Our bearish outlook for oil prices and belief that we are in the middle of a secular downcycle for commodities have not changed. Accordingly, we continue to favor defensive industries and areas of the natural resources universe, such as specialty chemicals, that we believe stand to benefit because lower commodity prices reduce their input costs. However, we remain aware of the potential for signs of�further economic weakness�to weigh on�cyclical names and have sought to emphasize idiosyncratic growth stories that can provide a bit of a buffer against macro headwinds. As always, we remain conscious of valuation, industry fundamentals, and longer-term risk/reward propositions. In the third quarter, we continued to high-grade the portfolio's holdings in response to evolving risk/reward profiles. Among commodity producers, we prefer high-quality names that can deliver strong, low-cost output growth without sacrificing their balance sheets. Despite our long-term outlook, we are not averse to taking advantage of the countercyclical rallies that crop up during secular bear markets. We also continue to explore electric vehicles and other disruptive trends that could create risks and opportunities in our investment universe. Our bottom-up approach to stock selection helps us assess this evolving landscape and make informed, long-term investment decisions.

Allocation to Metals and Mining

The portfolio remained underweight the diversified metals and mining industry. A global oversupply of many base metals is expected to be a headwind for the industry through much of the secular bear market in commodities. We continue to believe diversified metals and mining is one of the more challenged spaces within the natural resources complex over a longer time frame. We remain defensively positioned with the names in the portfolio, focusing on companies with solid balance sheets and sound records of capital allocation. During the quarter, we added to or established positions in high-quality copper producers that we believe can grow their milled output while generating a strong return on invested capital. Although we have a favorable medium- to long-term outlook for copper prices because of the potential for demand to expand as adoption of electric vehicles grows, we prefer to focus on smaller names pursuing projects that can drive cash flow growth and create value in a bear or bull market for commodities. The portfolio likewise maintained its below-benchmark allocation to precious metals and minerals, an industry where we focus on idiosyncratic opportunities that we believe can compound value. Over this period, we reduced the portfolio's exposure to precious metals and minerals, as the setup for these stocks tends to be less compelling when gold prices trade at a premium to some of the highest points on the incentive curve.

• We added to Ero Copper, a Canada-based miner that opportunistically acquired a mismanaged operation in Brazil several years ago. We believe that the company should create value for shareholders as it brings down the cost curve at its Brazilian operation and new mining projects come onstream that take advantage of the site's existing mill capacity. Ero Copper has also embarked on a robust exploration program that could unlock additional value.
• We initiated a�position in Lundin Mining, a Canada-based company that owns five mining operations in politically stable countries and generates a significant chunk of its revenue from copper. In our view, Lundin Mining has the potential to grow its operating cash flow significantly in coming years as it ramps up production from the Candelaria complex it acquired opportunistically from Freeport-McMoRan several years ago. Applying a similar game plan to the recently purchased Chapada gold and copper mine could unlock additional value as Lundin Mining works to extract more copper at minimal cost.
• Boliden's stock sold off after the company reported a second consecutive quarter of disappointing operating cash flow. These weak results stemmed primarily from temporary cost increases and provisions in the smelting division. In our view, the zinc and copper mining and smelting company ranks among the highest-quality names in diversified metals and mining, thanks to a strong management team, solid balance sheet, and history of allocating capital intelligently through the cycle. We took advantage of the pullback to add to Boliden because we believe the stock trades at an undemanding valuation and that the market overlooks the potential for the company to deploy its significant cash flow in ways that create value for shareholders.
• We exited Barrick Gold as we see better risk/reward profiles elsewhere in our investment universe.

Integrated Oil and Gas

Major and integrated oil companies appeal to us because of their clean balance sheets, financial strength, and the competitive advantages that come with scale. In our view, these qualities position the best of these companies to drive well-productivity gains and capital efficiency. We believe our highest-conviction holdings should be able to grow their hydrocarbon output in a cost-conscious manner and have exhibited a commitment to returning capital to shareholders.

• BP's stock finished the quarter lower, pressured by the decline in oil prices and weakness in the British pound, which weighed on local shares' performance in terms of U.S. dollars. We like BP's attractive valuation relative to its peers and believe the market underappreciates its ability to deliver solid production growth in the coming years. Although the aftermath of the Macondo oil spill in the Gulf of Mexico has been a headwind for BP, we believe the market overlooks the company's consequent operational improvements, investments in predictive maintenance and other technologies, and lower costs because of delayed project approvals during the last up-cycle. We took advantage of weakness in the stock to add to the portfolio's position.
• Shares of Total pulled back on similar macro headwinds. Some investors were also wary that Total's purchase of Occidental Petroleum's Mozambique assets could set the stage for the France-based company to pursue additional acquisitions. In our view, this transaction fits in with management's history of effective capital allocation in that the counterparty was a motivated seller and the involved assets align with Total's core competencies in offshore development and liquefied natural gas. We appreciate Total's high-quality management team, capital discipline, strong balance sheet, and credible plan to deliver solid production growth in the coming years. These qualities and an attractive dividend yield make Total one of our highest-conviction ideas in an environment where a declining cost curve should challenge the sustainability of high oil prices. We added to Total, which remains one of the portfolio's top holdings.
• We started a position in Royal Dutch Shell. The stock sold off after the company reported disappointing second-quarter results that compounded the challenging commodity price environment with operational issues. We see a favorable setup in Royal Dutch Shell's undemanding valuation, the prospect of improved execution, and projects slated to start up in the back half of the year.
• We reduced the portfolio's position in Occidental Petroleum to reflect our concerns about the company's acquisition of Anadarko Petroleum, a transaction that levered its once-clean balance sheet and puts significant pressure on management to meet its targets for asset sales and cost reductions as it integrates these operations. Although Occidental Petroleum's risk profile and our esteem for its management team have changed, we regard the company as a leading operator in the oil-rich Permian Basin and see the potential for its scale and technical expertise to unlock value for shareholders.

Allocation to Exploration and Production

During the quarter, we continued high-grade our positioning in oil and gas exploration and production to reflect an increasingly challenging environment. This process involved exiting holdings that we believe could struggle to compete as their larger, more sophisticated peers continue to leverage their superior scale, balance sheets, and technology to drive productivity and efficiency gains. Within this space, we remain focused on high-quality operators that we believe can grow their hydrocarbon output at midcycle oil prices, without damaging their balance sheets.

• Anadarko Petroleum was acquired by Occidental Petroleum.
• Although we appreciate the quality of Encana and Centennial Resource Development's assets in the oil-rich Permian Basin, we exited these positions in favor of investment opportunities that we believe offer a better risk/reward profile.
• We added to Concho Resources on weakness. We regard Concho Resources' recent operating challenges as temporary and note that the company still boasts a strong balance sheet, the scale to remain competitive, and high-quality acreage in the Permian Basin that contains a huge inventory of drilling locations.
• We�added to the portfolio's�position in ConocoPhillips, a high-quality oil and gas producer that we believe trades at a reasonable valuation and could deliver relative outperformance over the long run. We appreciate the company's solid management team, strong balance sheet, capital discipline, and the relatively low decline rate of its conventional assets. Although we acknowledge that the company could pursue a big acquisition to increase its exposure to the Permian Basin, we believe the stock's undemanding valuation, management's discipline, and the sharp pullback in U.S. oil and gas exploration and production stocks help to mitigate this risk.

Oil and Gas Equipment and Services

We remained underweight this industry because we believe ongoing well productivity gains and a declining cost curve make it difficult for these companies to push pricing, particularly in the commoditized service and product categories in the U.S. onshore market. Lower oil prices have prompted leading independent exploration and production companies to slow their activity levels in U.S. shale plays, another headwind for oil and gas equipment and service companies in the back half of the year. In contrast, we expect activity levels in the international markets to recover somewhat from years of underinvestment, though pricing traction has been hard to come by for many oil field equipment and service providers.

• We exited Baker Hughes, A GE Company, in favor of other investment ideas where we have more confidence in the management team and do not have to worry about the overhang from General Electric's plan to eventually divest its ownership.
• The portfolio finished the period overweight Schlumberger. In our view, the world's largest oil-field services company represents one of the better ways to gain exposure to an uptick�in international exploration and development activity. Other potential upside catalysts include a new CEO who plans to exit some of Schlumberger's lower-quality business lines in commodified industries.
• Shares of Dril-Quip, a leading provider of subsea wellheads, outperformed the subsector and eked out a positive return, thanks in part to its strong balance sheet and cost-cutting initiatives. We appreciate the company's high-quality management and exposure to the nascent recovery in international exploration and development activities as operators increasingly focus on cost-competitive offshore projects that utilize existing infrastructure.

Allocation to Energy Industrials

We high-graded our exposure in energy industrials, rotating into higher-conviction ideas that we believe offer exposure to value-oriented ideas and idiosyncratic growth stories that could prove resilient in a challenging environment.

• We sold shares of Ball, a global leader in aluminum packaging, on strength. In our view, the company should continue to benefit from growing demand as aluminum packaging replaces less sustainable options and cans take market share in cocktails and wines.
• We exited Fluor in favor of opportunities that we believe offer better risk/reward profiles. The stock sold off after the engineering and construction company reported disappointing second-quarter results that fell well short of expectations for revenue and adjusted earnings per share, prompting management to withdraw its full-year guidance. Although Fluor's strong balance sheet stands out in this space, we believe this turnaround story could take a long time to play out and likely will involve additional bumps along the way.
• During the quarter, we initiated a position in Silgan Holdings, a packaging company that boasts the largest share in the U.S. market for food cans. We appreciate the company's significant free cash flow and cost-cutting efforts. In our view, the stock trades at an undemanding valuation for a somewhat defensive stock, in part because of expectations for limited demand growth for good cans. Albeit in the nascent stage, consumers' increasing focus on packaging that is more readily recyclable might provide a tailwind for food cans�over the longer term.

Packaged Foods and Meats

We adjusted the portfolio's positioning in packaged foods and meats to reflect the evolving risk/reward profiles in this industry.

• We exited Cal-Maine Foods on strength. This move reflected our concerns about the declining cost curve in the shell egg business, as growing demand and higher prices for premium cage-free eggs appear to be subsidizing conventional production, which, over time, could drive down break-even costs in the industry.
• We added to Sanderson Farms. In our view, the third-largest poultry producer in the U.S. stands to benefit from the favorable supply-demand backdrop created by soaring protein prices in China, where a devastating outbreak of African swine flu could lead to significant chicken-for-pork substitution. We appreciate Sanderson Farms' low production costs, debt-free balance sheet, high-quality management team, and willingness to invest judiciously in capacity expansions throughout the cycle.