We invest primarily in developed markets and seek to have broad geographic exposure while avoiding large country bets. We are diversified across property types; although, given our bottom-up approach, we may be overweight or underweight particular subsectors at any given time. We believe that high-quality assets in high-barrier-to-entry markets run by skilled management teams drive superior performance within the real estate space over the long term. Because real estate cycles occur over long periods, we employ a long-term orientation to allow for the compounding of value for our clients. We believe that fundamental research is the key to identifying attractive long-term risk/reward opportunities.

United States

The largest absolute weight in the portfolio and benchmark is in the United States, the largest and most mature market within commercial real estate. In the U.S., leasing pipelines remain active, and occupancy rates and rents are increasing in many markets across a range of property types. We believe that commercial real estate should benefit from reasonable levels of new supply in conjunction with moderate demand growth. We hold a diverse range of U.S. commercial real estate companies, including a large allocation in Prologis, an industrial property landlord with significant global scale. We believe that the company is well positioned to benefit from supply-chain reconfiguration and growth in e-commerce.

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We also have large allocations in apartment REITs AvalonBay Communities and Equity Residential. AvalonBay Communities is a leading apartment REIT with an excellent development track record and assets located in communities with solid demand trends. Equity Residential is the largest publicly traded apartment REIT in the U.S. The company's holdings have evolved into a portfolio of high-quality, bicoastal assets with an urban focus.

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During the quarter, we initiated a position in Equity LifeStyle Properties, an owner of manufactured home communities. We believe the company's fundamentals are solid, and it should continue to benefit from demand for affordable housing.

Japan

We have a significant weighting in Japan, where we believe our holdings are well positioned to benefit from economic recovery and a reversal of deflationary pressures. Our largest holding is Nippon Accommodations Fund, which invests mainly in apartments in the Tokyo area. We believe it has the best portfolio among residential J-REITs. We also have a sizable position in Mitsubishi Estate, the largest real estate developer and landlord in Japan, which owns a substantial concentration of assets in the Marunouchi district adjacent to the Imperial Palace.

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During the quarter, we initiated a position in Mori Hills REIT, which primarily invests in high-quality office buildings in prime Tokyo locations. Mori Hills offers a relatively high�dividend yield�and attractive defensive qualities compared with other office J-REITs. We also reduced our position in Mitsui Fudosan, which develops and owns numerous office, housing, and retail properties, primarily in Tokyo. While we believe the company's development pipeline should drive cash flow growth over the next few years, we see few catalysts that would support stock appreciation in the near term.

Hong Kong

We maintain a substantial weighting in Hong Kong, where we focus on companies with high-quality properties in attractive locations. The lack of available land for commercial and residential construction should benefit operating fundamentals over the long run. We have been closely analyzing the impact of recent demonstrations on Hong Kong real estate companies, and we will continue to use our research capabilities to find the best long-term investment opportunities.

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Our largest exposure is to Sun Hung Kai Properties, one of the largest-cap real estate companies in the world with rental properties and residential developments in Hong Kong and mainland China. We added to luxury mall operator Hang Lung Properties during the period, based on an improving outlook for luxury sales on the Chinese mainland. The company's Hong Kong mall operations, with mostly fixed rents and lower exposure to tourism, also offer attractive defensive characteristics in the near term. We reduced our position in Hongkong Land Holdings, which owns prime commercial properties in the central business district of Hong Kong, as the upcycle in Hong Kong office space appears to have moved into its later stages.

United Kingdom

We also maintain a significant weighting to the United Kingdom. We believe London will remain an attractive global city for companies and employees alike. Our largest exposure is to Derwent London, which redevelops office assets in the West End and Tech Belt markets. We also hold positions in Great Portland Estates, which redevelops office assets in the supply-constrained West End; student housing developer Unite Group; and Shaftesbury, which owns a highly concentrated mixed-use portfolio in London's West End.

Additional Allocations

We maintain notable exposures to Australia and Singapore, and Germany represents our largest position in Continental Europe, although we remain underweight relative to the benchmark.

• In Australia, our largest exposure is to Goodman Group, which develops and owns industrial warehouses. We initiated a position in Dexus, the country's largest owner/manager of office properties, during the quarter based on our view that the company will benefit from above-trend rent growth and lower vacancy rates in Sydney over the next few years. We eliminated our holding in shopping center owner Scentre. We like the company's long-term prospects but believe it could face near-term challenges from consumer weakness and concerns regarding e-commerce.
• In Singapore, our largest position is in Capitaland Mall Trust, which is focused on suburban malls.
• Deutsche Wohnen, which maintains a portfolio of Berlin-focused residential and healthcare properties, was our largest purchase in Germany during the quarter. We believe the sell-off in the company's shares after the passage of a rent freeze in Berlin reflected an overly bearish market outlook, and we initiated a position at an attractive valuation.