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 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 second quarter, this prompted us to add exposure to well-positioned containerboard companies that we�believe should�benefit from secular demand tailwinds related to e-commerce and a rebalancing market. 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 Energy Industrials

We high-graded our exposure in energy industrials, rotating into higher-conviction�stocks that we believe�traded at undemanding valuations�and/or offered exposure to�idiosyncratic growth stories that could prove resilient in a challenging environment.

• We established a position in CNH Industrial, a company that produces agricultural equipment and commercial vehicles. Although we like the quality of the company's core businesses, under-earning business�segments and macro headwinds have weighed on the stock's performance. At current valuations, we believe�CNH Industrials�offers a favorable risk/reward profile that should afford some downside protection while we wait for an inflection in�the company's�underlying businesses.
• We added to the portfolio's stake in Epiroc, a high-quality mining equipment company that boasts a debt-free balance sheet and generates a significant portion of its revenue from services. In our view, Epiroc's growing service business, which aims to improve miners' productivity, should compound value for shareholders over time. We also believe that equipment orders could grow significantly once replacement cycles kick in and the industry steps up development of greenfield mining sites.
• 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 eliminated Pentair from the portfolio after the company pre-announced quarterly results that fell well short of guidance, raising questions about execution. We also had concerns about Pentair's leverage to residential construction.

Oil and Gas Storage and Transportation

The portfolio finished the quarter with an overweight allocation to the oil and gas storage and transportation industry, though we refined our positioning to emphasize ideas that we believe have the�most compelling�risk/reward profiles. The best-positioned companies in this space stand to benefit as hydrocarbon output from low-cost U.S. shale plays continues to increase. These stocks tend to fare better when interest rates are lower because of their dividend yields and the reduced credit risk for their counterparties in oil and gas exploration and production.

• We eliminated the portfolio's stake in Royal Vopak, a Netherlands-based company that owns a global portfolio of tank terminals that store gases, chemicals, and oil.
• We sold some of the portfolio's stake in TC Energy, which owns pipelines and other energy infrastructure in Canada and the U.S., on strength to manage position size. We like TC Energy's resilient cash flows and leverage to expansion opportunities created by growing North American oil and gas production.
• We initiated a position in Targa Resources, an oil and gas gathering and processing company that has built an integrated system of pipelines and other critical energy infrastructure in the Permian Basin. We value Targa Resources' expansion opportunities as hydrocarbon output from West Texas continues to increase and see the potential for�the company's�financial condition to improve as these projects generate incremental cash flow.

Paper and Forest Products

International containerboard prices have tumbled�from their peak in�the back half of 2018, pressured by macro-driven demand deterioration and supply-side capacity additions that have increased inventories. These headwinds have already prompted leading producers to reduce their operating rates to help rebalance the market. Despite this near-term weakness, our long-term outlook for the industry remains favorable. We believe industry consolidation should help to moderate the cyclicality in containerboard pricing, while a rising capital-incentive curve and the increasing penetration of e-commerce provide long-term tailwinds. We started or added to positions in high-quality containerboard producers.

• We exited Australia-based packaging company Orora in favor of investment ideas that we believe offer better risk/reward profiles.
• We established a position in Packaging Corporation of America, the U.S. containerboard producer with the least exposure to international exports. We value the company's highly integrated business and disciplined management team, qualities that should help the company to sustain its superior profitability relative to peers.
• We added to International Paper, a leading producer and distributor of containerboard and other paper products. As with Packaging Corporation of America, this position is a bet that cyclical weakness eventually will give way to secular and structural tailwinds.
• Shares of West Fraser Timber and Interfor came under pressure from weakness in spot lumber prices. We continue to believe the market does not appreciate the extent to which the scarcity of timber in British Columbia has pushed the region to the higher end of the cost curve. In our view, this dynamic favors West Fraser Timber and Interfor, both of which have favorable geographic mixes that include meaningful exposure to the low-cost U.S. South.

Diversified Metals and Mining

The portfolio remained underweight the diversified metals and mining industry. A global oversupply of many metals and mining commodities is expected to be a headwind for this segment throughout much of this secular bear market in commodities. We continue to believe the industry is one of the more challenged spaces within the natural resources complex over�a longer time frame. We remain defensively positioned with the names we do own, focusing on companies with solid balance sheets and sound records of capital allocation.

• We initiated a position in Australia-based South32, a diversified mining outfit that boasts a strong balance sheet and continues to execute its plan of harvesting cash from its existing assets while incrementally improving the quality of its portfolio through sound capital allocation and strategic divestments. We like the company's high-quality management team and regard this stock as a value story that will play out over time.
• We eliminated the portfolio's position in Aurubis, a global copper smelter and recycler, in favor of opportunities that we believe have better risk/reward profiles.
• In May, shares of Boliden pulled back on concerns about the macro environment, the head of smelting's departure, and disappointing free cash flow in the first quarter. 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.

Allocation to Utilities

We appreciate utilities for their defensive qualities but remain selective and valuation-conscious, focusing on names that should be able to deliver solid cash flow and dividend growth during periods of deceleration in the broader economy. The portfolio again ended the quarter with a significantly above-benchmark allocation to utilities.

• We increased the portfolio's position in NextEra Energy's common stock. In our view, the company's utility franchise stands to benefit from a supportive regulatory environment and ample opportunity to invest in�clean energy, storage, and grid reliability. The utility is also the leading U.S. developer of renewable energy, a distinction that we believe gives it the expertise and scale to take advantage of growing demand for (and the declining cost of) wind and solar power. These opportunities should enable the company to compound shareholder value over time.
• We reduced the portfolio's exposure to NiSource in favor of other investment opportunities.
• We took advantage of recent strength to take some profits on Atmos Energy and manage our position size. In our view, the gas utility should be able to grow its cash flow and dividend at a steady clip, thanks to a long runway for system�investment and a supportive regulatory environment.

Allocation to Chemicals

Our bearish long-term outlook for commodities makes chemicals an area of focus, thanks in part to the potential margin uplift from lower input costs. However, with key end markets showing signs of slowing down and concerns about potential overcapacity in the polyethylene, we prefer names that operate high-quality businesses, have the most levers to pull to offset weakness, and/or offer exposure to potential upside drivers that are independent of the macro environment. Specialty chemicals and industrial gases finished the quarter as the portfolio's largest overweight allocations at the industry level.

• We exited industrial gas company Air Liquide on valuation.
• We started a position in Westlake Chemical, a leading U.S. producer of polyethylene that opportunistically diversified into chor-alkali and polyvinyl chloride (PVC) via its 2016 acquisition of Axiall. Although potential capacity concerns and the uncertain macro backdrop make us cautious on commodity chemicals producers, we regard Westlake Chemical as a value play because the market has not priced in improving fundamentals in the chlor-alkali market. We also like management's history of allocating capital intelligently during past downcycles and its sizable ownership stake.
• We increased the portfolio's position in Linde, as we like the potential for�the industrial gas company�to drive margin expansion as it realizes projected cost synergies from its�combination with�Praxair. We also appreciate the company's high-quality management team, defensive qualities, and potential to compound value for shareholders.