Over the quarter, we continued to trim exposure to the most fairly valued COVID-19 beneficiaries while adding to positions that we believe will experience accelerating fundamentals as we enter and progress through 2022. In our view, the pandemic will continue to accelerate several existing and nascent trends that chiefly benefit growth companies?like those leveraged to e-commerce, digital media, and cloud computing?but we are also mindful of valuations and want to take advantage of opportunities in more cyclical segments of the market that should experience an inflection as the world continues to emerge from the pandemic.

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At the sector level, the largest shift occurred in communication services, where our allocation meaningfully rose. Our exposure to the consumer discretionary sector also increased. On the other hand, our exposures to financials, industrials and business services, and health care came down. Regionally, our allocation to Japan and North America decreased, while our exposure to emerging markets increased as we added thoughtfully to some Chinese names amid the region's market dislocation. Although we are closely watching the upward trajectory of U.S. interest rates?which can negatively impact emerging markets?we remain constructive on our emerging markets holdings and believe they should ultimately benefit on the other side of the pandemic

Communication Services

Communication services is our largest overweight, reflecting our belief that the lasting behavioral effects from the coronavirus pandemic could accelerate the long-term trend of streaming video services taking share from traditional television and exacerbate the ongoing shift toward digital advertising. We remain focused on highly innovative, secular growers within the entertainment and internet services spaces that are on the right side of change and benefiting from accelerating popularity of digital media.

• We initiated a position in online streaming video service Netflix. This is a name we have owned in the past given its attractive business model, global scale, low churn, and pricing power. We felt now was an opportune entry point as we think there are a number of catalysts that should drive accelerating growth over the next few months: content ramp-up in the back half of 2021, which should help drive net adds; continued international expansion; and improving margins. Overall, we think Netflix represents a compelling and high-quality growth opportunity with a favorable risk/reward profile.
• We initiated a position in Tencent Holdings, China's dominant social media platform. The stock has performed poorly in recent months amid increased regulatory pressures, creating what we believe is an attractive entry point. While regulatory changes in China could negatively affect the company's earnings in the short term, we believe that, over the long term, Tencent is well positioned for accelerating returns given its dominant role in Chinese social media and growing international gaming capabilities, with ample opportunity to further monetize its large, rapidly growing user base. In addition to social media and gaming, Tencent possesses broad capabilities, including online payments, online finance, and cloud computing services.

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Consumer Discretionary

The consumer discretionary sector has become increasingly challenging for stock pickers as market disruption, driven in part by rapid changes in consumer behavior and e-commerce, has led to a more dramatic demarcation between winners and losers. Given the polarized structure of the sector, our focus is on high-quality names that are on the right side of change and have dominant market positions. We find internet-based retail particularly attractive, as we believe that the leaders in this space should continue to benefit from strong fundamentals as we emerge from the pandemic. We also have exposure to select travel-related stocks that we believe are well positioned as economic conditions normalize.

• We initiated a position in Meituan, a Chinese shopping platform that operates a food delivery service as well as an online booking business for restaurants, hotels, and other services. While we expect some near-term earnings volatility, we believe the company possesses a dominant position in the in-store market with strong long-term monetization potential, while its food delivery offers advantages in a benign competition environment.
• We added to our position in Amazon.com during periods of weakness. We think the valuation for Amazon is reasonable and, while revenue from the firm's e-commerce business has started to decelerate amid market reopenings, its advertising and cloud computing businesses, which are more profitable, continue to accelerate.
• We eliminated our position in Ross Stores. While the company's recent earnings report was strong, full-year guidance was cautious, making the stock's risk/reward profile less attractive to us. Therefore, we chose to exit our position and reallocate funds to names with greater upside potential.

Industrials and Business Services

We remain overweight industrials and business services and believe our exposure within the sector is poised to capture the tailwinds of accelerating fundamentals as economic conditions improve and the world reopens. However, we acknowledge that multiples in certain pockets of the sector have risen along with expectations for economic improvement and large-scale infrastructure reform. We used the recent run in these stocks as an opportunity to reallocate funds into areas where we believe valuations are supportive of further gains. Our exposure is focused on long-cycle industrials and commercial services companies that should emerge from the pandemic in a stronger competitive position.

• We eliminated our position in global parcel and freight delivery service FedEx. The stock has done well over the past few months, but we continue to think the company faces rising costs heading into the holiday season that could potentially weigh on earnings, so we chose to eliminate our position.

Financials

We continue to have a modest overweight position to the sector and generally prefer nontraditional financials like security exchanges, which have low correlation to the rest of the portfolio and provide support with volatility, and online brokerages, which don't have the credit risk of banks. However, as expectations have grown for a post-pandemic economic expansion and higher interest rates, we have added purposeful exposure to select U.S. banks that we believe will experience improving economic returns as the world emerges from the pandemic. We also maintain exposure to select emerging markets banks that we believe are undervalued and underappreciated.

• We trimmed our position in Bank of America given near-term risks of negative earnings revisions due to low yields. However, we continue to think the level of interest rates should move higher given increased economic activity and that Bank of America should thrive in a post-pandemic environment with higher rates and consumer and business habits shifting back to normal.