Our positioning is mainly driven by fundamental, stock-specific views. Over the period, the market saw a dramatic shift away from secular growth and sectors that had performed well in recent months to more cyclical areas such as financials and energy. We are avoiding chasing this cyclical rotation and have generally held steady in our positioning, although our weight in information technology rose as we took advantage of the sector sell-off to pick up high-conviction names that we think have long-term and stand-alone earnings power. We also took down our allocation to health care, mostly in pharmaceuticals where we think the outlook has become less attractive.

Consumer Staples

Given our view that we continue to be in a low to moderate growth environment, we find that high-quality consumer staples names with real, growing businesses that pay a decent dividend offer compelling opportunities. Our holdings in this area remain tilted toward companies that hold significant market share and benefit from demand growth in emerging markets. The recent rotation away from staples to more cyclical sectors has provided us with the opportunity to add to or pick up high conviction names where valuations have become more compelling.

• We initiated a position in British American Tobacco, the third-largest tobacco maker in the world. We think the firm is positioned to be the fastest growing company in the industry, with exceptional sales growth and margin expansion. The company's recent bid for competitor Reynolds American would also be accretive to earnings, although the potential success of the deal does not affect our overall growth thesis. Valuation is also compelling as the stock has come down in recent months.
• We eliminated our position in global infant and child nutrition staples company Mead Johnson Nutrition. Our thesis for the company (that revenue would stabilize and lead to improving returns) has not played out as expected, and the firm has seen weaker-than-expected demand in its emerging market segments and heightened price competition in the U.S. We, therefore, elected to reallocate funds to names where we think the risk/reward is more compelling.

Information Technology

We are cautious in our positioning within the sector as valuations have become stretched in certain areas, and rapid disruption has also been challenging for companies that are more established or behind the innovation curve. Within the sector, we remain positioned to benefit from the ongoing transition toward greater computing mobility, increasing use of the Web, and growing technology consumption in emerging markets. As a result, our holdings are tilted toward e-commerce, social media, and cloud software-areas where valuation appears high but is reasonable given the significant earnings growth potential these companies offer.

• We initiated a position in Alibaba Group Holding, China's dominant online retailer. Alibaba has an asset-light business model, which we think is scalable, self-enhancing, and highly cash flow generative. We are impressed by the firm's powerful position in China's fast-growing e-commerce market and think the firm's moves into cross-border e-commerce and cloud computing via its AliCloud service are also compelling.
• We eliminated our position in NXP Semiconductors following news that it would be acquired by Qualcomm. With limited upside remaining, we chose to exit our position and reallocate funds to more high conviction names.

Health Care

Our holdings are tilted toward drugmakers with strong pipelines, equipment makers with significant technology advantages, and health care providers that will benefit from lower health care utilization in the U.S.

• We eliminated our position in U.S. hospital owner and operator HCA Holdings. With increased uncertainty surrounding the fate of the Affordable Care Act and health care exchanges, we are concerned that possible loss of coverage for individuals could negatively affect hospital profitability over the next few years. With the risk/reward less compelling, we chose to exit our position.
• We eliminated our position in pharmaceutical firm Merck. We have concerns about the durability of the company's Januvia and HCV drug franchises and believe several upcoming patent expirations will pressure margins in the near term.

Consumer Discretionary

Our holdings in consumer discretionary are diversified across industries and geographies. However, many of our holdings have a strong presence in online retail and/or exposure to emerging markets with attractive demographics.

• We initiated a position in home improvement retailer Home Depot, swapping out our position in Lowe's, which we eliminated. While both firms benefit from a duopoly industry structure and an ongoing rebound in the U.S. housing market, we have grown more bullish on Home Depot, which has had more consistently strong topline growth while our conviction in Lowe's has come down amid some recent execution issues.
• We have a core holding in Inretail Peru, a Peruvian supermarket and retail food operator. We believe the company is well run and that the firm represents a compelling secular growth opportunity as formal retail penetration in the region remains very low.

Financials

Our holdings in this area are broadly diversified, but we retain a focus on commercial banks in fertile emerging market economies and high-quality U.S. banks and U.S. capital markets companies with global exposure. We also see opportunity in select regional U.S. banks, which are disproportionately better positioned to benefit from possible deregulation than larger U.S. banks.

• We initiated a position in Fifth Third, a U.S. regional bank headquartered in Cincinnati, Ohio. We think Fifth Third is a high-quality bank with a new, top-notch management team committed to driving earnings growth through efficiency gains, and the stock's valuation is extremely compelling. At an industry level, we also think smaller regional banks in the U.S. like Fifth Third should benefit disproportionately from easing regulatory burdens and rising interest rates.
• We have a core holding in discount broker Charles Schwab. The company represents a premier franchise that is highly levered to rising short-term interest rates, with a sizable scale advantage over competitors. While the firm has been challenged in its traditional mutual fund offerings by ETFs and passive investments, we think the market is underestimating the tailwind from higher interest rates as the U.S. Federal Reserve moves toward rate normalization.