Over the course of the third quarter, we made a number of adjustments to our sector positioning. Within IT, we identified what we believe to be a compelling opportunity in a global payments fintech company. We also raised the portfolio's materials weighting, particularly in the area of packaging, and initiated a position within consumer staples. We reduced our exposure to energy, health care, and industrials and business services.

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Our major overweight sector positions at the end of September were in utilities, materials, and financials. The largest underweight sector positions included IT, consumer staples, and communication services. On a geographic basis, our main underweight allocation is in the U.S. where we believe valuations are still expensive, while the largest relative overweight position is in China. We see value in emerging markets, the UK, Russia, and Korea.

IT

IT is a very large and diversified sector and we generally see the most opportunities in cyclical areas, particularly memory semiconductor-related names. Our analysts in this area are very experienced and have an in-depth understanding of the sector. The sector has very short cycles, and the market is currently concerned about near-term momentum; we have bought for when the cycle recovers. Our key holdings here include Samsung Electronics, SK Hynix, and Micron Technology.

Overall, we have a long-standing underweight position in the IT sector, but over the course of the quarter we raised the extent of our exposure, initiating a position in Fiserv. The financial services technology company operates primarily through the payments and financial segments. In our view, the company is well positioned to enjoy a multiyear period of above-average organic growth as the penetration rate of mobile banking continues to increase. During this period, we expect the business will be able to generate strong growth in earnings per share. The combination of stable growth, a defensive earnings profile, and a strong free cash flow yield make the stock an attractive late-cycle investment.

Materials

In the second quarter of 2020, we raised our exposure to the materials sector, and in the most recent quarter, we further increased the size of our weighting, including new holdings in Packaging Corporation of America and Stora Enso. We like three areas within the sector: (i) cyclical materials, such as copper and iron ore; (ii) previous metals (gold, silver); and (iii) cyclical areas, such as packaging.

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• Packaging Corporation of America is one of North America's largest producers of containerboard and a major producer of uncoated freesheet. The business' high integration rate, limited export exposure, virgin-focused mix, and disciplined management team combine to result in superior margins and returns versus peers. Containerboard is an industry with favorable long-term fundamentals driven by consolidation, forward integration, and an elevated capital-incentive curve, while cyclical weakness provided an attractive entry point for the stock.

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• Stora Enso is a Finland-based producer of paper-based packaging, wood products used in building applications, and pulp, a key intermediate material used to produce items such as tissue and fiber-based clothing. We expect the company to revalue its forestry assets in the short term, which is likely to boost sentiment toward the stock. Furthermore, the company's industrial assets, which are highly levered to the price of pulp, are enduring the worst cyclical downturn in pulp prices in at least two decades, and we therefore expect strong upside potential as we move into a recovery.

Consumer Staples

The portfolio remains underweight consumer staples, but within the sector, we built a position in Coca-Cola, a global marketer of non-alcoholic beverages. Most of the system's manufacturing and distribution assets are housed within independent bottlers around the world, but the company still retains significant bottling assets in the U.S. and select emerging markets. The company has restored growth in sales and revenues on a sustainable basis, though profitability has yet to follow due to non-operating headwinds. We expect earnings per share growth to resume going forward. The stock is currently out of favor among investors as it sells into the "out-of-home" market, which has been significantly affected by the pandemic. However, Coca-Cola currently pays a dividend that is higher than many U.S. utilities, and we believe that if it is able to repair its business and grow again, there is considerable upside to its share price.

Energy

When U.S. oil prices turned negative in April, we added to our exposure. As this anomaly has now played out, we have once again reduced our exposure, selling out of both integrated energy company Chevron and French energy company Total. We believe that the transition to cleaner energy and the potential for oil prices to remain lower for longer will be a headwind for the sector over the longer term.

Industrials and Business Services

Over the course of the third quarter, we moved further underweight industrials and business services. This was mainly due to the closing of our position in Toshiba, a Japanese electronics conglomerate, which engages in the manufacture and sale of electronic and electrical products. The delay in the initial public offering of the memory division (Kioxia) was a headwind for the stock, although not unexpected. While certain businesses within the conglomerate are generating healthy profits, others offer only thin margins and would be more susceptible to a global multiyear recession.

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Despite this sale, we are positive on Japan. We see increasing evidence that Abe's reforms are finally yielding the intended corporate restructuring. The recent proposed deal between NTT and NTT DoCoMo is, in our view, an excellent example of this.

Health Care

We eliminated our holding in German conglomerate Bayer, which is composed of four divisions: pharmaceuticals, crop science, consumer health, and animal health. Management announced a profit warning for 2021, as well as cost-cutting measures and a reduction in future dividends. Bayer's crop science division in particular has struggled, and the company's earnings outlook has dimmed.