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Energy and Transportation Drive Gains

Posted July 21, 2014

Global markets in the second quarter shrugged off turmoil in the Middle East, and ever-present political gridlock in the United States, setting record after record on many major indexes. Corporations seem to share investors’ bullish view of an improving global economy, announcing $774 billion worth of merger and acquisition (M&A) activity globally in the quarter.

The Fund was well positioned to benefit from these conditions, outperforming its U.S. and international benchmarks in the second quarter, the S&P 500 Index and MSCI World Index, respectively. Our positions in Canadian energy companies were major contributors to performance, as oil rose 3.4% on unrest in the Middle East and news that the U.S. may allow oil exports for the first time in 40 years. Fund holdings Canadian Natural Resources and Birchcliff Energy benefited, rising by 15.7% and 28.2% in the quarter, respectively. U.S. rail traffic rose by 6.8% in the quarter, leading to a 6.4% gain for the Fund’s holding in Union Pacific Corp.

We believe gaming in Macau, the only part of China where gaming is legal, has the potential to be a positive, long-term contributor to returns, but it will not be a smooth ride. Restriction of money flow to Macau and World Cup betting caused a decline in gaming revenue in June, affecting our holdings in Wynn Macau (-5.6% for the quarter), Galaxy Entertainment (-8.0%), and SJM Holdings (-10.9%). The restrictions were not unexpected and, we believe, are short-term concerns that should not have a long-term impact on the growth of gaming in Macau. The declines make the valuations of these companies all the more compelling, as the opportunities for them to grow per-share value over the long run remain robust.

After recent meetings with dozens of companies across five different countries in Asia, we came away with a renewed sense of confidence in the region. There is simply no substitute for seeing these businesses and economies with our own eyes, forming our own opinions rather than being driven by what the crowd is doing.

The management teams at the companies we visited are working diligently to meet growing demand for high quality housing, entertainment, and consumer goods. Our opinion is that the encouraging reality on the ground does not match the negative sentiment generally reflected in the media. Growth in China is slowing from the heady rates of the recent past, but is still impressive. With a bigger base to grow off of each year, we believe there is a long runway ahead for many Asian economies.

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The views in this material were those of Fund management as of the date written and may be subject to change. The preceding examples of specific investments are included to illustrate the Fund’s investment process and strategy. There can be no assurance that such investments will remain represented in the Fund’s portfolios. Holdings and allocations are subject to risks and to change. The views described herein do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security.

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