core Equity - Gross -1.27%  -2.17% 5.95% 5.04% 8.93% 5.90%
International Core Equity - Net -1.48%  -2.59% 5.06% 4.15% 8.01% 5.01%
MSCI EAFE Index -1.24%  -2.75% 6.84% 4.90% 6.44% 2.84%

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 $8,155.0 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

Data as of 6/30/2018

10 Largest Holdings

as a % of total assets

Total SA (France) 3.63%
Koninklijke Ahold Delhaize NV (Netherlands)
2.50%
Orange SA (France)
2.30%
SAP SE (Germany) 2.00%
Bayer AG (Germany)
1.93%
Danone SA (France)
1.90%
Isuzu Motors Ltd. (Japan)
1.83%
Roche Holdings AG, Genusscheine (Switzerland)
1.82%
Airbus SE (France)
1.80%
Ferguson plc (Switzerland) 1.70%

Country Allocation

as a % of equity assets

France 15.12%
United Kingdom
14.78%
Japan 14.27%
China 9.33%
Germany 8.56%
Switzerland 7.79%
Canada 5.73%
Netherlands 4.48%
Australia 3.64%
Luxembourg 2.47%
Brazil 2.20%
Ireland 1.69%
Hong Kong 1.56%
Sweden 1.51%
Norway 1.34%
Korea 1.23%
Taiwan 1.18%
Spain 1.10%
Italy  1.07%
Denmark  0.94%

Sector Diversification

as a % of equity assets

Financials 16.95%
Industrials 15.30%
Consumer Staples 14.59%
Energy 13.49%
Information Technology 9.69%
Telecommunication Services 8.19%
Consumer Discretionary 7.42%
Materials 7.31%
Health Care 6.67%
Real Estate  0.38%

Composite Composition1

Foreign Common Stock 96.32%
Cash and Cash Equivalents 3.68%

Composite Total Assets1

Assets ($M) $8,155.0
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 $8,155.0 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

As of 6/30/2018

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

Market Update

Broad international markets were down slightly more than 1% (in U.S. dollars) over the quarter. In local currency, broad international markets were up slightly more than 3%, though the appreciation of the U.S. dollar more than offset those gains. The relative health of the U.S. economy drove the currency strength, as U.S. economic data generally exceeded expectations. On the other hand, economic data out of Japan and Europe was generally weaker than expected, while Chinese economic strength materially deteriorated in June.

Geopolitical threats and concerns heavily influenced stock performance during the quarter, with none more significant than the ongoing trade war concerns initiated by the Trump Administration, particularly with China. There is no doubt the U.S. wants serious and material concessions. While an all-out trade war remains unlikely, we believe achieving concessions will require economic pain, posturing and time.

We believe local country nationalism in the European Union remains concerning. For instance, the new Italian government is headed by a coalition of two parties that are Euro-skeptics, an environment that could induce increased instability to the region. Additionally, the lingering uncertainty on the future of the Korean peninsula remains a significant risk, including for China-U.S. tariff discussions. Significant tensions on several fronts also continue in the Middle East, with the U.S. re-imposing sanctions on Iran on May 8. In aggregate, we feel these geopolitical threats are only somewhat priced into the markets.

As anticipated, the U.S. Federal Reserve (Fed) raised rates in June and we expect two additional rate increases in 2018. U.S. wage inflation has held steady around 2.75%, somewhat assuaging the inflation fears that hurt performance in the first quarter. In other regions, rate policies remain mixed. We expect the U.K. to increase rates, China to continue deleveraging (albeit likely at a slower pace than previously expected), and the Bank of Japan as well as the European Central Bank are likely to continue tapering through year end with a long glide path to normalizing short-term rates. Overall, we anticipate less inflation in most developed international markets relative to the U.S.

Portfolio Review

The Portfolio performed in line with the benchmark for the quarter, with sector allocation driving relative performance. The Portfolio’s large overweight to the strong-performing energy sector as well as an underweight allocation to the poor-performing financials sector drove relative gains.

Stock selection was a detractor to performance and was driven by Japanese cyclicals and the Portfolio’s exposure to emerging-market holdings. Both of these allocations are highly correlated with global growth, and a slightly deteriorating economic backdrop and trade war rhetoric hurt their performance.

During the quarter, the Portfolio maintained an overweight allocation to defensive sectors relative to the index given increased volatility and strong cyclical performance over the last two years. The Portfolio maintains strong overweights to energy and telecommunications, with our largest underweights to health care and consumer discretionary.

At quarter end, the Portfolio had no active currencies hedges and remained fully invested, with cash about 3% of the Portfolio.

Outlook

Despite perceived risks to equity markets, we continue to believe global economic growth is solid today, supported by monetary and fiscal policy. In addition, we believe corporate tax relief in a number of countries (the U.S., France and Japan) as well as infrastructure spending should help support the current market cycle. That said, the current economic cycle is in its 10th year – long by any standard. 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 a downturn. If the trade war escalates and becomes irreversible, it would likely end the current cycle and be a detriment for equities.

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, we believe 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 reversing of negative interest rate policy globally.

We believe relative valuation remains supportive for international equities, while absolute valuations are less attractive. We see relative value opportunities in emerging markets (especially China), energy/off-cycle commodity plays, companies linked to internet expansion 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 June 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