Litman Gregory Masters International Fund Third Quarter 2018 Attribution

During the third quarter of 2018, the Litman Gregory Masters International Fund fell 2.98% and the MSCI ACWI ex USA Index was up 0.71%. The MSCI EAFE Index gained 1.35% in the quarter and the Morningstar Foreign Large Blend Category returned 0.80%1. Since its inception in December 1997, the fund has compounded returns at an annual rate of 7.11% after fees, while the MSCI ACWI ex USA, MSCI EAFE, and foreign blend category have gained 5.39%, 5.00%, and 4.43%, respectively.

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit

Themes, Trends, and Observations from the Managers*

David Herro, Harris Associates
Global equity prices continued to be volatile last quarter due to trade fears, UK/European politics, and mixed though still generally positive economic data. Foreign equity markets rebounded modestly from the weakness we saw earlier in the year though most markets are still negative for the year in US dollar terms. Despite a seemingly higher level of caution among investors, we believe the outlook for underlying company fundamentals remains favorable and should lead to positive equity returns over the medium to long term.

In our international equity portfolio, we opportunistically re-positioned the portfolio across existing holdings and added one new position, Naspers, the South African conglomerate. Geographically, our portfolio exposure remains tilted toward developed markets though many of the businesses we hold possess global revenue streams. We continue to focus our research on unique opportunities across both developed and emerging markets.

Vinson Walden, Thornburg Investment Management
Broadly, many portfolios that were underweight to the United States had a challenging third quarter. Although corporate fundamentals have remained okay, equity market sentiment has been squeezed by several issues:

  • a moderately softer European and Asian macro environment
  • the uncertainty of European political issues, particularly surrounding Brexit and Italy’s new government
  • elevated trade war policy implementation and rhetoric by the Trump administration

The result is that the dispersion in regional equity market performance continued through September.

Today, investors debate the future direction of the economies of China, Europe, various emerging markets, and the United States. They consider potential policy actions by the Federal Reserve, Congress, the Trump administration, and foreign government regulatory and policy actions. Concerns about tariffs and trade policy changes were impactful on share price movements of global producers of tradeable goods in the September quarter. Many political and macroeconomic issues will remain open, but we believe people around the world will continue to buy goods and services and trade with one another. Importantly, overall global consumer spending is growing in 2018, along with global industrial production and global population. Most macroeconomic indicators around the world positively surprised in 2017 and 2018 to date. Attention is now turning to 2019, with slower expected growth as central bank tightening continues in the United States and gets underway in other countries.

Positive economic trends have supported a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive assets, though with increasing debate in recent months around valuation and the expected duration of the global economic growth cycle. It appears that political gridlock will prevail in Washington, DC, into 2019 and 2020. The Fed has maintained the pace of federal funds target rate hikes, moving the upper bound of its target from 0.75% to 2.25% over the last seven quarters. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates and support the prices of financial assets.

Howard Appleby, Jean-François Ducrest and Jim LaTorre, Northern Cross
The team has high conviction in its concentrated portfolio of market leading franchises. Concerns regarding the macroeconomic outlook in China have weighed on the Macau casinos, which was a negative contributor in the quarter. We think the near- and long-term fundamentals for these franchises remain very strong and see current valuations as attractive. The team sees other opportunities arising in industrial automation, also coming under pressure due to concerns about the Chinese economy. Global agriculture leader Bayer saw near-term pressure related to an adverse product liability jury award related to its non-selective herbicide Roundup. It is our view that the potential financial impacts have been overstated by the market and thus see an opportunity for Bayer’s valuation to recover. In short, due to broader macro and company-specific factors, we are finding more opportunities for outperformance and are positioning our portfolio accordingly. The team added one new position in the quarter, Philip Morris International. Philip Morris International is the industry leader in next-generation lower-risk tobacco products. The stock has come under pressure due to concerns about heightened regulation and competition from new entrants. We think Philip Morris International can deliver strong earnings and cash flow growth that is not reflected in the current price.

Mark Little, Lazard Asset Management
International equities rose in the third quarter of 2018, with the perceived strength of the US economy driving stocks higher despite a number of negative international developments. China came under pressure as the economy slowed and trade war rhetoric started to become a reality. Italian stocks fell on concerns over the new government’s fiscal stance, while emerging-market currencies continued to slide. Progress on the United Kingdom’s Brexit talks remained elusive. In contrast, Japan was seen as an improving safe haven. Sector performance was diverse. Strong oil prices and US data drove up energy shares and industrial cyclicals, while renewed euro concerns drove down financials and local utilities. Automotive stocks were hurt by trade war fears and a slowdown in China, while health care was seen as enjoying uncorrelated growth.

On the macroeconomic side, the global economy is developing somewhat of a split personality. Data from the United States remain very strong, buoyed by corporate tax cuts and strong business confidence. This is driving up inflationary expectations, driving down unemployment, and driving up interest rates and the US dollar. However, this tightening of US dollar liquidity is putting increasing pressure on the rest of the world, especially the traditionally vulnerable emerging markets such as Turkey. Trade war rhetoric is hurting global trade sentiment, including a China that was already starting to slow and a Europe that is once again facing political uncertainty. This environment is seeing money flow into US equities and into companies seen as offering structural growth, whose valuations are appearing increasingly stretched. Unless China launches a major stimulus, the risk from here is that eventually the US economy itself will stutter, either from rising rates or from turmoil elsewhere in the world. This would provoke an end to US dollar tightening but may be painful in the interim. Rising costs may start to pressure margins, while rising rates are generically concerning given the overwhelming amount of debt that has continued to pile up on public and private sector balance sheets since the financial crisis. Overall, the portfolio team remains confident that, by continuing to focus on stock selection, and seeking to find stocks with sustainably high or improving returns trading at attractive valuations, the strong long-term track record of the strategy should continue.

Fabio Paolini and Benjamin Beneche, Pictet Asset Management
As some of you may know, our approach to valuation leans upon the concept of normalized free cash flow. “Normal” is of course highly subjective but broadly leads us to question levels of profitability that are significantly above or below historical levels. Recently, we have often concluded that high levels of profitability are not sustainable; parts of the semiconductor supply chain and general industrials come to mind. On the flip side, we have struggled to identify business cycles that appear to be at cyclically depressed levels. As a result, we continue to hold a portfolio that has higher exposure to stable consumer franchises (GlaxoSmithKline, Anheuser-Busch InBev, Japan Tobacco) and secular growth (Softbank/Safran/ even though near-term multiples are somewhat higher. That said, we did add one position to the portfolio over the quarter: Moscow Exchange, a business that we have watched closely for some time, and whose price decline moved from the realms of “cheap” to “very cheap.”

Moscow Exchange is the leading securities exchange in Russia. The company possesses all the attractive characteristics of an exchange business model: high recurrent revenues, a limited capital requirement, and high margins that lead to a high rate of cash conversion, attractive returns on capital, and substantial cash distributions to shareholders. However, Moscow Exchange differs from its European peers in several compelling ways: (1) its market is relatively immature, which creates the opportunity for significant growth through the expansion of its product range; (2) it has a vertically integrated business model (trading and post-trade services) that both generates higher (and steadier) revenues and makes it tougher for competitors to get established; (3) its customer base is highly diversified; and (4) it holds a near monopoly on trading in virtually all asset classes in Russia. Another characteristic of Moscow Exchange profitability has been a relatively high component of interest income on the customer cash (margin) balances. In the current environment of rising Russian interest rates, this is a tailwind while the company strives to grow its other revenue sources. The reason for the stock’s weakness is simple—the current low level of sentiment toward Russian stocks that has resulted from international tensions with the Putin government and sanctions. Whether or not these prove to be temporary, we believe the potential upside is such that Moscow Exchange warrants a place in the Masters International portfolio.

Although current market valuations broadly warrant a cautious approach, we continue to feel optimistic about the companies we own. We believe they each combine a long runway for growth with strong competitive advantages and that they trade cheaply relative to their normalized cash flows. The recent increase in market volatility has only provided us with more opportunities to purchase the types of business we like at favorable prices.

David Marcus, Evermore Global Advisors
While we are obviously not pleased with the performance of a number of our positions during the third quarter, we remain confident in the quality and valuations of the investments we have made. We have and will continue to take advantage of price declines caused by trade concerns and other macro issues to add opportunistically to existing positions and initiate new ones. Over time, we may shift some capital from investments that we like in favor of situations that we love, especially as volatility creates more compelling risk/reward scenarios. The number of special situations—deep value plus catalysts—continues to grow across international markets. We remain focused on investing only in those select situations that we believe will create the most compelling compounded returns.

* The opinions herein are those of the sub-advisors at the time the comments are made and are subject to change.

Discussion of Performance Drivers

During the quarter, the fund underperformed its benchmark. Both stock selection and sector allocation drove the underperformance. Stock selection within one sector in particular (consumer discretionary) was a material headwind for returns, in large part due to an unusual confluence of macro concerns, such as Brexit, Italy, and of course trade war with China—all of which depressed investor sentiment. We will touch on some of the stocks in this sector that dragged down performance this quarter later in the report. It’s important, however, to understand that the portfolio is built stock by stock so the fund’s overweight to consumer discretionary has always been a residual of stock picking, not a macro or sector call by the fund’s sub-advisors.

Litman Gregory Masters International Fund Sector Attribution

International Fund Sector Attribution

  • The fund’s largest sector overweight continues to be the consumer discretionary sector. Stock selection in this sector drove the majority of fund underperformance during the third quarter. Steep declines in stocks such as, Universal Entertainment, Las Vegas Sands, Wynn Macau, and MGM China detracted from returns. This sector was also the worst-performing sector within the benchmark.
  • Stock picking within the materials sector contributed to performance. The strong return in this sector was largely driven by OCI, a producer and distributor of natural gas–based fertilizers and industrial chemicals.
  • Rising oil prices helped the energy sector to be the top-performing sector in the benchmark. The fund had no energy exposure a few years ago, but managers have since added a handful of stocks in the sector, including Borr Drilling, Frontline, Schlumberger, and Teekay LNG Partners. These energy stocks lagged those of the benchmark and detracted from performance.
  • The fund’s largest sector underweight is to information technology stocks. This position was a slight positive as the sector modestly underperformed the broad market.

Top 10 Contributors as of the Quarter Ended September 30, 2018

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

OCI NV 3.33 0.01 18.47 0.64 Netherlands Materials
SoftBank Group Corp. 1.25 0.37 39.15 0.41 Japan Telecommunications
Vivendi SA 5.2 0.15 6.78 0.34 France Consumer Discretionary
Safran SA 1.87 0.18 16.24 0.3 France Industrials
CNH Industrial NV 2.38 0.07 14.16 0.27 Netherlands Industrials
Israel Discount Bank Ltd. Class A 1.92 0.00 14.82 0.25 Israel Financials
CK Hutchison Holdings Ltd. 2.6 0.13 9.04 0.23 Hong Kong Industrials
NN Group NV 1.44 0.06 12.61 0.17 Netherlands Financials
SAP SE 1.45 0.56 10.76 0.16 Germany Information Technology
Don Quijote Holdings Co. Ltd. 1.68 0.00 9.1 0.15 Japan Consumer Discretionary

Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Contributors

Safran (Fabio Paolini and Benjamin Beneche, Pictet Asset Management)

When we acquired it for the portfolio during the third quarter of 2017, Safran (a French aerospace firm) was a company in transition. Nearly three quarters of group earnings derive from its “propulsion” division. At the core of this is CFM, a joint venture with US engineering giant GE that commands a 75% market share in the supply of jet engines for narrow-body commercial aircraft. The market was skeptical about Safran for two reasons. First, it was making a significant shift from a one-engine model platform (the CFM56) that had been in production for 25 years to a newly developed engine, the “Leap.” Such transitions depress cash generation; they are costly in terms of research and development and the investment required to ramp up new production. Concerns related to this were being compounded by initial production delays to the Leap program. Second was Safran’s acquisition of troubled aircraft interiors group Zodiac and the management effort that was going to be necessary to turn the business around. Zodiac had become distressed by a series of contracts that were mispriced and by poor execution. Our thesis was that (1) high-margin aftermarket (spares and maintenance) revenues from the huge installed base of CFM56 engines would continue to grow through 2025; (2) that Leap development and ramp up costs would fall away quickly and allow investor focus to switch to a growing fleet of Leap-powered engines that will give a high degree of visibility into Safran’s cash generation for many years to come; and (3) that Safran’s high-quality management would quickly tackle Zodiac’s problems and begin to grow the returns from the business.

During the third quarter, Safran stock continued an upward progression in the wake of strong first quarter results that came toward the end of the second quarter, and then rose sharply on an even more positive set of second quarter results in early September. These pointed to a further rise in air traffic numbers and record demand for new narrow-body civil aircraft that carry its engines. These trends are proving highly positive for both CFM56 installed base maintenance revenues and for the roll out of its new Leap engine. The ramp of Leap production is continuing well, with no new production or process issues to delay its progression. Running this new base through our valuation model led us to increase our assessment of Safran’s intrinsic value during the quarter. Our thesis remains well on track and we see further attractive upside to this new target price.

NN Group (David Marcus, Evermore Global Advisors)

NN Group is a Netherlands-based $15.4 billion market cap financial conglomerate that operates in 18 countries and offers a comprehensive range of retirement, insurance, investment, and banking services. After reporting strong second quarter financial results, shares of NN appreciated about 10% during the quarter. We believe shares in NN remain undervalued and expect catalysts, including the ongoing integration of the company’s Delta Lloyd acquisition, to continue to unlock value over the coming months and years.

SAP (Howard Appleby, Jean-François Ducrest, and Jim LaTorre, Northern Cross)

SAP was a positive contributor to performance, driven largely by continued momentum in customer adoption of SAP’s latest Enterprise Resource Planning software, powered by HANA, its in-memory database that provides for real-time computations and analytics. Further, SAP’s cloud-based subscription services continue to gain traction and have driven top-line growth on top of a sticky core revenue base. We think companies globally have an ever-increasing need to improve operating efficiency and gain real-time business intelligence to make decisions. SAP provides solutions that achieve both goals, which has allowed it to maintain a strong industry position in the face of rising competition.

Fagron (David Marcus, Evermore Global Advisors)

Fagron is a $1.4 billion market cap Belgium-based leader in pharmaceutical compounding. Strong operating results at the company’s US operations combined with the opening of its Canadian business and other positive corporate developments, led to a 13.7% increase in the price of Fagron shares during the quarter. Despite this share price increase, we believe Fagron shares still trade at a significant discount to our estimate of intrinsic value. In our initial thesis and valuation, we did not assign any value to the US business in order to build in a significant margin of safety. Now, as the US business has undergone a radical restructuring, we are getting the US assets and their European growth potential for a very modest valuation in spite of the solid performance Fagron has already delivered.

Shire (Mark Little, Lazard Asset Management)

Shire, a pharmaceutical company and long-standing investment, is in the midst of a takeover from Japanese rival Takeda, which we believe is likely to proceed. The market had priced Shire at a material discount to the value of Takeda’s offer, which we believed was unjustified, and this started to close as confirmation of the transaction came closer.

Top 10 Detractors as of the Quarter Ended September 30, 2018

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector Inc. 2.2 0.1 -31.84 -0.83 China Consumer Discretionary
Universal Entertainment Corp. 1.26 0.00 -31.85 -0.51 Japan Consumer Discretionary
Las Vegas Sands Corp. 1.99 0.00 -20.68 -0.46 United States Consumer Discretionary
Anheuser Busch Inbev 3.07 0.36 -13.69 -0.44 Belgium Consumer Staples
Wynn Macau Ltd. 1.38 0.02 -25.04 -0.39 Hong Kong Consumer Discretionary
MGM China Holdings Inc. 1.08 0.00 -30.05 -0.38 Hong Kong Consumer Discretionary
Bayer AG 1.62 0.43 -18.59 -0.34 Germany Health Care
IWG PLC 1.25 0.00 -24.02 -0.33 Switzerland Industrials
ASML Holding NV 2.66 0.38 -9.43 -0.23 Netherlands Information Technology
Informa PLC 2.43 0.06 -8.05 -0.21 United Kingdom Consumer Discretionary

Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Detractors (Fabio Paolini and Benjamin Beneche, Pictet Asset Management)

Our thesis on is broadly unchanged in the 18 months since it was added to the portfolio. Despite continued price weakness through the early part of the period, and then a sharp fall in September, we continue to believe that (1) over time the business will be able to convert its significant scale advantage and strategic alliances into operating margins in the vicinity of 5%; and (2) JD can co-exist with larger competitor Alibaba Group Holding in a rapidly expanding Chinese e-commerce market. Their customer proposition and business models both have their advantages and are sufficiently differentiated to allow both to thrive. However, investors are currently frustrated with JD as continued heavy investment in its distribution business is holding back the progression of margins. The situation is compounded by the evidence that while both JD and Alibaba are growing gross merchandise value (GMV—value of goods transacted on the platform) at over 30% per annum, Alibaba is monetizing this more efficiently. Its core commerce revenues are growing at 55% compared to JD growth more in line with its GMV. However, we do not see this as meaning Alibaba has “won” and that JD is “doomed.” JD’s business model allows for a degree of quality control and end-to-end control of the delivery network that is way beyond that which Alibaba is capable of. Unlike Alibaba, JD is a genuine retailer, and when we compare it to bricks and mortar competition, JD has both more scale and a better operating cost base. Furthermore, the company has been a truly prodigious cash generator. Earnings have languished due to investments in logistics and research and development, but a negative working capital position helped JD to generate USD 2 billion in the last quarter alone. This compares to a market cap today of around USD 35 billion! Cash continues to build up on a balance sheet that boasts a gross cash level of USD 7.2 billion (net cash of USD 4 billion). In the future we think the creation of a logistics management company will further reduce the capital intensity of the business and lead to even higher returns on capital over the long term. To us, the story remains highly compelling.

Which brings us to the “left field” development that prompted the recent sharp price decline. Early in September, it became public that CEO/founder and controlling shareholder Richard Liu had been questioned by police in Minneapolis for the alleged rape of a Chinese student at the University of Minnesota while he was attending an executive leadership course. The allegations are clearly very serious, but Liu was released without charge and allowed to return to China. We have no insight into how the episode will conclude (so have not added to the position on the weakness), but we are reluctant to judge Liu based on what is currently known. We are monitoring the situation closely and for the time being remain holders.

Universal Entertainment (David Marcus, Evermore Global Advisors)

Universal Entertainment is a $2.3 billion market cap leading developer and manufacturer of pachinko and pachislot gaming machines in Japan. It is also the owner and operator of Okada Manila, one of the largest casinos in the Philippines. Despite reporting solid second quarter financial results, the price of Universal shares declined about 30% during the quarter. One development that possibly could have alarmed investors is the company’s announcement on August 6 that former Universal chair Okada was arrested by the Hong Kong Independent Commission Against Corruption. It is important to note, however, that Mr. Okada resigned his board position on June 29, 2018, and is no longer involved with the company. We believe the company’s Okada Manila subsidiary will continue to gain market share and will ultimately be publicly listed, which will help to crystallize the appropriate value for this prized asset that is embedded within Universal.

Anheuser-Busch InBev (Howard Appleby, Jean-François Ducrest, and Jim LaTorre, Northern Cross)

Anheuser-Busch InBev was a detractor to performance in the quarter. We attribute this primarily to the negative impact of currency depreciation and overall economic slowing in Brazil among other emerging markets. In addition, Anheuser-Busch InBev has suffered from the weak performance of its US-based operations. Given Anheuser-Busch InBev’s elevated leverage (taken on to fund its 2016 acquisition of SAB Miller), there is concern that it may have to reduce its dividend in order to accelerate its debt reduction plan. Given Anheuser-Busch InBev's dominant market position, we expect the company to recoup currency depreciation through higher pricing. However, these pricing gains take time to rebuild. In addition, we think the addition of Africa provides the company with considerable opportunity for growth in the years ahead. This is a clearly unique asset—strong cash generation from the United States funding growth in emerging markets, which we think will deliver outsized returns in the years ahead. Even if Anheuser-Busch InBev reduces its dividend, we think the company should post solid EBITDA (earnings before interest, taxes, depreciation, and amortization) growth in the years ahead, which will drive outperformance.

Informa (Mark Little, Lazard Asset Management)

UK media company Informa came under pressure as it reported slightly disappointing margins and as investors worried about its exposure to China and economic sensitivity of their global-exhibitions business. We believe these concerns are overblown and that Informa represents very good value for a relatively stable high-returning business.

Telecom Italia (David Marcus, Evermore Global Advisors)

Telecom Italia is the domestic market leader in Italy for fixed-line and mobile networks with a $12.3 billion market cap. TIM also owns a 67% stake in TIM Participações (TIM Brazil), a $7 billion market cap telecom operator that provides mobile services, fiber optic data, and broadband services in Brazil. We have been shareholders in Telecom Italia since 2015. Telecom Italia has been undermanaged for quite some time, over the last 15-plus years, and in spite of that, there remains substantial value.

Despite reporting solid financial results in July, shares of Telecom Italia declined by about 18% during the third quarter. In addition, the continued price decline is confusing as activist investor Elliott Management recently took control of 10 out of the 15 seats on the board. We continue to hold CEO Amos Genish in high regard and believe he has done a great job thus far despite his short time at the helm. We continue to closely monitor the interaction between Genish and the new board and whether there will be any changes to the company’s strategic direction that could raise concerns.

Lloyds Banking Group (Vinson Walden, Thornburg Investment Management)

Lloyds Banking Group provides financial services to individual and business customers in the United Kingdom and overseas. The company's business activities include retail and commercial banking, long-term savings, protection, and investment. We initially viewed Lloyds as a good organic capital generation and capital return story trading at a reasonable valuation for one of the best return profiles within the European banking space. Operational results confirmed, in our view, that the bank would be willing and able to pay out capital to shareholders in excess of 13% CET1 (regulatory capital). Furthermore, we expected in excess of 200 basis points of organic capital generation per annum via low- to mid-single-digit percentage loan growth and stable to growing margins. We also liked that UK banks didn't have the structural headwinds of “lower-for-longer” rates that other European banks had. We believe Lloyds can maintain its attractive dividend, and the share price can increase with earnings and with a moderate valuation re-rate toward sector average multiples as the market gains confidence in the bank’s ability to navigate economic complexity around Brexit and potential regulatory changes.

With respect to valuation, we review traditional fundamental metrics such as price-to-book and price-to-earnings ratios, while triangulating the appropriate valuation against Lloyds’s current and prospective ability to earn attractive returns (from UK-specific macro factors and internal business execution), which is measured through traditional metrics like return on equity and return on assets. We also consider its ability to meet regulatory capital requirements, and whether these requirements compromise the bank’s ability to fund growth and to fund its dividend. When triangulating these factors, we believe Lloyds’s valuation is too low on an absolute basis (considering its returns and earnings power) and on a relative basis compared to the European banking sector.

During the third quarter, there was a cascading effect across markets as global investors became more concerned about macro and policy risks. As it became clear that the European economy was “fine” but moderately softer than expectations, European markets declined. This was exacerbated by fears of government and external risks such as an Italian political party’s interest in exiting the common currency and the collapse of the Turkish lira. With Brexit negotiations going poorly, the UK market sold off more than eurozone markets. Given bank stocks’ above-average market sensitivity, UK bank stocks have underperformed the overall UK market. Lloyds slightly outperformed the UK banks index but was still caught up in the general sensitivity to softening European equity markets.

In the midst of these capital market dynamics, Lloyds reported earnings that beat expectations with its second quarter earnings report. Some market participants questioned the durability of its ability to deliver differentiated earnings, but the company explained how it continues to prioritize profitability over growth.

Looking forward, the company continues to execute its corporate strategy of defending and strengthening brand equity to support new business generation and continuing to manage the cost structure. We are watching for new risks, such as macro headwinds from Brexit negotiations, a softer housing market, or uncertainty caused by the regulatory environment, but don’t believe there have been significant changes in the last number of months. We are aware of the Bank of England’s stance on raising rates but don’t believe we can make a differentiated prediction of their decision process. Instead, we believe Lloyds will do well if rates remain low, and we think the bank’s earnings and valuation have positive sensitivity to rate increases