Brandes International Equity Fund Q3 Commentary

Market Overview

Most international equity markets, including in Europe and Japan, delivered negative results for the third quarter of 2014.

Uncertainty over the Russia-Ukraine crisis and data on stagnating economic growth in Europe appeared to have offset the European Central Bank’s suggested readiness to provide more aggressive stimulus to support the euro zone’s fragile recovery.

Emerging-market stocks were also hit as the investor optimism that propelled them last quarter seemed to dissipate. Fears that the U.S. Federal Reserve was moving closer to raising interest rates caused market concern about a potential repeat of last year’s sell-off and led investors to take a more cautious stance toward the asset class. Putting additional pressure on market sentiment was the uncertainty over the ongoing pro-democracy protest in Hong Kong against the Chinese government.

Amid this backdrop, the Brandes International Equity Fund underperformed its benchmark, the MSCI EAFE Index, which declined 5.88% for the quarter.

Performance Detractors

Companies domiciled in Europe accounted for the largest relative performance detractors during the quarter. The Fund’s holdings in European food & staples retailing (e.g., Tesco, J Sainsbury, Carrefour, Wm Morrison), oil gas & consumable fuels (e.g., British Petroleum, ENI), and diversified telecommunication services (e.g., Telecom Italia) all weighed on returns.

The majority of our food & staples retailing holdings are domiciled in the United Kingdom, where the food retailing landscape has been challenging for the last few years. With economic conditions still difficult, discount retailers have been able to steal market share from traditional grocers such as Tesco and Wm Morrison. Nonetheless, we remain convinced that these companies represent attractive businesses with value in their property portfolios, as well as in their non-core and international assets. Moreover, we are attracted to their capacity to improve cost structures.

Tesco (TESO)’s shares were hit particularly hard this quarter after reports of further market share slippage. In addition, the company issued a trading statement where it disclosed an overstatement of its expected profit for the first half of 2014, primarily attributed to the accelerated recognition of commercial income and delayed accrual of costs. The company’s senior management, which was newly appointed from outside of Tesco, is leading the review, which will be concluded by late October 2014. While most headlines have focused on domestic operations, we see substantial value in Tesco’s non-U.K. assets and in their real estate holdings. We are closely monitoring the unfolding situation to determine its potential impact on our estimate of Tesco’s intrinsic value.

Within our oil & gas allocation, shares of U.K.-domiciled oil giant British Petroleum (BP) suffered after a U.S. federal judge ruled that the company was grossly negligent with respect to the 2010 Macondo well accident in the Gulf of Mexico. The decision came as part of the first in BP’s three-phase trial. In our view, the share-price decline following this headline was excessive.

Our intrinsic value estimate for BP had already incorporated an estimate of a grossly negligent penalty. Following the news, we re-evaluated the company and came to the conclusion that the shares still offered an attractive margin of safety. Any penalty is not expected to be paid for several years, and the company has reaffirmed the ruling would not impact its dividend or buyback policy—nor would it lead the company to accelerate its asset disposal program. With significant cash on its balance sheet, which will still increase given the company’s asset disposal plan, we believe BP maintains a strong financial flexibility.

Beyond the aforementioned holdings, pharmaceutical firms Daiichi Sankyo Company and GlaxoSmithKline, and construction material company Italcementi also detracted from returns in the quarter.

Positive Contributors

Despite the overall negative performance, some of the Fund’s holdings performed well in the quarter, with emerging-market wireless service providers China Mobile and Mexico-based America Movil representing key positive contributors to returns.

In July, China Mobile (CHL) formally announced a jointly established telecommunications tower company between China’s three state-owned wireless carriers (China Mobile, China Unicom, and China Telecom). The partnership was made to help reduce individual spending, allow for the companies to share infrastructure, and ultimately increase each carrier’s network coverage and quality. While industry watchers had already speculated on the transaction for months, China Mobile’s share price appreciated on the formal announcement.

Meanwhile, America Movil (AMX) announced that it would begin to take measures to reduce its share in the Mexican telecommunications services market to below 50%. Possible measures include spinning off its cellular towers so that they can lease them at market rates, and divesting some of its assets on the east coast of Mexico. This asset disposal plan is popularly viewed as a pragmatic step for America Movil to appease the new regulator. The market seemed to welcome the news as it alleviated some of the uncertainty related to the new regulations in the Mexican telecommunication services sector, which had weighed on America Movil’s shares for several months.

In addition to these two companies, the Fund saw positive performance from select companies in banks (e.g., Brazil’s Banco do Brasil), pharmaceuticals (e.g., France-based Sanofi, Japanese Astellas Pharma), automobiles (e.g., Japan-based Nissan Motor Co.), and aerospace & defense (e.g., Brazil-based Embraer).

Select Fund Activity in the Third Quarter

During the quarter, the investment team exited the Fund’s positions in Banco do Brasil, Spain’s Telefonica, Japan-based NTT andAstellasPharma,aswellasU.K.-domiciledAstraZeneca.

We initially added AstraZeneca (AZN), one of the world’s largest pharmaceutical companies, to the Fund in mid-2007. At the time, a series of late-stage research & development (R&D) failures had stymied the company’s product pipeline and cast doubt on its ability to offset upcoming patent expirations. Furthermore, pharmaceutical stocks had fallen out of favor globally. Among the factors that weighed on market sentiment were: 1) declining R&D productivity and returns as clinical trials had become longer and more expensive, with a lower probability of success; 2) a patent cliff which threatened future revenue; and 3) more recently, austerity measures and reimbursement pressures stemming from mounting fiscal deficits of many governments worldwide.

Amid all these challenges, we saw in AstraZeneca a company with a diversified product portfolio, strong foothold in emerging markets, and a potential to reduce costs. Most importantly, the company’s market price at that time seemed to give very little value to AstraZeneca’s R&D potential or past R&D investments.

The market now appears to be ascribing more value to the company’s R&D potential. The company’s early-stage pipeline showed promising clinical trial data, specifically the immuno- oncology franchise that may potentially change the way cancer is treated. Additionally, the company received attention earlier in the

year following potential interest as an acquisition target. With the shares trading near our estimate of intrinsic value, we decided to exit the position.

In addition to the sales mentioned above, other Fund activity during the quarter included the additions of U.K.-based Kingfisher and British Sky Broadcasting Group, as well as Austria-domiciled Erste Group Bank.

Erste Group Bank (WBO:EBS) (Erste) is the leading retail bank in Austria, Romania, the Czech Republic, Romania, and Slovakia. The company also maintains a significant presence in several other European Union member states in Central and Eastern Europe.

Erste’s stock price has been negatively impacted by concerns of decelerating economic growth in Central and Eastern Europe, geopolitical uncertainties associated with the situation in Ukraine, as well as political and regulatory concerns in several markets, particularly in Hungary. In our opinion, these concerns have led the market to

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