Global Equity 3Q 2021

(All MSCI index returns are shown net and in U.S. dollars unless otherwise noted.)

Markets Review

Global Markets (total return) performed as follows:

Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle Global Equity Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Global equity markets fell during the third quarter, the MSCI ACWI Index’s first quarter of negative performance in over a year. Overall, the MSCI ACWI declined 1.05% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index pulled back 0.88%. In terms of style, value stocks underperformed their growth counterparts during the quarter, with the MSCI ACWI Value Index lagging the MSCI ACWI Growth Index by 0.66%.

Regionally, Asia—despite Japan’s outperformance—and South America were the worst performers. On the other hand, Africa and North America, the only two regions to post positive returns, were the strongest. On a sector basis, seven of the eleven sectors within the MSCI ACWI Index posted losses, with Consumer Discretionary, Materials and Communication Services the worst performers. Meanwhile, Energy, Financials and Information Technology were the strongest sectors.

Similar to the first two quarters of the year, data regarding reported COVID-19 cases remained volatile across most major regions of the world. Conditions worsened during the quarter as Delta, a more contagious variant of the virus, spread globally, leading to as many as ~4,560,000 new reported weekly cases around the world. Furthermore, vaccine doses remain relatively scarce globally, particularly in developing countries, causing a deceleration in vaccination uptake rates.

As conditions remained uncertain, reactions were mixed, as a handful of countries such as New Zealand, Australia and Japan reinstituted strict lockdown measures, while countries like the U.S., South Korea and the U.K. maintained loose restrictions or even relaxed restrictions. On the monetary policy front, central bank decisions also varied, as the U.S. indicated that a tapering of its asset-purchase plan may soon be warranted and the Bank of Korea increased interest rates, while the European Central Bank raised its inflation target and China lowered reserve requirements for its banks. The volatile environment seems to have even affected political leadership positions, as Japanese Prime Minister Yoshihide Suga surprisingly chose not to seek re-election, and Fumio Kishida was elected to take his place.

Meanwhile, China continued to ramp up its regulatory crackdown on technology, data privacy and education, creating uncertainty amongst investors. Additionally, Evergrande, one of China’s largest real estate developers, shocked investors with its warning of cash flow issues and potential default on more than $300 billion in liabilities. Concerns about a ripple effect in the event the company were allowed to collapse captured the market’s attention at the end of the quarter.

In geopolitical news, the U.S. completed its withdrawal from Afghanistan, ending its 20-year presence in the country. This has created uncertainty for world governments regarding the future of the country and stability of the region.

Performance and Attribution Summary

For the third quarter of 2021, Aristotle Capital’s Global Equity Composite posted a total U.S. dollar return of 0.14% gross of fees (-0.03% net of fees), compared to the MSCI World Index, which returned -0.01%, and the MSCI ACWI Index, which returned -1.05%. Please refer to the table below for detailed performance.

Performance (%)	3Q21	YTD	3 Years	5 Years	10 Years	ITD*
Global Equity Composite (gross)	0.14	13.02	15.00	14.71	13.72	11.63
Global Equity Composite (net)	-0.03	12.75	14.60	14.30	13.25	11.16
MSCI World Index (net)	-0.01	13.04	13.13	13.73	12.67	10.72
MSCI ACWI Index (net)	-1.05	11.12	12.57	13.19	11.89	9.86

From a sector perspective, the portfolio’s outperformance relative to the MSCI World Index can be attributed to security selection, while allocation effects had a negative, largely offsetting, impact. Security selection in Health Care, Energy and Consumer Discretionary contributed the most to the portfolio’s relative performance. Conversely, security selection in Industrials and Communication Services and an overweight in Materials detracted from relative return.

Regionally, allocation effects were responsible for the portfolio’s outperformance relative to the MSCI World Index, while security selection had a negative, largely offsetting, impact. Security selection in Europe and an overweight in Japan contributed the most to relative performance, while security selection in North America and Asia/Pacific ex-Japan detracted.

Source: FactSet

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.

Contributors and Detractors for 3Q 2021

Relative Contributors	Relative Detractors
Nemetschek	Oshkosh
Penske Automotive	Magna International
Danaher	Samsung Electronics
Sony	Twitter
Dassault Systèmes	LVMH

Nemetschek, a European provider of software solutions for architectural and building construction projects, was the leading contributor for the quarter.

The company reported strong results, with both margins and revenue well above expectations. Correspondingly, management increased its guidance for full-year 2021. We believe margin improvement was due to its transition toward the more profitable licensing of its software, a catalyst we previously identified, in addition to COVID-related cost savings. Revenue growth was largely driven by its Design and Build segments as international cross-selling rose. Importantly, Bluebeam, its building collaboration software, achieved record levels of growth in new users. Nemetschek’s Build segment also benefited from the continued favorable environment for the construction sector. Furthermore, during its annual user event, the company announced new product features that it plans to release in the first half of 2022 that aim to increase office to field collaboration and connectivity – the fastest-growing area within construction software.

Sony, maker of the PlayStation videogame console, was a primary contributor for the quarter.

Sony reported strong results, particularly in electronics and music, leading to an increase in management’s full-year guidance for operating income. Strength in electronics was driven by TV and camera sales, while success in music was attributed to the continued shift to streaming, a catalyst we previously identified. The company also hosted its annual PlayStation Showcase, where Sony further demonstrated its robust content pipeline with incoming titles such as Call of Duty: Vanguard, Grand Theft Auto V and Marvel’s Spider-Man 2. Additionally, Sony completed its acquisition of Crunchyroll, AT&T’s anime business that boasts over three million paying subscribers across 200 countries. The company also announced that Sony Pictures Networks India had entered merger discussions with India-based Zee Entertainment, a deal that would bring together two leading Indian media network platforms. Lastly, Sony continued to expand its gaming division by acquiring U.K. game developer Firesprite Games, an addition that is expected to bolster the company’s virtual reality (VR) software titles. We believe these actions will continue to enhance the company’s ability to monetize its vast intellectual property library across multiple segments, including entertainment, gaming, music and motion pictures.

Canada-based auto parts supplier Magna was the largest detractor for the quarter.

Following strong performance through the second quarter of 2021, shares declined as earnings came in slightly below expectations. Additionally, management lowered 2021 revenue and margin guidance due to sporadic shutdowns from the microchip shortage, as well as higher commodity prices and increased labor costs. We see this as a short-term headwind as supply chains eventually return to normal. Instead, we remain focused on the company being uniquely positioned to supply parts for an increasingly electrified and autonomous fleet of vehicles. This includes Magna’s specialty in lightening vehicles, a necessity for heavy electric cars, and its years of investment in self-driving technologies. Moreover, management remains optimistic, citing recent progress on the company’s ICON digital radar product, which is expected to launch in 2022. Magna and LG also closed a joint venture that Magna believes will strengthen its position in electric powertrains. Separately, Magna’s July announcement that it would acquire Veoneer, an auto safety business, fell through after quarter-end. This caused Veoneer to pay Magna a $110 million fee for terminating the merger agreement.

Twitter, the digital news platform, was one of the quarter’s largest detractors.

Shares declined during the quarter despite an improving advertising market and a largely positive earnings report, an improvement from its disappointing first quarter results. Twitter shared positive results, with double-digit revenue growth and 206 million average monetizable daily active users (mDAU) in the second quarter. More importantly, Twitter reported strong growth in advertising revenue, total ad engagements and cost per engagement (CPE), a testament to Twitter’s focus on optimizing its interface for user-friendly experiences and providing relevant content. Furthermore, the company remained proactive in expanding and enhancing the platform’s functionalities through the addition of products such as Communities, Super Follows and Twitter Blue, as well as improvements in Tip Jar, direct messaging and Twitter Spaces audio chat platform. We believe these efforts demonstrate Twitter’s continued product improvements and will further enhance its monetization efforts over the long term.

Recent Portfolio Activity

Buys	Sells
FirstCash	None

During the quarter, we did not exit any positions, but we added one new position: FirstCash.

FirstCash, Inc.

Founded in 1988, Texas-based FirstCash operates 2,800+ pawn shops in 24 U.S. states and four Latin American countries: Mexico, Guatemala, Colombia and El Salvador. Its stores buy and sell pre-owned consumer merchandise, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments. Like all traditional pawn shops, the company also provides small consumer loans secured by pledged personal property. With annual revenue of $1.5 billion and more than 16,000 employees, FirstCash is an international leader in a fragmented industry consisting primarily of mom-and-pop stores.

Pawnbrokers offer a convenient service to credit-constrained and/ or underbanked consumers by providing access to short-term cash loans. Unlike other providers of short-term loans (e.g., payday loans), however, pawn shops do not allow for the possibility of consumer debt spirals, nor do they utilize collection agents or have loans linked to bank accounts. If a customer is not able to repay the loan, FirstCash simply acquires the pledged property and the debt is extinguished. The company and industry are therefore differentiated in the small loan space due to their sustainable business practices and, in our opinion, face a lower risk of overregulation.

High-Quality Business

Some of the quality characteristics we have identified for FirstCash include:

• Attractive business fundamentals, with a market-leading position (more than two times the size of the next-largest competitor) in an industry with high barriers to entry;
• Diversified lending and retail model, enhanced by scale, has resulted in a resilient business with strong margins and cash flows;
• Loyal customer base, with ~75% of its loan business from recurring customers; and
• A strong balance sheet and a disciplined capital allocation strategy that allows for organic investments, selective acquisitions and returns of capital to shareholders (i.e., buybacks and dividends).

Attractive Valuation

We believe FirstCash shares are priced below our estimate of the company’s intrinsic value based on our estimates of normalized earnings. More specifically, we think the company is well positioned to increase market share from store count expansion domestically and internationally.

Compelling Catalysts

Catalysts we have identified for FirstCash, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:

• Revenue growth from continued expansion in Latin American countries with attractive demographics and high per capita unbanked populations;
• Continued market share gains in the U.S. through small shop acquisitions, focusing on states with growing populations and stable regulation; and
• Shareholder-friendly deployment of FREE cash flow generation.

Conclusion

At Aristotle Capital, our work is focused on individual companies. Where broader issues such as central bank policy decisions, the pandemic and geopolitics are relevant, we take a long-term approach, attempting to minimize the distractions of what may be on others’ minds. While the headlines focus on short-term news, in our view, the fundamentals of a business are the most important determinants of its long-term stock price performance. Consequently, we believe the best way for an investment manager to consistently add value is to maintain a long-term perspective and focus on understanding a company’s key attributes and value drivers.