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In the first quarter of 2026, the ClearBridge International Growth EAFE Strategy experienced underperformance relative to its primary benchmark, the MSCI EAFE Index, yet surpassed its secondary benchmark, the MSCI EAFE Growth Index. This period was characterized by significant geopolitical events, notably the escalating Middle East conflict, which adversely impacted international equities. The strategy's lack of traditional energy sector exposure proved to be a major drag on performance, as energy stocks surged. Conversely, value stocks demonstrated resilience, outperforming growth stocks by a substantial margin. The strategy made proactive adjustments, reducing holdings in high-beta sectors like financials, consumer discretionary, and information technology, while strategically increasing investments in utilities, materials, and Japanese equities to align with evolving market dynamics and identify new avenues for structural growth.

Navigating Geopolitical Headwinds and Market Volatility

The initial months of 2026 saw international equity markets grappling with considerable volatility, largely triggered by an intensified military conflict in the Middle East. This geopolitical turmoil led to a marked decline in international equities in March, overshadowing an otherwise positive start to the year. The MSCI EAFE Index, while down 1.2%, still outperformed the S&P 500 Index. Notably, value stocks outside the U.S. showcased remarkable strength, with the MSCI EAFE Value Index gaining 2.0%, significantly outperforming the MSCI EAFE Growth Index's -4.7% by 670 basis points. Over the trailing 12 months, value stocks maintained a substantial lead of over 1,700 basis points. The ClearBridge International Growth EAFE Strategy's relative underperformance was primarily attributed to its limited exposure to the energy sector, which experienced a remarkable 40% surge during this three-month period. Additionally, a March selloff disproportionately affected higher-beta holdings in financials, consumer discretionary, and information technology, contributing to the strategy's challenges.

The Middle East conflict, particularly concerns surrounding Iran's control over the Strait of Hormuz, caused immediate disruptions in oil and gas supplies. This situation exacerbated inflationary pressures from surging commodity prices, prompting the European Central Bank to reconsider its anticipated rate cuts. These rapid and dramatic shifts, combined with profit-taking following a strong performance in 2025, led to a 3.7% decline in the financials sector. Portfolio holdings such as Adyen, Intesa Sanpaolo, and NatWest Group were particularly affected. Banks, especially European banks, faced profit-taking and were reallocated as funding sources toward more defensive sectors like insurance and stock exchanges. Conversely, Australian and Canadian banks exhibited resilience, being less susceptible to rising energy costs. In response, the strategy trimmed some banking exposure as certain holdings neared their target prices. The emergence of generative AI tools also heightened concerns about competitive dynamics in the IT sector, leading to broad-based multiple contractions across software companies, including SAP. Despite these short-term weaknesses, the strategy maintains an optimistic outlook for international growth stocks, believing that recent portfolio repositioning has laid the groundwork for improved future outcomes, especially as growth stock valuations become more attractive.

Strategic Portfolio Repositioning for Future Growth

In response to the market volatility and emerging risks, particularly in March, the ClearBridge International Growth EAFE Strategy undertook significant portfolio adjustments. The indiscriminate selling observed across the investable universe, especially impacting high-growth companies with innovative business models, presented opportunities for strategic re-entry. Notably, the strategy repurchased shares of Spotify, leveraging the spike in volatility. Conversely, positions in Shopify and MercadoLibre were exited as they reached their predetermined price targets. A key focus of the repositioning was to identify companies poised to benefit from energy security initiatives and increased fiscal spending in Europe. This included investments in defense stocks and companies facilitating electric grid infrastructure, such as the new acquisition of French utility Engie. Furthermore, to capitalize on anticipated infrastructure spending in Europe, the strategy invested in Rio Tinto, a global mining powerhouse, recognizing its future profit potential from high-demand industrial metals like copper, aluminum, and lithium.

The strategy also made a concerted move into the Japanese market, adding five new positions. This decision was driven by several favorable tailwinds, including rising interest rates in Japan, expected to boost bank net interest margins, ongoing governance reforms driving higher returns on equity and shareholder-friendly actions, and expansionary fiscal policies under the Takaichi administration supporting domestic demand and technology investments. New Japanese holdings included Keyence (automation and inspection equipment), ORIX (capital and financing), Pan Pacific International Holdings (discount retail), Shin-Etsu Chemical (specialty materials), and Sumitomo Electric Industries (electrical components), with Sumitomo replacing Fujikura. Within the IT sector, the strategy maintained a neutral stance on semiconductor capital equipment, taking profits from ASML and Tokyo Electron while diversifying exposure with additions like ASM International and Lasertec, both critical to AI buildouts. Exits included Nomura Research Institute and RELX due to negative sentiment around AI disruption, Check Point due to delayed revenue growth, and EQT. The strategy aims to mitigate risks associated with an energy-dependent Europe and inflationary pressures, rebalancing the portfolio towards structural growth opportunities in utilities, materials, and Japanese equities, with a limited but strategic exposure to energy through companies like Woodside Energy.