Large Cap Growth Fund

Transcription

1 Large Cap Growth Fund Quarterly Review James S. Golan, CFA, Partner David Ricci, CFA, Partner Portfolio Managers

2 William Blair Large Cap Growth Fund Important Disclosures Risks: The views expressed in this report and the information about the holdings are as of the date of this material, unless otherwise noted, and are subject to change. Information about the Fund s holdings should not be considered investment advice. There is no guarantee that the Fund will continue to hold any one particular security or stay invested in any one particular sector. Holdings are subject to change at any time. The Fund s returns will vary, and you could lose money by investing in the Fund. The Fund invests most of its assets in equity securities of large cap domestic growth companies where the primary risk is that the value of the equity securities it holds might decrease in response to the activities of those companies or market and economic conditions. Individual securities may not perform as expected or a strategy used by the Adviser may fail to produce its intended result. Different investment styles tend to shift in and out of favor depending on market conditions and investor sentiment, and at times when the investment style used by the Adviser for the Fund is out of favor, the Fund may underperform other equity funds that use different investment styles. The Fund invests most of its assets in equity securities of domestic growth companies, including common stocks and other forms of equity investments (e.g., convertible securities). Convertible securities are at risk of being called before intended, which may have an adverse effect on investment objectives. The Fund is not intended to be a complete investment program. The Fund is designed for long-term investors. Performance cited represents past performance. Past Performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate with market and economic conditions and you may have a gain or loss when you sell shares. For the most current month end performance information, please call , or visit our Web site at Class N shares are available to the general public without a sales load. Class I Shares are available only to investors who meet certain eligibility requirements. This content is for informational and educational purposes only and is not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor s objectives, guidelines and restrictions. Investing includes the risk of loss. Please carefully consider the Fund's investment objective, risks, charges, and expenses before investing. This and other information is contained in the Fund's prospectus, which you may obtain by calling Read it carefully before you invest or send money. Copyright 2018 William Blair & Company, L.L.C. William Blair is a registered trademark of William Blair & Company, L.L.C. Distributed by William Blair & Company, L.L.C., member FINRA/SIPC 2

3 William Blair Large Cap Growth Fund Summary & Outlook Market Review the quarter, and as more countries became involved, anxiety grew that tariffs could potentially escalate into a trade war. Strong second quarter performance across U.S. growth equity benchmarks placed U.S. growth equities among the strongest performing investment styles year-to-date. In contrast, first quarter returns were more muted. After robust market performance in January, inflationary fears arose causing market volatility to spike and most major equity benchmarks to retreat. While companies generally reported strong financial results for the prior quarter and economic data was mostly positive, trade tensions and building inflationary pressures weighed on returns for the duration of the first quarter. Fund Performance The William Blair Large Cap Growth Fund (Class N) outperformed its benchmark, the Russell 1000 Growth Index, in the quarter despite a strong return of 5.76% for the benchmark. Both style and stock selection contributed to the outperformance. From a style perspective, our higher valuation exposure, which is driven by our higher growth bias, was a tailwind. Pertaining to stocks, the top contributor was ABIOMED (Health Care) which develops, manufactures and markets advanced medical technologies designed to assist or replace the pumping function of a failing heart. The company reported strong results as its Impella heart pump is increasingly becoming the standard of care for acute heart failure patients. Online retailer Amazon.com (Consumer Discretionary) was also a top contributor. The company reported strong financial results that reflected accelerating trends across many of its business segments. Other top contributors in the quarter were UnitedHealth Group (Health Care), Intuit (Information Technology) and Mastercard (Information Technology). Conversely, the top detractor was coffee, food and beverage retailer Starbucks (Consumer Discretionary) which underperformed in part due to the release of continued sluggish U.S. prior quarter trends, but also in reaction to the company s pre-announcement of weaker-than-expected current quarter comps. Open source software solutions provider Red Hat (Information Technology) was also a top detractor. After recent strong relative performance, the company reported lower-thanexpected billings growth due to lower renewals of contracts from the company's largest customers and the stock came under In the second quarter, growth style indices were broadly positive and volatility moderated from elevated first quarter levels. Higher stock prices and declining volatility were supported by a healthy U.S. economy. Retail spending rebounded, housing starts increased and manufacturing activity remained robust despite an appreciating U.S. dollar. In addition, consumer and business confidence remained elevated. With unemployment reaching 3.8%, its lowest level since 2000, and core inflation just over 2%, the Federal Reserve announced its second rate increase of 2018 and communicated expectations for two more before year end. With a strong fundamental backdrop and a positive tax impact, U.S. corporations generally posted robust earnings growth. As a gauge, corporations in the S&P 500 Index reported first quarter earnings growth of approximately 25%, as compared to the same period in the prior year, with over 80% of companies in the Index topping investor expectations. However, aggregate forward P/E ratios contracted as investors appeared to be mindful of risks on the horizon. Notably, trade tensions between the U.S. and China were a focus for investors over the course of 3

4 William Blair Large Cap Growth Fund Summary & Outlook Outlook pressure. Other top detractors were Raytheon (Industrials), Progressive (Financials) and Estee Lauder (Consumer Staples). Additionally, not owning Apple (Information Technology), the largest position in the benchmark, was a detractor. Despite the Fed pursuing monetary tightening and the potential for a global trade war, optimism still persists across consumers, businesses and investors as we enter the tenth year of the current economic expansion. While rates still remain low relative to history, the Fed has telegraphed a path of increases and their ability to navigate the economy in the face of inflationary pressures from a potential trade war remains a risk. Further, continued uncertainty around the ultimate outcome of proposed tariffs could disrupt business planning and dampen overall productivity. However, the impact of fiscal stimulus in the form of lower corporate tax rates has largely overwhelmed trade concerns thus far. One early benefit of corporate tax reform in the U.S. has been an increase in capital expenditures, which in turn has the potential to boost productivity and create jobs longer term. In addition, the current administration has been aggressive in reducing regulation on businesses, which could be a continued tailwind for companies. For the year-to-date period ended June 30, 2018, the Large Cap Growth Fund (Class N) outperformed its benchmark,, the Russell 1000 Growth Index, driven by both positive stock selection and a style tailwind. Specific to stocks, stock selection was positive across many sectors, most notably Industrials, Information Technology and Consumer Discretionary. The top contributor for the period, for reasons cited above and similar strong results reported in the first quarter, was online retailer Amazon.com (Consumer Discretionary). Digital marketing and media solutions provider Adobe Systems (Information Technology) was also top contributor. The company reported earnings and revenue growth that exceeded expectations in the first and second quarter and the stock outperformed. Other top contributors were Mastercard (Information Technology), Netflix (Consumer Discretionary) and Intuit (Information Technology). Conversely, top detractors were Monster Beverage (Consumer Staples) and Starbucks (Consumer Discretionary). Energy drink company Monster Beverage reported sales growth and earnings in the first quarter that missed expectations, as its international distributors reduced inventory. Shares of Starbucks underperformed for reasons cited above. Other top detractors were Affiliated Managers Group (Financials), Biogen (Health Care) and PPG Industries (Materials). From a style perspective, as investors became more focused on the potential implications of inflation-related cost pressures on businesses, our higher and more sustainable growth bias, which leads us to companies with value-added products and services and flexible pricing, was a tailwind. It remains to be seen how long the expansion can persist given the unprecedented fiscal stimulus at this point of the economic cycle. Broadly speaking, corporate earnings trends and forward looking guidance are reflective of the strong economy. But to the extent that rising wages, raw materials prices and freight costs begin to compress margins for the average company, we believe the companies in our Fund, which generally offer strong value propositions to their customers and have more pricing flexibility, are better positioned to withstand these pressures. Our focus remains on identifying companies with durable growth drivers, independent of the economic backdrop, whose stocks present compelling risk/reward opportunities. 4

5 Market Performance Month to Date Russell 3000 Russell 1000 Russell Midcap Russell 2500 Russell 2000 Quarter to Date Russell 3000 Russell 1000 Russell Midcap Russell 2500 Russell 2000 Year to Date Russell 3000 Russell 1000 Russell Midcap Russell 2500 Russell 2000 Value Core Growth Market Performance Although peak earnings and economic growth concerns remain, corporate earnings continued to be generally stronger than expected, helping drive the U.S. equity market higher in the second quarter. While the fundamental backdrop in the U.S. remains positive and inflation remains moderate, there are a number of risks on the horizon. Global market risks include the potential for a global trade war, geopolitical tensions and emerging market turmoil; all of which could contribute to a possible slowdown in global growth. Style Performance Growth benchmarks generally outperformed value benchmarks in June; the lone exception was mid caps where value outperformed growth. While value outperformed growth during the quarter in the smaller cap segments of the market, growth maintained a sizable lead over value across the cap spectrum year-to-date. Market Cap Performance With the exception of mid cap outperformance in June, smaller caps outperformed larger caps within the value benchmarks in all three periods; the performance was linear for the quarter and year-to-date periods. Within the growth benchmarks, large caps narrowly outperformed smaller caps in June while smaller caps outperformed larger caps for the quarter and year-to-date periods. Mid caps trailed in all three periods. Source: FactSet; Eagle Past Performance is not a guarantee of future results. A direct investment is an index is not possible. The Russell 3000 Index measures the performance of the all-cap segment of the U.S. equity universe. The Russell 1000 Index measures the performance of the largecap segment of the U.S. equity universe. It includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell Midcap Index measures the performance of the mid cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index based on a combination of their market cap and current index membership. The Russell 2500 Index measures the performance of the small to mid-cap segment of the U.S. equity universe. It includes approximately 2500 of the smallest securities in the Russell 3000 Index based on a combination of their market cap and current index membership. The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest securities in the Russell 3000 Index based on a combination of their market cap and current index membership. Core returns represent the Total Return indices. The value segments of these indices include companies with lower price-to-book ratios and lower forecasted growth values. The growth segments of these indices include companies with higher price-to-book ratios and higher forecasted growth values. 5

6 Market Performance Russell 1000 Growth Total Return Q Consumer Discretionary 9.64 Consumer Staples 0.61 Energy 9.64 Financials Health Care Industrials Information Technology 8.60 Materials 2.93 Real Estate 5.06 Telecom 3.68 Utilities 1.70 Data calculated in Opturo. Past returns are no guarantee of future performance. A direct investment in an index is not possible. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. 6

7 William Blair Large Cap Growth Fund Performance Periods ended 6/30/2018 Quarter YTD 1 Year 3 Year 5 Year 10 Year Large Cap Growth Fund (LCGNX) Class N 6.39% 12.28% 30.77% 14.90% 17.40% 11.18% Large Cap Growth Fund (LCGFX) Class I 6.44% 12.38% 31.02% 15.17% 17.69% 11.46% Russell 1000 Growth 5.76% 7.25% 22.51% 14.98% 16.36% 11.83% Inception 12/27/1999 Performance cited represents past performance. Past Performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate with market and economic conditions and you may have a gain or loss when you sell shares. For the most current month end performance information, please call , or visit our Web site at Class N shares are available to the general public without a sales load. Class I Shares are available only to investors who meet certain eligibility requirements. William Blair Large Cap Growth Fund Expense Ratios: Gross Class N Shares Class I Shares Net 1.19% 1.05% 0.90% 0.80% The Fund s Adviser has contractually agreed to waive fees and/or reimburse expenses to limit fund operating expenses until 4/30/19. Expenses shown are as of the most recent prospectus. A direct investment in an index is not possible. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher priceto-book ratios and higher forecasted growth values. 7

8 William Blair Large Cap Growth Fund Analysis The charts below show the average sector weights and relative performance, by sector, for the Fund vs. its benchmark. Q Average Weights Telecom Utilities Cash Health Care 0.51 Industrials Information Technology Real Estate Financials Industrials Energy Health Care Materials Consumer Staples Consumer Staples Financials Consumer Discretionary Consumer Discretionary Energy Q Relative Performance 0.67 Information Technology 0.28 Materials Real Estate LARGE CAP GROWTH FUND Telecom Russell 1000 Growth 0.02 Utilities Cash Source: Opturo. Past returns are no guarantee of future results. Based on Global Industry Classification Sectors (GICS). Concentration of assets in one or a few sectors may entail greater risk than a fully diversified stock portfolio and should be considered as only part of a diversified portfolio. 8

9 William Blair Large Cap Growth Fund Top 5 Contributors to Return ABIOMED, Inc. (ABMD) develops, manufactures and markets advanced medical technologies designed to assist or replace the pumping function of a failing heart. ABIOMED reported strong results during the quarter in support of our thesis that Impella, the world s smallest heart pump, will become the standard of care in the markets it serves. In the U.S., Impella patient utilization was strong with 35% sales growth in the quarter, while our thesis that Impella will be adopted globally was supported by 107% non-u.s. sales growth in the quarter. We initiated a position during the quarter. We believe ABIOMED s heart pump will become the standard of care in high risk PCI and cardiogenic shock settings. Further, expansion into additional indications and increased penetration globally should support many years of double-digit revenue growth. Amazon.com Inc. (AMZN) operates the internet's leading e-commerce website and a cloud computing business, Amazon Web Services (AWS). Outperformance was due in part to Amazon.com reporting strong financial results that reflected accelerating trends across its business segments, including overall quarterly sales growth of 43% year-over-year in addition to margin improvement. In addition, Amazon.com s high margin advertising business exhibited fast growth and represents a potentially significant incremental source of profits. We maintained our position and continue to believe in Amazon.com's long runway for growth as they continue to expand into new categories. Intuit (INTU) is a leading provider of software for tax preparation, personal finance and small business management, with applications such as TurboTax and QuickBooks. As tax season ended in April, Intuit raised 2018 guidance amidst strength in its Consumer segment due to market share gains with do-it-yourself tax fillers and an increase in average revenue per filing (ARPU). The increase in ARPU was driven by TurboTax Live which is a newly offered service where, for an added fee, tax fillers have on-demand access from their computer to a tax professional to help them complete their taxes. We maintained our position in the stock. We believe the company has multiple compelling growth opportunities, is well managed and less sensitive to economic factors relative to many other technology companies. UnitedHealth Group (UNH) provides health care coverage, software and data consultancy services. The company operates in two primary business platforms: UnitedHealthcare, which offers health care insurance to an array of customers and markets, and Optum, a healthcare services business. UnitedHealth reported continued strong business momentum as both revenue and earnings for the prior quarter were above consensus estimates. Also, fear that regulation could potentially hurt the company s pharmacy benefit manager business subsided, and incremental commentary from health care professionals continues to show that UnitedHealth is well positioned in the industry. We maintained our position. Mastercard (MA) is a technology-driven global payments company. The company reported revenue and earnings that were ahead of expectations and also raised forward-looking guidance for the full year given strong underlying business momentum. Key drivers of recent results include purchase volume growth and cross border revenue growth, both of which accelerated in the quarter. We trimmed our position on strength, but continue to believe the business is structurally advantaged and should benefit from the secular tailwind of the global shift to electronic payments from cash and check-based transactions. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed. Specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and you should not assume that investments in the securities identified and discussed were or will be profitable. 9

10 William Blair Large Cap Growth Fund Largest 5 Detractors From Return Starbucks Corp. (SBUX) offers rich-brewed coffee, beverages, food items, premium teas, as well as beverage related accessories and equipment through an extensive network of company operated and licensed retail stores worldwide. Shares underperformed during the second quarter, in part due to the release of continued sluggish U.S. prior quarter trends, but also in reaction to the company s pre-announcement of weaker-than-expected current quarter comps. In particular, investors were surprised by comps in China that were flat to down slightly. The latter was a result of the Chinese government curtailing the use of unaffiliated third-party delivery services, which Starbucks had relied on to deliver its drinks to customers, but also new lower-priced local competition emphasizing their own delivery. Starbucks expects to have an official delivery partner in China by fiscal year end, which is important given the rapid adoption of delivery in key markets. Also in the quarter, Starbucks experienced senior leadership changes including Executive Chairman Howard Schultz, who stepped down as anticipated, and the retirement of the CFO. We trimmed our position and are closely re-examining our fundamental outlook for China given the importance of that market in the company s ability to achieve above-average long term revenue and earnings growth. Red Hat (RHT) provides open source software solutions designed to provide high-performing, scalable, flexible, reliable, secure and stable technologies that meet the information technology (IT) infrastructure needs of its enterprise customers. The stock came under pressure after the company reported lower-thanexpected billings growth due to lower renewals of contracts from the company s largest customers. Many of these large customers renewed their contracts earlier than expected last year to take advantage of new products that Red Hat began offering in Hence, renewal opportunities for 2018 have diminished. We view lower renewal opportunities as a near-term headwind as demand still appears to be robust for Red Hat s products. We trimmed our position prior to the company reporting results in the quarter due to strong relative performance over the last year. Over the long term, we maintain our belief that Red Hat, with its industry leading position, will continue to be a beneficiary of the massive shift in enterprise IT architectures to Linux-based operating systems, around which Red Hat provides enterprise quality support, services and other cloud-based products. Raytheon (RTN) is one of the largest U.S.-based defense contractors. The company focuses on missiles, missile defense, radar, surveillance, cyber security and other technology focused end-markets for the defense industry. Despite reporting business results which beat consensus expectations for the first quarter and raising guidance for the remainder of the year, Raytheon underperformed, along with other defense contractors, due to decreasing tensions on the Korean Peninsula which some have speculated will decrease demand for defense markets. We added to our position on the weakness and continue to believe Raytheon, with its less cyclical and diversified revenue streams, is better positioned for sustainable growth relative to its industry and Industrial sector peers. Progressive (PGR) is one of the largest property and casualty insurers in the U.S. The company is primarily a provider of personal and commercial auto insurance and residential property insurance. Despite strong underlying trends in premium growth (i.e. growth in the amount collected from policy holders) and underwriting margins, the stock underperformed in the quarter. Investors appear to be concerned that recent improved profitability in the industry will lead to increased price competition in the future. We trimmed our position in reflection of anticipated moderating industry tailwinds, but we continue to believe that Progressive can gain market share in monoline automotive and that a move into bundled home and automotive insurance will continue to drive long term growth. Estee Lauder (EL) is a leader in the prestige beauty market that manufactures and sells premium beauty products in more than 150 countries across a variety of channels including department stores, specialty retailers, salons, travel retail and ecommerce. The stock has materially outperformed over the last year due to strong fundamentals and business momentum but, a combination high valuation relative to history and lofty expectations going into the quarter which were only met and not exceeded caused the stock to underperform. We trimmed our position early in the quarter due to strong performance, but continue to have confidence that management has positioned the company for success with its prestige beauty focus within higher growth channels. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed. Specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and you should not assume that investments in the securities identified and discussed were or will be profitable. 10

11 William Blair Large Cap Growth Fund Positioning Top 10 Holdings by Weight Large Cap Growth Fund % in Fund Microsoft Corp Amazon.com Inc Alphabet Inc UnitedHealth Group Inc Facebook Inc-A Zoetis Inc Accenture Plc-Cl A Mastercard Inc - A Texas Instruments Inc Adobe Systems Inc Total: Russell 1000 Growth % in Index Source: Eagle. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. William Blair may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. Holdings are shown as a percentage of total gross assets. 11

12 William Blair Large Cap Growth Fund Characteristics Growth EPS Growth Rate (LT forecast)* Quality Return on Assets (5-year average) Free Cash Flow Margin Debt to Total Capital Valuation PE Ratio (1 year forecast) Capitalization ($M) Weighted Average Market Cap Weighted Median Market Cap Portfolio Positions Number of Securities Cash % Cash in Portfolio Active Share % Active Share Large Cap Growth Fund Russell 1000 Growth 19.1% 17.6% 9.9% 16.0% 39.8% 9.6% 14.1% 45.9% 25.8x 20.7x $257,787 $107,926 $274,668 $107, % 0.0% 67% Source: William Blair; FactSet; Eagle. *This measure represents the weighted average of forecasted growth in earnings expected to be experienced by stocks within the portfolio over the next 3-5 years. This projected earnings growth should not be considered an indication of future performance. From a portfolio perspective, the portfolio P/E ratio and EPS Growth Rate are weighted averages of the individual holdings' P/E ratios and EPS Growth Rates. 12

13 William Blair Large Cap Growth Fund Positioning Sector Weights as of 6/30/ Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecom 0.15 Utilities Cash LARGE CAP GROWTH FUND Russell 1000 Growth 1.02 Source: William Blair; Eagle Based on Global Industry Classification Sectors (GICS). Concentration of assets in one or a few sectors may entail greater risk than a fully diversified stock portfolio and should be considered as only part of a diversified portfolio. 13

14 William Blair Large Cap Growth Fund Holdings Portfolio Benchmark Weight Weight CONSUMER DISCRETIONARY Amazon.Com Inc Live Nation Entertainment In Mcdonald's Corp Starbucks Corp Netflix Inc CONSUMER STAPLES Monster Beverage Corp Coca-Cola Co/The Estee Lauder Companies-Cl A ENERGY Eog Resources Inc FINANCIALS Progressive Corp Intercontinental Exchange In HEALTH CARE Unitedhealth Group Inc Zoetis Inc Stryker Corp Abiomed Inc Biogen Inc Danaher Corp INDUSTRIALS Verisk Analytics Inc Raytheon Company Copart Inc Fortive Corp Transdigm Group Inc Portfolio Benchmark Weight Weight INFORMATION TECHNOLOGY Microsoft Corp Alphabet Inc-Cl A Facebook Inc-A Accenture Plc-Cl A Mastercard Inc - A Texas Instruments Inc Adobe Systems Inc Intuit Inc Alphabet Inc-Cl C Red Hat Inc Paypal Holdings Inc MATERIALS Praxair Inc Ppg Industries Inc REAL ESTATE Sba Communications Corp Cash Total As of 6/30/2018. Individual securities listed in this report are for informational purposes only. There is no guarantee that the Fund will continue to hold any one particular security or stay invested in any one particular sector. Holdings are subject to change at any time. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed. 14

15 Glossary - Terms Alpha: A measure of a portfolio s return in excess of the market return, after both have been adjusted for risk. It is a mathematical estimate of the amount of return expected from a portfolio above and beyond the market return at any point in time. For example, an alpha of 1.25 indicates that a stock is projected to rise 1.25% in price in a year over the return of the market, or the return when the market return is zero. When an investment price is low relative to its alpha, it is undervalued, and considered a good selection. Beta: A quantitative measure of the volatility of the portfolio relative to the overall market, represented by a comparable benchmark. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile, and could be expected to rise and fall more slowly than the market. Developed Markets: Using the Morgan Stanley Capital International (MSCI) geographic definition, this region includes: United Kingdom, Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Spain, Sweden and Switzerland), Japan, Pacific Asia (Australia, Hong Kong, New Zealand, and Singapore) and the Western Hemisphere (Canada and other Americas). Debt to Total Capital Ratio: This figure is the percentage of each company s invested capital that consists of debt. Companies with a high Debt to Total Capital level may be considered more risky. From a portfolio perspective, the portfolio Debt to Total Capital Ratio is a weighted average of the individual holdings' Debt to Total Capital Ratio. Emerging Markets: Using MSCI s geographic definition, this region includes: Emerging Markets Asia (China, India, Indonesia, Malaysia, S Korea, Taiwan, and Thailand), Emerging Markets Europe, Mid-East and Africa (Czech Republic, Hungary, Poland, Russia, Turkey, Egypt, Morocco, and S Africa), and Latin America (Argentina, Brazil, Chile, Columbia, Mexico, Peru and Venezuela). EPS (Earnings Per Share) Growth Rate (Projected): This measure represents the weighted average of forecasted growth in earnings expected to be experienced by the stocks within the portfolio over the next 3-5 years. From a portfolio perspective, the portfolio P/E ratio and EPS Growth Rate are weighted averages of the individual holdings P/E ratios and EPS Growth Rates. Data calculated in FactSet. EV/EBITDA: (Enterprise Value / Earnings Before Interest, Taxes and Depreciation-Amortization): The EV/EBITDA ratio is useful for global comparisons because it ignores the distorting effects of individual countries' taxation policies. It's used to find attractive takeover candidates. Enterprise value is a better measure than market cap for takeovers because it takes into account the debt which the acquirer will have to assume. Therefore, a company with a low EV/EBITDA ratio can be viewed as a good takeover candidate. EV/IC: (Enterprise Value / Invested Capital) Ratio: Enterprise Value (EV), which is market capitalization minus cash plus debt divided by Invested Capital (IC), which is the sum of common stock, preferred stock and long-term debt. This number will get you a simple multiple. If it is below 1.0, then it means that the company is selling below book value and theoretically below its liquidation value. Information Coefficient: A measure of the correlation between expected and actual returns. Information Ratio: A measure of risk-adjusted return. The annualized excess return of the portfolio relative to a respective benchmark, divided by the annualized tracking error relative to that same benchmark. The higher the measure, the higher the risk-adjusted return. PBV: (Price/Book Value) Ratio: The PBV Ratio measures the value of a company's common stock relative to its shareholder's equity. A price-to-book multiple above one means that the price of the company's common stock is higher than its common shareholder's equity. A price-to-book multiple below one means that the price of the company's common stock are less than its break-up value, and the shares may be undervalued. PCF: (Price/CashFlow): Some analysts favor the price/cash flow over the price-earnings (PE) ratio as a measure of a company s value. Cash flow is a measure of a company's financial health. It equals cash receipts minus cash payments over a given period of time. 15

16 Glossary - Terms P/E: (Price/Earnings) Ratio: This is the most common measure of how expensive a stock is. Simply, it is the cost an investor in a given stock must pay per dollar of current annual earnings. A high P/E generally indicates that the market is paying more to obtain the stock because it has confidence in the company s ability to increase its earnings. Conversely, a low P/E often indicates that the market has less confidence that the company s earnings will increase rapidly or steadily, and therefore will not pay as much for its stock. R-squared: A measurement of how closely the portfolio s performance correlates with the performance of its benchmark, such as the MSC AC World Free ex US Index. In other words, it is a measurement of what portion of a portfolio s performance can be explained by the performance of the overall market or index. Ranges from 0 to 1, where 0 indicates no correlation and 1 indicates perfect correlation. Risk (Standard Deviation): A measure of the portfolio s risk. A higher standard deviation represents a greater dispersion of returns, and thus a greater amount of risk. The annualized standard deviation is calculated using monthly returns. Sharpe-Ratio: A risk-adjusted measure calculated using standard deviation and excess return (Portfolio return Risk Free Rate) to determine reward per unit of risk. The higher the Sharpe ratio, the better the portfolio s historic risk-adjusted performance. Tracking Error: Tracking Error measures the extent to which a portfolio tracks its benchmark. The tracking error of an index portfolio should be lower than that of an active portfolio. The tracking error will always be greater than zero if the portfolio is anything other than a replication of the benchmark. Trailing 1-Year Turnover: This figure reflects the portfolio s trading activity by calculating the amount of the portfolio s holdings bought or sold over the prior year, expressed as a percentage of the portfolio s average market value. Turnover figures may be related to the amount of trading costs experienced by the portfolio. Weighted Average Market Capitalization: Market capitalization refers to the total market value of each company's outstanding shares. The Weighted Average Market Capitalization for a portfolio is calculated as the average market capitalization of the stocks within the portfolio, weighted by the amount of each stock owned. Weighted Median Market Capitalization: This calculation represents the median market capitalization of the stocks in the portfolio, weighted by the amount of each stock owned. 16