In the fourth quarter, OPEC's agreement to cut production and Donald Trump's victory in the U.S. presidential election introduced a heightened level of volatility into the market. Investors fled more defensive names in favor of those poised to immediately benefit from these events. As a result, some of the companies that we believe are positioned to achieve meaningful growth in the long term were pressured during the period. While we expect this volatility to continue, we also believe that in 2017 the market will again begin to favor higher-quality companies with solid fundamentals and effective management teams. We continue to closely monitor the evolving political and macroeconomic landscape. At the same time, however, our approach during these times of heighted volatility remains rooted in our bottom-up approach to stock selection, which we expect to lead to outperformance over the long term.

Oil and Gas Exploration and Production

We continue to emphasize companies in this space that benefit from favorable cost structures and those accelerating growth through the development of their assets. We maintain that the Permian region continues to offer some of the most promising opportunities in oil and gas exploration and production. Companies holding strategic geographic assets, particularly those in this region, as well as leveraging new drilling techniques are well positioned to add value for shareholders in this time of heightened volatility.

• We believe Cimarex Energy remains a top pick in U.S. oil and gas exploration and production for several reasons. It benefits from improving capital productivity, its ability to shift its production profile to take advantage of the highest-value commodity price, and its strong financial strength. Cimarex Energy's assets within the Permian region as well as the STACK play in Oklahoma are also appealing.
• Pioneer Natural Resources continues to stand as a top holding in the portfolio, thanks in large part to its strong asset base within the Permian region. We consider the company one of the better U.S. low-cost oil suppliers over the long term. In our opinion, its asset base still holds a lot of potential for the company to unlock.
• We believe EOG Resources stands as a leader in onshore discovery and execution. The company's large shale assets across North America position it well to benefit from improvements of well completion and enhanced resource recovery. We increased our position during the quarter.
• We trimmed our position in Tourmaline Oil, as we expect the recent rig count increase in North America to begin pushing natural gas prices lower.

Allocation to Major Oil Companies and Integrateds

We value investments in major integrated oil companies, specifically when heightened volatility exists in the market. We seek companies in this segment that are characterized by clean balance sheets and that have several financial and operating levers to pull. While both provide a level of protection, the latter also serves as a means to achieve growth in the face of a challenging environment.

• We remain encouraged by Total's strong fundamentals coupled with its upstream, downstream, and chemicals operations. The company's third-quarter earnings report reaffirmed these thoughts. We also point to CEO Patrick Pouyanne as an additional positive. His efforts to reset the business for lower oil prices by focusing on prudent management of its operational expenses and capital expenditures are encouraging.
• Shares of Exxon Mobil Corporation received a boost during the period after its Chief Executive Officer Rex Tillerson emerged as President-elect Trump's pick for Secretary of State. Looking forward, we value Exxon Mobil Corporation's long-term potential. The company's relentless focus on costs and superior project execution result in an enterprise that holds the potential to meaningfully generate cash. While the volatility within the current macro environment can be challenging for companies in this space, Exxon Mobil Corporation benefits from its diversified businesses, the sum total of which offers relative stability.
• Royal Dutch Shell's leadership in oil and gas exploration and production coupled with its disciplined management team make it an appealing investment. Also, the fact that it generates approximately equal cash flow from its upstream, downstream, and integrated gas operations is a source of valuable diversification.

Oil and Gas Equipment and Services

We find many companies in this segment to have solid businesses with an ability to generate free cash flows in what can often be an uncertain energy environment.

• Schlumberger, the world's largest oil field services company, is one of our largest positions in this industry. The company benefits from a strong balance sheet, ability to generate cash flow, and solid management team.
• US Silica Holdings is one of the largest providers of industrial sand in the U.S. Its shares are driven by oil and gas companies, as it derives a significant amount of revenue from its sand proppant business, which is utilized during well completions. We initiated a new position during the period.

Specialty Chemicals Stands as Largest Nonenergy Position

Within this industry, we seek companies that we believe are positioned to benefit from declining input costs and growing demand from strong end markets. This area of the market continues to offer value opportunities for investors.

• RPM, a provider of specialty products to consumer and industrial markets, benefits from strong new product development and its reputation as the preferred company for entrepreneurs in the building products space. With over 50 businesses, RPM holds a diversified positioning that we also value.
• We initiated a position in Linde, one of the major players in the chemical industry. We are encouraged by its growth potential and returns backed by long-term contracts. Its recent proposed merger with Praxair has the potential to create meaningful shareholder value.

Diversified Metals and Mining

A global oversupply of many metals and mining commodities is expected to be a headwind for this segment throughout much of this secular commodity bear market. We remain defensively positioned with the names we do own, focusing on companies with solid balance sheets.

• We initiated a position in Boliden. We believe the company will benefit from constrained zinc supply globally.
• Similarly, we initiated a position in Independence, a mining company that holds gold, nickel, and zinc operations based in Australia. We believe that nickel prices are likely to increase due to constrained supply fundamentals.

Utilities

Although we hold an overweight in utilities overall, we remain very selective in this area. For example, our underweight to water utilities benefited relative performance during the quarter. Water utilities are often expensive based on valuation, and we tend to avoid this segment.

• We trimmed our position in NiSource due to its fuller valuation and concerns surrounding a negative impact from tax reform. The company services both natural gas and electric customers spanning several states.