Manager Commentary

As of March 31, 2012

How did the Fund perform for the period?
For the three-month period ended March 31, 2012, the Individual Investor Class and Institutional Class of the Fund had total returns of 10.84% and 10.80%, respectively, vs. 10.86% for the MSCI EAFE (Net) Index.¹

What factors contributed to the Fund’s performance?
First quarter international markets were ebullient, as European sovereign fears dissipated thanks to the European Central Bank (ECB), which quite unexpectedly and very successfully introduced the Long-Term Refinancing Operation (LTRO) program. Similar to what the Federal Reserve Bank (Fed) did during the U.S. credit crisis, this ECB initiative significantly reduced the risk of systemic bank failure by flooding the European markets with liquidity. The LTRO allowed banks to engage in a very attractive carry trade of borrowing from the ECB at low rates and purchasing high-yield sovereign debt.  With this move, the ECB resolved the European credit market freeze-up and the sovereign liquidity crisis, at least in the near term. This led to a reversal of the “fear trade” that characterized international markets in 2011. Early in the quarter, investors moved back into attractively valued equities with solid fundamentals that had been marked down indiscriminately by last year’s market decline. In the second half of the quarter, the rally broadened, boosted by improving economic indicators such as global industrial production and U.S. unemployment. Volatility continued as optimism on Europe was offset by fears elsewhere. In China, for example, an economic slowdown triggered by the deflating property market bubble brought on investor concerns regarding the changing composition of China’s economy, relying less on investment and exports and more on domestic consumption. North African and Middle Eastern geopolitical risks also remained at the forefront of investors’ minds.

From a sector perspective, the biggest beneficiaries of the reversal in investor sentiment and improving economic outlook were financials and consumer discretionary. Meanwhile, energy stocks lagged due to already high oil price assumptions along with fears of a slowing growth in China. Telecommunications stocks simply lost investor interest given their high-yield, defensive nature. On a regional basis, emerging markets were the largest beneficiary of the rally, since they were the hardest hit last year despite solid fundamentals. Meanwhile, UK market returns lagged as investors unwound some of their safe haven allocations from 2011. Currencies were also a significant contributor to market returns during the period: the Euro, British pound, and Swiss franc all appreciated 2.9%-4.0% versus the U.S. dollar. Some emerging currencies hard hit in 2011 reversed course with sizeable returns.  Included in this lot were the Turkish lira, up 6.08%, and the Polish zloty, up 10.71% during the quarter. The yen was the only large global currency to depreciate against the U.S. dollar, losing 7.19% of its value during the quarter.

With this market backdrop, the International Fund participated in the first quarter rally and delivered close-to-market returns. The Fund benefited most from regional allocation decisions, particularly from the Fund’s large (10.11%) exposure to outperforming emerging markets and underexposure to the underperforming UK market. However, the Fund lost ground from sector allocation decisions, mostly from an underweight to outperforming financials and an overweight to underperforming energy. Stock selection was a positive contributor to performance across most sectors with the exception of information technology and consumer discretionary. Stock selection in the financials sector was the largest positive contributor to performance, and more than compensated for the underweight in that sector. From a regional standpoint, stock selection was a detractor from performance in Japan and Europe and a positive contributor in the UK and Australasia.

Can you discuss any significant changes in the Fund’s positioning throughout the period?
There were no significant sector allocation changes in the portfolio during the quarter.  From a regional perspective, we reduced the underweight to the UK with the addition of Vodafone Group PLC, ADR and also added to existing positions to take advantage of lagging UK market performance. This came at the expense of Japan, Europe and Australasia. The portfolio remains overweight in energy, industrials, telecommunications, information technology, emerging markets, and Canada, and remains underweight in financials, consumer discretionary, health care, utilities, Japan, the UK, Australia and Europe.  

During the quarter, the Fund purchased new positions in Japanese Software company Trend Micro, Inc., Swiss industrials company ABB, Ltd., ADR, Spanish and Latin American Company Telefonica SA, UK Telecom Vodafone Group PLC, ADR and a silver exchange traded fund (ETF) iShares Silver Trust. The Fund liquidated positions in Japanese glass producer Nippon Electric Glass Co., Ltd., Dutch telecommunication company Koninklijke KPN NV and Hong Kong property developer Sun Hung Kai Properties, Ltd. 

Which stocks contributed positively to performance?
The largest contributors to performance during the period included Turkish bank Turkiye Halk Bankasi AS, German auto manufacturer BMW AG, UK smart metering company Spectris PLC, Singapore bank DBS Group Holdings, Ltd. and Japanese construction and mining equipment company Komatsu, Ltd. These holdings appreciated between 25%-45% in value and represented sizeable positions in the Fund.  

Which stocks detracted from performance?
The largest detractors from performance during the period included Spanish integrated oil producer Repsol YPF SA, Japanese personal goods manufacturer Kao Corp., Spanish telecommunications company Telefonica SA and Japanese pharmaceutical Eisai Co., Ltd. These sizeable holdings in the portfolio lost between 1% to 17% of their market value during the quarter. UK used and new gaming retailer Game Group PLC was also a significant detractor despite the fact that it is a very small holding, as the entire equity value of the company was wiped out when it went into bankruptcy proceedings during the quarter due to very poor UK market conditions.

What is your market outlook, particularly with respect to how it will impact your Fund?
We are encouraged by monetary and fiscal policy moves in Europe and by improving economic fundamentals in the United States, some of the emerging markets and parts of Europe.  However, we expect market volatility to continue, driven by uncertainty over longer term sovereign credit concerns, as well as by the paradox of expansionary monetary policy combined with contractionary fiscal policies in many regions. It appears that investors have come to terms with some of the more dire scenarios still possible in Europe. Therefore, we feel it is quite likely that we will  see a shift in investor focus to other geopolitical areas of concern outside of Europe.  

These concerns include:

• U.S. elections and campaign rhetoric, particularly related to trade                isolationism, fiscal austerity and military intervention
• Continuation of populist uprisings around the world without obvious                 near term solutions for sources of discontent
• Iran: new threat of military entanglement and oil supply shocks
• Implications of China shifting growth focus from investment to                 consumption: lower sustained growth

Nevertheless, economic recovery in the aftermath of the global financial crisis appears to continue in regions with low levels of government and private sector debt, particularly in emerging market economies. This should serve as a buoy for global investor sentiment.
                             
We expect continued volatility in the currency markets, with sovereign fears favoring liquidity, of which the U.S. dollar is the primary beneficiary, and a relief of those fears favoring growth and commodity currencies.

In this volatile and increasingly regionally-differentiated market environment, the International Fund continues to focus on investing the portfolio in regions and sectors where we see high sustainable growth potential or where that growth is underestimated by current market conditions.    

For this reason we maintain a large weight in those emerging markets where we expect growth to surprise investors on the upside and outpace that of developed markets.  We continue to favor Turkey, where we feel valuation and growth remain attractive and sovereign risk is still overestimated. We also continue to favor Brazil, where we feel resilient economic fundamentals will lead to upside growth surprise.  The Fund’s large allocation to emerging markets has come at the expense of under-exposure to other developed markets, where we believe deleveraging and austerity programs will yield slow growth for the next several years, even though these same programs will make those markets more resilient over the long term.  

 From the sector perspective, we maintain an overweight position in energy, which benefits from continued emerging market demand growth. Likewise, the Fund is overweight telecommunications and information technology relative to the benchmark; we believe that these sectors will outperform due to their very strong and sustainable cash flows. We maintain an underweight to the financials sector, focusing on sustainably growing institutions with high capital ratios, but avoiding large parts of the sector that face sizeable unresolved balance sheet issues and the implementation of a much more restrictive regulatory environment.  We also maintain a sizeable underweight to the consumer discretionary sector, which continues to suffer disproportionately from imposed fiscal austerity.  

We maintain our quality focus in the portfolio by investing in companies across all sectors and regions that have more sustainable growth and return potential, better cash flows, higher dividend yields and stronger balance sheets than their peers.

Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Emerging market and international investments involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, economic or political instability in other nations or increased volatility and lower trading volume. Derivatives involve special risks and may result in losses.

Portfolio holdings as of 03/31/12: Vodafone Group PLC, ADR (1.0%), Trend Micro, Inc. (0.9%), ABB Ltd., ADR (1.7%), Telefonica SA (1.5%),  iShares Silver Trust (0.5%), Turkiye Halk-Bankasi AS (2.3%), BMW AG (1.7%), Spectris PLC (1.0%), DBS Group Holdings, Ltd. (1.7%), Komatsu, Ltd. (2.0%), Repsol YPF SA (2.5%), Kao Corp. (1.6%), Eisai Co., Ltd. (1.6%), Game Group PLC (0.1%). The following companies were not held by the fund as of 03/31/12: Nippon Electric Glass Co., Ltd., Koninklijke KPN NV and Sun Hung Kai Properties, Ltd. Holdings are subject to change. 

An investment in the Fund involves risk, including loss of principle. Foreign investing involves special risks such as currency fluctuations and political uncertainty. Performance data quoted represents past performance, which does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain performance for the most recent quarter- and month-end, click here.

As of 12/31/11, total annual International Fund operating expenses, gross of any fee waivers or reimbursements, are 1.95% for the Individual Class shares and 1.70% for the Institutional Class shares. Total International Fund operating expenses, net of fee waivers, reimbursements and acquired fund fees and expenses, are 1.40% for the Individual Class shares and 1.15% for the Institutional Class Shares. The International Fund’s investment adviser has contractually agreed to reimburse expenses (excluding Acquired Fund Fees and Expenses) allocable to Individual Class shares of the International Fund to the extent such expenses exceed 1.40% of the average daily net assets of Individual Investor Class shares and 1.15% of the Institutional Class shares. This reimbursement arrangement will remain in effect through at least December 31, 2015.

¹The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of July 2010 the MSCI EAFE Index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Performance for the MSCI EAFE Index is shown “net”, which includes dividend reinvestments after deduction of foreign withholding tax. Investors cannot invest directly in any index.

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