Core Equity 2Q 2021
Markets (total return) performed as follows:
Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle Core Equity Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.
The U.S. equity market continued to trend upwards for the fifth consecutive quarter. Overall, the S&P 500 Index gained 8.55% during the period. Concurrently, the Bloomberg Barclays U.S. Aggregate Bond Index increased 1.83%. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 6.72% during the quarter.
On a sector basis, ten out of eleven sectors within the S&P 500 Index finished higher for the period, led by Real Estate, Information Technology and Energy. The worst performers were Utilities (the only sector to post a negative return), Consumer Staples and Industrials.
Positive momentum in the U.S. regarding the receding spread of COVID-19, vaccination uptake and relaxation of quarantine mandates continued to build during the quarter. According to CDC reports, more than 50% of the country (more than 65% for those 18 and over) has received at least one dose of the vaccine, and the number of new daily cases in the U.S. has fallen to levels unseen since the onset of the pandemic. As a result, various state governments have dropped travel restrictions, capacity limitations, curfews and mask requirements for fully vaccinated individuals, leading to increased economic activity, such as traveler throughput at U.S. airports, which as of June 2021 is approaching pre-COVID levels.
In line with the improving conditions, economic data points were also strong, as May retail sales were up 28.1% year-over-year, the ISM manufacturing index came in above 60 for a fourth consecutive month and the ISM services index hit a record high. Unemployment also continued to decline to 5.8%, the lowest level over the past year.
Additionally, the narrative surrounding inflation continued to capture headlines as the Bureau of Labor Statistics reported a 5% year-over-year increase in the Consumer Price Index, the largest gain since August 2008. While the year-over-year increase was abnormally high, it is important to note that prior year percentage changes were abnormally low. As such, the Federal Reserve reiterated its stance that the near-term price pressures are largely transitory in nature and made no changes to the current rate policy or asset purchase plan.
Lastly, Senate members have been in negotiations with President Biden for a $1.2 trillion, eight-year spending package that would be used to rebuild the nation’s infrastructure. The deal, which currently has bipartisan support, could pass the Senate as early as next month.
Performance and Attribution Summary
For the second quarter of 2021, Aristotle Atlantic’s Core Equity Composite posted a total return of 7.05% gross of fees (6.94% net of fees), underperforming the S&P 500 Index, which recorded a total return of 8.55%. Since its inception on August 1, 2013, the Core Equity Composite has posted a total return of 16.56% gross of fees (16.01% net of fees), while the S&P 500 Index has reported a total return of 14.81%.
|Performance (%)||2Q21||1 Yr||3 Yrs||5 Yrs||Since Inception*|
|Core Equity Composite (gross)||7.05||39.70||21.10||19.81||16.56|
|Core Equity Composite (net)||6.94||39.12||20.60||19.33||16.01|
|S&P 500 Index||8.55||40.79||18.65||17.64||14.81|
During the second quarter, the portfolio’s underperformance relative to the S&P 500 Index was driven primarily by security selection, although allocation effects also modestly detracted from relative returns. Security selection in Health Care, Financials and Consumer Discretionary detracted the most from relative performance. Conversely, security selection in Consumer Staples and Information Technology, along with an underweight in Consumer Staples, contributed the most to relative results.
|Relative Contributors||Relative Detractors|
|Avery Dennison||Guardant Health|
Bio-Techne shares outperformed during the second quarter, as the company continued to execute its strategy and drive accelerating organic revenue growth. The company remains well positioned, in our view, to benefit from increased research and development spending in bio-pharma and academic end markets.
Avery Dennison Corporation
Avery Dennison shares outperformed during the second quarter following the release of a strong first quarter earnings report that included better-than-expected guidance for fiscal year 2021. Th e company is benefiting from accelerated growth related to the reopening of global economies, and management consequently raised its organic growth outlook to 8%-10% from the prior 3%-7%. We believe the company should continue to benefit from cyclical tailwinds related to the ongoing post-COVID economic expansion, as well as secular growth in its RFID and intelligent label business.
Marriott International, Inc.
Marriott underperformed during the second quarter despite a strong report of its first quarter earnings in May, which nearly doubled consensus estimates. However, revenue growth was slightly below consensus estimates, and concern remains that business travel trends are still slowly recovering from the coronavirus. Due to this uncertainty, the company did not provide guidance for the remainder of 2021.
Guardant Health, Inc.
Guardant underperformed during the second quarter following solid gains during the prior quarter. The decline in Guardant shares, in our view, appeared related to general weakness in high P/E multiple growth stocks given the perceived shift in investor focus to cyclical stocks. During the second quarter, Guardant reported first quarter earnings that exceeded consensus forecasts, although fullyear 2021 guidance was disappointing, in our opinion. We continue to view Guardant positively and expect its total addressable market to continue to grow.
Past performance is not indicative of future results. Attribution results are based on sector returns, which are gross of investment advisory fees and include the reinvestment of all income. Please see important disclosures at the end of this document.
Recent Portfolio Activity
The table below shows all buys and sells completed during the quarter, followed by a brief rationale.
We sold our position in Alteryx following disappointing earnings reports in each of the past three quarters. We believe the company’s business model is in transition as the new CEO and management team restructure both the go-to-market strategy as well as the overall product offering mix.
We believe the outlook for the U.S. large cap equity market near term will be primarily influenced by the start date for Federal Reserve monetary policy shifting to a tightening cycle. The start date for Federal Reserve tightening will most likely continue to shift forward due to the rise in inflation expectations. Additional fiscal stimulus can also factor into equity market movements but will likely be less predictable due to concerns over federal debt levels and the potential to overheat the economy. Markets typically see increased volatility in periods leading up to a change in Federal Reserve policy toward tightening, and we would expect this time frame to be no different. The markets have already, to some degree, priced in higher rates, as higher valuation stocks have seen a period of multiple compression, which started last fall. We believe the outlook for earnings growth continues to improve and will likely more than offset further multiple compression. We continue to expect a shift back to secular growth and away from cyclical stocks in the second half of the year. Our focus will continue to be at the company level, with an emphasis on companies we believe maintain secular tailwinds or strong product-driven cycles.
The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Atlantic makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Core Equity strategy. Not every client’s account will have these characteristics. Aristotle Atlantic reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Atlantic’s Core Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. For example, a 0.5% annual fee deducted quarterly (0.125%) from an account with a ten-year annualized growth rate of 5.0% will produce a net result of 4.4%. Actual performance results will vary from this example. The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe.
It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index has been selected as the benchmark and is used for comparison purposes only. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies. The Index covers all industries except transportation and utilities. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite includes over 3,000 companies, more than most other stock market indices. The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of domestic investment grade bonds, including corporate, government and mortgage-backed securities. The WTI Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for oil consumed in the United States. The 3-Month U.S. Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of three months. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest directly in these indices.
Aristotle Atlantic Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. AAP-2107-28