We continue to believe that with the extreme divergence between value stocks and growth-oriented securities, the scale will likely tilt back in value's favor.

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During the quarter, we made no drastic changes to portfolio positioning, but rotated into opportunities that better fit our investment framework. We continue to see EM as fertile terrain for finding "forgotten" pockets of opportunities in stocks with asymmetrical risk-return profiles, wherein fundamental changes or operational improvement may drive a rerating while at the same there is potential downside support in terms of a strong balance sheet and healthy dividends.

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We saw rotations in sectors such as financials, energy, and consumer discretionary. We also initiated new positions in the utilities sector with potential catalysts for change and downside support. In the energy sector, we started new positions as we believe in the oil supply cut thesis that is supportive of oil price continuing to climb out of its trough. We found a downside anchor in the oil price falling below its cash cost in the first quarter. Materials was our largest sector overweight at the end of the third quarter. We have not substantially increased our positions in deep cyclical stocks that were added to the portfolio in the second quarter in order to benefit from the reflationary scenario of a world recovering from the pandemic.

Energy

We increased our allocation to the energy sector after reversing a longstanding underweight from the second quarter. We continue to believe in the oil price recovery thesis due to the supply cuts.

• During the quarter, we initiated a position in Reliance Industries, a conglomerate with businesses in oil exploration, refining, petrochemicals, telecommunications, retailing and broadcast media. We believe we paid a fair price for Reliance's old-economy businesses such as petrochemicals and telecoms. Its businesses are emerging from cyclical troughs and are poised to generate better earnings. Moreover, its new-economy businesses are benefitting from a series of mergers and acquisitions, giving it the scale to restructure. We think that the potential downside is limited for the stock and the upside may be substantial. We are also not ruling out a possible initial public offering for some of its divisions.

• Aside from Reliance, we started a position in Novatek, an independent producer of natural gas based in Russia, which is increasingly involved in the transportation and marketing of its own production directly to its customers. As a low-cost supplier with a good track record, we see its global market share increasing. We like its strong balance sheet and low volatility, regulated domestic gas business that generates cash to fund growth. Gazprom, a major Russian oil and gas company, has a stake in Novatek and we eliminated our position in Gazprom this quarter as we favored Novatek.

• We continued to add to existing positions in other energy companies such as the aforementioned Lukoil, Petrobras and CNOOC during the quarter.

Financials

Financials is the portfolio's biggest sector position. It has been through a tough year given the sharp falls in economic growth due to the coronavirus pandemic and the significant reduction in interest rates. However, we sought emerging market banks that have better franchises and stronger balance sheets while still fitting our investment framework. In the second quarter, we reduced our exposure to names in central and eastern Europe due to concerns about regulatory risks with dividend payouts being put on hold. During the third quarter, we shifted positions within the financial sector in Indonesia and China.

• For example, in China, we eliminated PICC Property & Casualty, one of the country's largest property and casualty insurance companies, as the departure of its well-respected chairman and risk management issues cast a pall on our thesis of an improving return on equity. Aside from these, continued concerns on auto reform deregulation dragged down its share price. We also exited Industrial and Commercial Bank of China as our investment thesis of dividend and earnings growth has panned out, but the stock failed to rerate within our holding period.

• We decided to redeploy funds to a higher conviction idea such as Ping An Bank, one of China's commercially-run banks which has cleaned up its balance sheet and has a healthy provision level. We think it is well positioned to benefit from better growth in consumer lending in the next two to three years as China recovers from the coronavirus pandemic.

• In Indonesia, we exited Bank Negara Indonesia and switched into another lender with better franchise quality - Bank Rakyat Indonesia. We think that over the long term, this new banking addition to the portfolio will become a more valuable franchise with its dominant positioning in micro lending. We like this bank despite the possibility of national service risk for large state-owned banks in the current environment.

• Outside of EM Asia, we established a position in OTP, Hungary's leading bank and the dominant retail franchise in the country. Aside from its market share, the bank remains well capitalized and has a strong balance sheet. In its latest results, it committed to pay out a dividend to compensate shareholders for the proposed but unpaid 2019 dividend in due course.

Utilities

We have turned overweight in the utilities sector during the quarter as we found new investment opportunities befitting our investment criteria. We established positions in two Chinese utility names - one with several catalysts for change and the other anchored by dividend support. We established a position in China Resources Gas, a gas distribution company. In China, we view gas distribution as an attractive sector with multiple tailwinds. We like the sector as it enjoys government policy support, volume growth, continuing gas consumption growth compared to other energy sources, and potential merger and acquisition opportunities.

We also initiated a position in Guangdong Investments, a well-run water distribution and sewage treatment company, following sharp share price weakness due to concerns about the impact of the coronavirus pandemic on the earnings of its non-water division. We think the company, which provides natural water to Hong Kong, is committed to maintaining its dividend per share growth as the impact of the pandemic on its business is likely to be temporary.

Consumer Discretionary

In the consumer discretionary space, where we have a sizeable underweight, we established a position in Fuyao Glass Industry, an automotive glass maker in China, which we see as a market share gainer. This quality cyclical stock may benefit from the recovery in auto volumes given the pent-up demand.

In China, the world's biggest vehicle market, vehicle sales rose for a fifth month in August. Within the auto sector, we exited Dongfeng Motor and instead built a position in Guangzhou Automobile, which counts Toyota, Honda, Mitsubishi and Fiat Chrysler Automobiles as its joint venture partners in China. Guangzhou Automobile's balance sheet strength should provide us downside support. The company has a strong and visible earnings momentum among auto OEMs partly due to the market share gain of Toyota and Honda and its domestic brand narrowing losses.

Industrials

We increased our allocation in the industrials and business services sector during the quarter as we identified names with attractive risk/reward profiles. For example, we initiated a new position in Mexico's Grupo Aeroportuario Sur, which operates nine airports in southeast Mexico. The company reported its worst quarter on record due to the slump in traffic, but we believe that, based on its liquidity position, it can withstand more pain if the current environment persists. With traffic recovery, Aeroportuario will continue to offer resilient and durable free cash flow from its portfolio of long-term airport concessions.

In India, we continue to find good opportunities in the industrial cyclicals, which increased our allocation to this south Asian market. We initiated a position in Ashok Leyland, one of India's largest commercial vehicle makers, which may benefit from the pick-up in infrastructure and mining projects.

While initiating positions in these two names, we exited Korea Shipbuilding which we bought as we saw it benefitting from an industry supply consolidation. While we think this theme will continue as most of the company's competitors are making a loss, the shipyard's plans to merge with a rival encountered delays.