As always, our trading activity during the quarter was driven from the bottom up. 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. While we think this rotation could persist in the near term and made some changes early in the quarter to ensure that we can benefit and participate in this cyclical rally, uncertainty is still very high. We remain focused on the long term, making sure we are investing in companies on the right side of change and where we have a unique insight into those changes. Over the quarter, our allocations to financials and consumer staples increased, while our weighting in information technology decreased.

Information Technology

We have high conviction in the technology sector, as this is an area where rapid market share shifts mean growth companies are plentiful regardless of the broader macroeconomic environment. We look for innovative companies with the potential to be true market disruptors on the right side of change. The shifts toward greater connectivity, mobility, and use of cloud software applications are powerful long-term trends, and the markets for consumer and enterprise technology products are expanding in all regions. Rapid growth in the use of the Internet, particularly in Asia, has yielded many compelling stories with long runways for growth.

• We eliminated our position in global payment operator MasterCard. While the company remains a solid, high-quality growth company, we have exposure to the industry through PayPal, and we chose to exit our position and reallocate funds to names where we have higher conviction.
• We eliminated our position in Facebook. While the company continues to have the dominant global presence in online social networks, we anticipate the firm will be facing challenges over the next 12 months to accelerate monetization and expect growth to decelerate in 2017.
• We initiated a position in Baidu, China's dominant search engine. We think the company's investment cycle is coming to an end, which should lead to accelerating revenues and margin recovery over the medium term. The company is also launching new initiatives, including a mobile app news feed that can be monetized over time. Valuation has been compelling on the back of several quarters of weak earnings.

Consumer Discretionary

We favor the consumer discretionary sector due to the strong growth stories we see in specific areas of the sector, rather than a broad-based affinity for this area. Market disruption, driven in part by rapid changes in consumer behavior and e-commerce, has led to a more dramatic demarcation between winners and losers. Our focus is on identifying companies with product cycles that we believe will drive market share growth going forward. We have found Internet-based media and retailing companies particularly attractive, but most of our holdings will be driven by product-specific stories.

• We initiated a position in Hennes & Mauritz, one of the world's largest specialty apparel retailers (known colloquially as H&M). We think H&M has a strong business model with high-quality management and high returns on capital, and we believe the firm can produce high single-digit organic revenue growth over the long term given its global appeal and space rollout opportunities. Recent headwinds for the company that we believe to be temporary, including a strong USD, an investment cycle, and a difficult macroeconomic backdrop, created an attractive entry point for us.
• We eliminated our position in off-price retailer Ross Stores on strength. The stock jumped after the company reported strong third-quarter results, and we chose to take profits and reallocate to names with greater upside potential.

Financials

Our outlook for the sector has improved materially over the past several months as the results of the U.S. presidential election have made it likely that U.S. financials in particular are poised to benefit from several tailwinds, including rising interest rates and inflation, deregulation, and lower corporate tax rates. That being said, the recent rally in the sector has lifted valuations into more reasonable territory, and we are being cautious about any names we are picking up, making sure to focus on the long term rather than near-term momentum. We like regional U.S. banks, which are disproportionately better positioned to benefit from deregulation than larger banks, high-quality capital market firms, and select European banks that we think are undervalued and underappreciated.

• We initiated a position in discount brokerage 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.
• We eliminated our position in Brazilian bank Itau Unibanco on strength. The stock has experienced a significant runup in recent months amid a rally in the Brazilian markets, and we think the company has reached fair value and risk/reward is no longer attractive.

Consumer Staples

We have some concerns that consumer staples have become broadly expensive as investors have flocked to higher-yielding stocks in recent years. That being said, the recent rotation during the fourth quarter of 2016 into more cyclical names provided us with some stock-specific opportunities to pick up high-quality names at improved valuations.

• We initiated a position in Reckitt Benckiser, a consumer staples company specializing in consumer health, hygiene, and home care products. We think the firm is a high quality company with an attractive portfolio of products, an excellent management team, and exposure to Europe and emerging markets. The company also has a unique position in consumer health, a category otherwise dominated by pharmaceuticals companies. The stock sold off in October following weak third-quarter results, which created an attractive entry point.

Health Care

While health care remains a fertile area for growth potential and accelerating technological discovery, our enthusiasm has been tempered of late due to broadly richer valuations in certain areas, uncertainty about the drug pricing environment, and a subdued pace of innovation and breakthroughs. That being said, increased market volatility has created pockets of opportunity that we have used to pick up some high-quality, high conviction names.

• We initiated a position in Roche Holding, a Swiss pharmaceutical company with a focus on the oncology market. We think Roche operates a strong business model in an attractive, high-margin oncology segment, where it has a dominant position and a key growth driver in its cancer drug Avastin. The company also has a compelling long-term pipeline.
• We eliminated our position in U.S. managed care company Aetna on strength after the firm reported solid third-quarter results, sending shares higher. We think there are several headwinds to growth for the firm moving into 2017, including exchange market exits and several lost Medicaid contracts, so we chose to exit our position and reallocate funds to names with greater upside potential.