ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

As we’ve highlighted several times throughout the year, volatility was a recurring theme for most of 2023 and the fourth quarter was no exception. Following a sluggish start to the quarter, small cap stocks rallied off their October lows and ended the period with a double-digit gain. For the quarter, the Russell 2000’s gain of 14.03% outpaced the 11.96% total return of the Russell 1000 Index, marking the first quarterly outperformance period for the small cap index since the third quarter of 2022. Overall equity performance continued to be tightly correlated to 10-year US Treasury bond yields. When yields rose in October, stocks fell sharply. Yields collapsed in November and December, and stocks rallied. The Federal Reserve’s dovish commentary was a primary catalyst for the ‘everything-rally’ that ensued into year end. At the mid-December meeting, Chairman Powell made public comments that suggested the Fed had interest rate cuts on its mind, saying cuts were “a topic of discussion” among Federal Reserve members. At the time of this writing, markets are currently pricing in several rate cuts in 2024, however, the situation remains fluid as a host of uncertainties could potentially alter the pace and direction of policy moves throughout the year.

Stylistically, value stocks outperformed their more expensive growth counterparts during the quarter as evidenced by the Russell 2000 Value Index returning 15.26% compared to 12.75% for the Russell 2000 Growth Index. For 2023 as a whole, however, the Russell 2000 Growth Index led, gaining 18.66% versus 14.65% for the Russell 2000 Value. Factor performance was decidedly mixed during the fourth quarter, although companies with negative earnings, high short interest, and low ROE & ROIC were among the strongest performers into year end, indicating a lower quality skew to the Russell 2000 rally during the period.

At the sector level, ten of the eleven sectors in the Russell 2000 Index recorded positive returns during the fourth quarter, led by robust returns in the Financials (+21.56%), Consumer Discretionary (+17.39%) and Real Estate (+16.86%) sectors. Conversely, Energy (-6.03%), Utilities (+7.83%), and Communication Services (+9.68%) all underperformed. For the full year, Information Technology, Consumer Discretionary and Industrial fared best. Utilities was the lone sector to finish in negative territory while Health Care and Communication Services also lagged.

Sources: CAPS Composite Hub, Russell Investments

Past performance is not indicative of future results. 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. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Small Cap Equity Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Performance Review

For the fourth quarter of 2023, the Aristotle Small Cap Equity Composite posted a total return of 11.02% net of fees (11.18% gross of fees), trailing the 14.03% total return of the Russell 2000 Index. Underperformance was driven by a combination of security selection and allocation effects. Overall, security selection was weakest within the Health Care, Information Technology and Consumer Staples sectors and strongest in Utilities, Financials and Materials. From an allocation perspective, underweights in Financials and Consumer Discretionary detracted from relative returns but were partially offset by underweights in Energy and Communication Services which contributed.

Relative Contributors	Relative Detractors
SP Plus	Oceaneering International
Customers Bancorp	Belden
ACI Worldwide	Patterson-UTI Energy
Viad	Huron Consulting
HASI	Designer Brands

CONTRIBUTORS

SP Plus (SP), a provider of parking management, payment services, facility maintenance and event logistics solutions, appreciated following an announcement that the company would be acquired by Metropolis Technologies. We maintain a position ahead of the expected close of the transaction in 2024.

Customers Bancorp (CUBI), a Pennsylvania-based regional bank, benefited from strong fundamental performance and improved sentiment following the company’s latest earnings release after the company reported net interest margin expansion alongside, solid credit, capital, and broader business trends. We maintain our investment as we believe management’s focus on accumulating capital, limiting balance growth, and remixing loans and deposits into higher value-add verticals should create additional shareholder value in periods to come.  

DETRACTORS

Oceaneering International (OII), a global technology company delivering engineered services, products and robotic solutions to the offshore energy, defense, aerospace, manufacturing, and entertainment industries, declined during the period amid a pullback in energy prices and conservative management commentary around the company’s near-term outlook. We maintain a position, as we believe the company should continue to benefit from future increases in offshore activity along with continued growth within its industrial robotics business segment.

Belden (BDC), a manufacturer and seller of connectors, cables, and networking gear to help its customers acquire, transmit, manage, and orchestrate data, declined during the period amid a weaker demand environment, pauses in capital spending, and channel de-stocking. Despite these near-term pressures, we maintain our position as we believe the company’s ongoing transition from being mostly a commoditized component supplier to a complete solutions provider can drive margin expansion. Furthermore, we believe the company’s focus on serving secularly attractive end markets of Industrial Automation, Cybersecurity, Broadband & 5G, and Smart Buildings will position the company favorably over the long term.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Northern Oil & Gas	Coherus Biosciences

BUYS/ACQUISITIONS

Northern Oil & Gas (NOG), a leading non-operated working interest franchise in the premier shale basins across the United States, was added to the portfolio. Overall, we believe the company’s ability to opportunistically add high-quality acreage in multiple basins remains a key differentiator for the stock. Furthermore, we believe the company’s scale and proprietary database built from participation in over 9,800 wells provides management with intimate knowledge and the ability to make swift and informed capital allocation decisions.

SELLS/LIQUIDATIONS

Coherus Biosciences (CHRS), a commercial-stage biopharmaceutical company engaged in the development and commercialization of biosimilar and immune-oncology therapeutics for major regulated markets, was removed from the portfolio. Despite the company’s efforts to grow and diversify its revenue base through a series of upcoming product launches, a variety of factors contributed to our decision to step away from our investment including a shift in company focus, competitive pricing pressures, and a recent C-suite departure.

Outlook

Compared to late 2022, when the market seemed to be bracing for a recession, the end of 2023 seems to indicate a more optimistic tone as we move into the new year. Recent sentiment has been boosted by optimism of falling inflation and dovish messaging out of the Federal Reserve, although we acknowledge that the market’s enthusiasm on this matter in recent months may be overly optimistic. Regardless of any forthcoming policy decisions, we are reminded that the days of zero interest rates and easy access to capital have likely come to an end.  Our view is that an end to the ‘public venture capital’ mindset that has dominated small cap markets in recent years should give way to a renewed focus on profits, cash flows and balance sheet strength, which should be beneficial for fundamentally oriented active managers. In the near term, we continue to focus our efforts on the risks associated with individual investment positions under various potential scenarios instead of attempting to forecast Fed policy or interest rate moves. Based on our recent conversations with management teams, we believe the economic environment can be characterized as “good, not great” which is an improvement from this time last year, when many believed a recession was imminent both domestically and across the globe. In many ways, 2023 was another reminder that asset allocators must learn to expect the unexpected. We see that theme continuing into the new year, especially in the face of an uncertain economic backdrop and looming presidential election.

Regarding the impact on small caps, we believe macro concerns have been a drag on investor sentiment, which, once again, negatively impacted the asset class relative to large caps in 2023. Relief in this area and an improvement in the forward outlook could have the opposite effect and provide a relative boost for small caps in 2024. Valuations of small versus large continue to remain near multi-decade lows, which we believe suggests a more favorable setup for small caps relative to large caps in the periods to come (14.7x P/E for the Russell 2000 Index vs. 23.3x P/E for the Russell 1000 Index). Additionally, earnings and sales growth are expected to improve for small & mid caps in 2024 and outpace that of large caps, which we believe provides further fundamental support and potential upside for the asset class. Against a backdrop of moderating inflation, normalized interest rates, and a still growing U.S. economy, it looks to us that small-cap’s lengthy stretch of relative underperformance may be long in the tooth. If the economy continues to stabilize, our view is that valuations are likely to rise for those businesses that have largely sat out the mega-cap performance regime.  It also helps that the well-noted concentration in large caps is reaching 50-year highs and small cap valuation relative to large cap is at multi-decade lows, therefore any fundamentally driven repositioning is likely to benefit small caps more than larger companies, in our view. Lastly, large cap cycles have historically peaked at market tops crowded with mega caps, a scenario we find ourselves in today.

Positioning

Our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Overweights in Industrials and Information Technology are mostly a function of our underlying company specific views rather than any top-down predictions for each sector. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles of many retail businesses and a potential deceleration in goods spending following a period of strength. While the portfolio’s allocation to Health Care is modestly below that of the benchmark, we continue to remain underweight the Biotechnology industry as many companies within that group do not fit our discipline due to their elevated levels of binary risk. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

As we’ve highlighted several times throughout the year, volatility was a recurring theme for most of 2023 and the fourth quarter was no exception. Following a sluggish start to the quarter, SMID cap stocks rallied off their October lows and ended the period with a double-digit gain. For the quarter, the Russell 2500’s gain of 13.35% outpaced the 11.96% total return of the Russell 1000 Index, marking the only quarterly outperformance period for the SMID cap index for the calendar year. Overall equity performance continued to be tightly correlated to 10-year US Treasury bond yields. When yields rose in October, stocks fell sharply. Yields collapsed in November and December, and stocks rallied. The Federal Reserve’s dovish commentary was a primary catalyst for the ‘everything-rally’ that ensued into year end. At the mid-December meeting, Chairman Powell made public comments that suggested the Fed had interest rate cuts on its mind, saying cuts were “a topic of discussion” among Federal Reserve members. At the time of this writing, markets are currently pricing in several rate cuts in 2024, however, the situation remains fluid as a host of uncertainties could potentially alter the pace and direction of policy moves throughout the year.

Stylistically, value stocks outperformed their more expensive growth counterparts during the quarter as evidenced by the Russell 2500 Value Index returning 13.76% compared to 12.59% for the Russell 2500 Growth Index. For 2023 as a whole, however, the Russell 2500 Growth Index led, gaining 18.93% versus 15.98% for the Russell 2500 Value. Factor performance was decidedly mixed during the fourth quarter although companies with negative earnings, high short interest, and low ROE & ROIC were among the strongest performers at year end, indicating a lower quality skew to the Russell 2500 rally during the period.

At the sector level, ten of the eleven sectors in the Russell 2500 Index recorded positive returns during the fourth quarter, led by robust returns in the Financials (+18.16%), Consumer Discretionary (+16.60%) and Real Estate (+16.52%) sectors. Conversely, Energy (-5.78%), Consumer Staples (+7.94%) and Utilities (+10.34%) all underperformed. For the full year, Industrials, Information Technology, and Consumer Discretionary fared best. Utilities was the lone sector to finish in negative territory while Health Care and Energy also lagged.

Sources: CAPS Composite Hub, Russell Investments

Past performance is not indicative of future results. 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. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Small Cap Equity Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Performance Review

For the fourth quarter of 2023, the Aristotle Small/Mid Cap Equity Composite generated a total return of 9.52% net of fees (9.67% gross of fees), trailing the 13.35% total return of the Russell 2500 Index. Underperformance was driven by a combination of security selection and allocation effects. Overall, security selection was weakest within the Health Care, Industrials, and Information Technology sectors and strongest in Financials, Utilities, and Real Estate. From an allocation perspective, underweights in Consumer Discretionary and Real Estate detracted from relative returns but were partially offset by underweights in Consumer Staples and Utilities which contributed.

Relative Contributors	Relative Detractors
BankUnited	Belden
Gartner	Oceaneering International
HASI	Patterson-UTI Energy
Dycom Industries	Range Resources
ACI Worldwide	Huron Consulting Group

CONTRIBUTORS

BankUnited (BKU), a bank holding company that provides commercial and consumer banking services in select regions nationally, appreciated alongside the broader regional banking sector during the quarter as deposits continued to stabilize, net interest margins expanded, and credit trends remained relatively strong. We maintain our investment given the company’s favorable geographic footprint, expansion into new markets, and improving underlying fundamentals.

Gartner (IT), a global research and advisory firm, helping senior executives in IT, Finance, HR, and other areas make better business decisions, appreciated after delivering strong fundamental performance within the company’s Research and Consulting departments along with continued cost discipline driving favorable margin performance. We continue to maintain a position given the company’s subscription-based, highly cash generative business model and our expectations for continued underlying demand for the company’s IT Research and Consulting as they support their client’s mission-critical priorities.

DETRACTORS

Belden (BDC), a manufacturer and seller of connectors, cables, and networking gear to help its customers acquire, transmit, manage, and orchestrate data, declined during the period amid a weaker demand environment, pauses in capital spending, and channel de-stocking. Despite these near-term pressures, we maintain our position as we believe the company’s ongoing transition from being mostly a commoditized component supplier to a complete solutions provider can drive margin expansion. Furthermore, we believe the company’s focus on serving secularly attractive end markets of Industrial Automation, Cybersecurity, Broadband & 5G, and Smart Buildings will position the company favorably over the long term.

Oceaneering International (OII), a global technology company delivering engineered services, products and robotic solutions to the offshore energy, defense, aerospace, manufacturing, and entertainment industries, declined during the period amid a pullback in energy prices and conservative management commentary around the company’s near-term outlook. We maintain a position, as we believe the company should continue to benefit from future increases in offshore activity along with continued growth within its industrial robotics business segment.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Northern Oil & Gas	Coherus Biosciences
LKQ Corporation

BUYS/ACQUISITIONS

Northern Oil & Gas (NOG), a leading non-operated working interest franchise in the premier shale basins across the United States was added to the portfolio. Overall, we believe the company’s ability to opportunistically add high-quality acreage in multiple basins remains a key differentiator for the stock. Furthermore, we believe the company’s scale and proprietary database built from participation in over 9,800 wells provides management with intimate knowledge and the ability to make swift and informed capital allocation decisions.

LKQ Corporation (LKQ), a North American market leader in alternative collision repair parts with expertise stemming across used, recycled, refurbished, and remanufactured collision repair parts as well as the market for (new) aftermarket collision repair, was added to the portfolio. Overall, we believe the company maintains favorable scale advantages that allow for volume purchase discounts from suppliers and a wider distribution network, higher fill rates, and faster response times relative to competition. Furthermore, the company has made investments in improving its technology and logistics network beyond that of its smaller competitors, which we believe will further cement its market position through technological sophistication.

SELLS/LIQUIDATIONS

Coherus Biosciences (CHRS), a commercial-stage biopharmaceutical company engaged in the development and commercialization of biosimilar and immune-oncology therapeutics for major regulated markets, was removed from the portfolio. Despite the company’s efforts to grow and diversify its revenue base through a series of upcoming product launches, a variety of factors contributed to our decision to step away from our investment including a shift in company focus, competitive pricing pressures, and a recent C-suite departure.

Outlook

Compared to late 2022, when the market seemed to be bracing for a recession, the end of 2023 seems to indicate a more optimistic tone as we move into the new year. Recent sentiment has been boosted by optimism of falling inflation and dovish messaging out of the Federal Reserve, although we acknowledge that the market’s enthusiasm on this matter in recent months may be overly optimistic. Regardless of any forthcoming policy decisions, we are reminded that the days of zero interest rates and easy access to capital have likely come to an end.  Our view is that an end to the ‘public venture capital’ mindset that has dominated SMID cap markets in recent years should give way to a renewed focus on profits, cash flows and balance sheet strength, which should be beneficial for fundamentally oriented active managers. In the near term, we continue to focus our efforts on the risks associated with individual investment positions under various potential scenarios instead of attempting to forecast Fed policy or interest rate moves. Based on our recent conversations with management teams, we believe the economic environment can be characterized as “good, not great” which is an improvement from this time last year, when many believed a recession was imminent both domestically and across the globe. In many ways, 2023 was another reminder that asset allocators must learn to expect the unexpected. We see that theme continuing into the new year, especially in the face of an uncertain economic backdrop and looming presidential election.

Regarding the impact on SMID caps, we believe macro concerns have been a drag on investor sentiment, which, once again, negatively impacted the asset class relative to large caps in 2023. Relief in this area and an improvement in the forward outlook could have the opposite effect and provide a relative boost for SMID caps in 2024. Valuations of SMID versus large continue to remain near multi-decade lows, which we believe suggests a more favorable setup for SMID caps relative to large caps in the periods to come (15.5x P/E for the Russell 2500 Index vs. 23.3x P/E for the Russell 1000 Index). Additionally, earnings and sales growth are expected to improve for small & mid caps in 2024 and outpace that of large caps, which we believe provides further fundamental support and potential upside for the asset class. Against a backdrop of moderating inflation, normalized interest rates, and a still growing U.S. economy, it looks to us that SMID cap’s lengthy stretch of relative underperformance may be long in the tooth. If the economy continues to stabilize, our view is that valuations are likely to rise for those businesses that have largely sat out the mega cap performance regime.  It also helps that the well-noted concentration in large caps is reaching 50-year highs and SMID cap valuation relative to large cap is at multi-decade lows, therefore any fundamentally driven repositioning is likely to benefit SMID caps more than larger companies, in our view. Lastly, large cap cycles have historically peaked at market tops crowded with mega caps, a scenario we find ourselves in today.

Positioning

Our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Overweights in Industrials and Information Technology are mostly a function of our underlying company specific views rather than any top-down predictions for each sector. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles of many retail businesses and a potential deceleration in goods spending following a period of strength. We also continue to be underweight in Real Estate as a result of structural challenges for various end markets within the sector. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

Markets Review

After three consecutive positive quarters, the U.S. equity market pulled back, as the S&P 500 Index declined 3.27% during the quarter. Concurrently, the Bloomberg U.S. Aggregate Bond Index also fell, dropping 3.23% for the quarter. In terms of style, the Russell 1000 Growth Index slightly outperformed its value counterpart by 0.03%.

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Focus Growth Composite 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. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Declines were broad-based, as nine out of the eleven sectors within the Russell 1000 Growth Index finished lower. Utilities, Real Estate and Consumer Staples were the worst-performing sectors. Meanwhile, Energy and Communication Services were the only two sectors in the green, and Health Care declined the least.

Economic growth in the U.S. remained steady, as data released during the quarter showed real GDP increased at an annual rate of 2.1%. The increase was driven by higher levels of consumer and government spending, as well as nonresidential fixed investment. The labor market remained tight during the period, with a 3.8% unemployment rate in August, while average hourly earnings for all employees increased by 4.3% year-over-year.

There was an uptick in inflation reported during the quarter, as annualized CPI increased from 3.0% in June to 3.7% in August. In addition, oil hit its highest level of the year, with both WTI and Brent eclipsing $90 a barrel. Given the concerns about rebounding inflation, 10-year and 30-year Treasury yields spiked to their highest marks since 2007 and 2011, finishing the quarter at 4.59% and 4.73%, respectively. However, the broader trend of disinflation continues, as the 3.7% August CPI figure is still less than half the 8.3% increase the Index experienced the year prior.

After raising its benchmark federal funds rate to a range of 5.25% to 5.50% in July, the Federal Reserve (Fed) held interest rates steady in September, citing a solid pace of expanding economic activity, a slightly softer—yet still strong—labor market and tighter credit conditions. The Fed indicated that it would continue to monitor cumulative monetary policy, the lagged effects of policy decisions, and economic and financial developments when determining the extent of additional rate increases.

On the corporate earnings front, S&P 500 companies reported a 4.1% decline in earnings, the third straight quarter that saw a year-over-year decrease. Despite the drop, fewer companies discussed “recession” and “inflation” during the reporting period. Furthermore, aggregate earnings estimates for the third quarter increased by 0.4% (above the 10-year average of -3.4%), the first increase in nearly two years.

Performance and Attribution Summary

For the third quarter of 2023, Aristotle Atlantic’s Focus Growth Composite posted a total return of -5.51% gross of fees (-5.53% net of fees), underperforming the -3.13% total return of the Russell 1000 Growth Index.

Performance (%)	3Q23	YTD	1 Year	3 Years	5 Years	Since Inception*
Focus Growth Composite (gross)	-5.51	19.29	22.49	2.50	8.62	10.32
Focus Growth Composite (net)	-5.53	19.21	22.37	2.40	8.41	10.07
Russell 1000 Growth Index	-3.13	24.98	27.72	7.97	12.41	13.37

Sources: FactSet
Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income. Please see important disclosures at the end of this document.

During the third quarter, the portfolio’s underperformance relative to the Russell 1000 Growth Index was due to both allocation effects and security selection. Security selection in Health Care, Financials and Industrials detracted the most from performance. Conversely, security selection in Information Technology and Real Estate, as well as an overweight in Financials, contributed to relative results.

Contributors and Detractors for 3Q 2023

Relative Contributors	Relative Detractors
Apple	DexCom
Synopsys	Sage Therapeutics
Costco Wholesale	Darling Ingredients
Nvidia	Iovance Biotherapeutics
ServiceNow	Bio-Techne

Contributors

Apple

Apple contributed to outperformance in the third quarter, as a result of the underweight position relative to the benchmark.  Following a very strong first-half performance, the stock saw a pullback ahead of the iPhone 15 launch, as investors weigh the potential growth from the new phone in the face of macroeconomic headwinds and slowing consumer spend.

Synopsys

Synopsys contributed to performance in the quarter as the company reported third quarter revenues that were above consensus, additionally the company raised fiscal year guidance for 2023. Synopsys continues to be a key beneficiary from the demand for semiconductors throughout the entire economy, as well as the increasing complexity of semiconductor design, particularly for silicon used in the artificial intelligence (AI) technology stack.  The company is also leveraging AI for its design tools which can drive increased usage and improve margins for the company’s tools. 

Detractors

DexCom

DexCom shares were weaker in the third quarter following Novo Nordisk’s announcement of topline data from the SELECT trial on cardiovascular outcomes on patients using their weight loss drug Wegovy on August 8th.  The trial showed a 20% reduction in major adverse cardiovascular events in patients using the drug.  This led to broad-based pressure on companies in the diabetes space, as well as those exposed to other weight-related maladies.  The weakness came despite DexCom reporting 26% organic growth and raising full-year guidance in late July.  We continue to see continuous glucose monitoring devices playing an important role in driving better health outcomes for diabetes patients and believe that given the low penetration rates, DexCom can continue to grow. 

Darling Ingredients

Darling Ingredients shares were weak in the third quarter after the company reported an inline quarter and reaffirmed guidance for the fourth quarter. Diamond Green Diesel had a planned downtime in July when an unexpected fire resulted in 10 days of no production in Norco Los Angeles later in the quarter. Higher interest rates this month pressured companies with outsized leverage, such as Darling Ingredients, and they are working on deleveraging following several acquisitions last year.    

Recent Portfolio Activity

The table below shows all buys and sells completed during the quarter, followed by a brief rationale.

Buys	Sells
Adobe	Crowdstrike Holdings
Meta Platforms	NXP Semiconductors
	Sage Therapeutics
	Iovance Biotechnologies

Buys

Adobe

Adobe is one of the largest and most diversified software companies in the world. It has been known for brands such as Acrobat, Photoshop and Adobe Document Cloud. Adobe’s business is organized into three reportable segments: Digital Media, Digital Experience, and Publishing and Advertising. The Company’s products allow users to express and use information across all print and electronic media.

We see Adobe as a key enabler of digital transformation initiatives through the Digital Media and Digital Experience business segments. Adobe continues to innovate and integrate new capabilities across all its product suites. We see several products per customer continuing to increase, as Adobe users continue to use more products.  We see this as a competitive advantage.

Meta Platforms

Meta Platforms, formerly known as Facebook, is a global technology company specializing in social networking and the development of augmented and virtual reality technologies. Founded in 2004 and headquartered in Menlo Park, CA, the company has expanded its reach to nearly three billion monthly active users worldwide.

We see Meta as well-positioned to capture a significant share of the rapidly growing digital advertising market and has created an interconnected ecosystem of apps that drives higher user engagements. While leveraging AI and machine learning technology, Meta should see an acceleration in the development of targeted digital advertising capabilities and enhance the user experience across its platform. We see near-term catalysts in Rising Reels and Messenger revenue monetization and an expected robust 2024 political and Olympic advertising. Year-to-date, investors have been optimistic about the company’s pivot away from a focus on metaverse investments to an emphasis on profitability and growth in what the company calls its “Year of Efficiency.”

Sells

CrowdStrike Holdings

We sold CrowdStrike Holdings and believe that recent channel checks and commentary from competitors and software companies indicate increasing headwinds across multiple industry verticals. We also believe that macroeconomic conditions and high interest rates are resulting in shorter contract cycles which also represent headwinds to Free Cash Flow growth.  While the company continues to be an industry leader in endpoint detection, we view a potential slowdown.

NXP Semiconductors

We sold NXP Semiconductors to reduce our exposure to the automotive sector in semiconductors following the strong returns over the past 3 years.  We are seeing early data of slowing global auto sales due to macroeconomic conditions and higher interest rates.  While we think this may be a shorter-term slowdown, the risk is increasing of elevated inventory levels and pricing headwinds.

Sage Therapeutics

We sold Sage Therapeutics following results of the company’s new drug application for Zuranalone that was approved in Post Partem Depression (PPD), but not major depressive disorder (MDD).  The complete response letter (CRL) on MDD stated that the company would need to complete additional trials to prove the efficacy and durability in MDD, so they are evaluating next steps along with Biogen.  Sage was unable to say how committed they or Biogen would be to funding additional studies at this point.  Given the uncertainty surrounding the company, we decided to exit the position.

Iovance Biotherapeutics

We sold Iovance Biotherapeutics, following uncertainty which arose from the company canceling out of two investor events.  Iovance is in the late stages of FDA review on their lead candidate Lifileucel in advanced melanoma. These cancellations could stem from issues with site inspections which tend to take place later in the review cycle.  The company has not commented on why it canceled these investor events, and we do not think this bodes well for the prospects of a straightforward approval with a clean, positive label for the company.

Outlook

The equity markets in the third quarter were negatively impacted by a steep rise in interest rates. The move in interest rates reflects the outlook that the Fed will have to keep rates higher for longer to get inflation under control. Rising oil prices did not help the inflation outlook but did result in pushing the Energy sector into positive territory and making the sector the best performer for the period. The consumer is now facing higher gasoline prices at the pump, and those with student loans are now faced with renewed interest payments due to the failed attempt to forgive student debt. This has resulted in an increased probability of slower economic growth due to these challenges. The one bright spot continues to be the strong backlog of orders in the industrial segment of the economy. We have yet to see a material benefit from the recently passed legislative packages that could extend and add to these backlogs. We are now entering a period where the economy should show signs of slowing given the duration and severity of rate hikes on the part of the Fed. The equity markets may very well welcome bad economic news as a sign that the rate cycle is finally coming to an end. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

Markets Review

After three consecutive positive quarters, the U.S. equity market pulled back, as the S&P 500 Index declined 3.27% during the quarter. Concurrently, the Bloomberg U.S. Aggregate Bond Index also fell, dropping 3.23% for the quarter. In terms of style, the Russell 1000 Growth Index slightly outperformed its value counterpart by 0.03%.

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Large Cap Growth Composite 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. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Declines were broad-based, as nine out of the eleven sectors within the Russell 1000 Growth Index finished lower. Utilities, Real Estate and Consumer Staples were the worst-performing sectors. Meanwhile, Energy and Communication Services were the only two sectors in the green, and Health Care declined the least.

Economic growth in the U.S. remained steady, as data released during the quarter showed real GDP increased at an annual rate of 2.1%. The increase was driven by higher levels of consumer and government spending, as well as nonresidential fixed investment. The labor market remained tight during the period, with a 3.8% unemployment rate in August, while average hourly earnings for all employees increased by 4.3% year-over-year.

There was an uptick in inflation reported during the quarter, as annualized CPI increased from 3.0% in June to 3.7% in August. In addition, oil hit its highest level of the year, with both WTI and Brent eclipsing $90 a barrel. Given the concerns about rebounding inflation, 10-year and 30-year Treasury yields spiked to their highest marks since 2007 and 2011, finishing the quarter at 4.59% and 4.73%, respectively. However, the broader trend of disinflation continues, as the 3.7% August CPI figure is still less than half the 8.3% increase the Index experienced the year prior.

After raising its benchmark federal funds rate to a range of 5.25% to 5.50% in July, the Federal Reserve (Fed) held interest rates steady in September, citing a solid pace of expanding economic activity, a slightly softer—yet still strong—labor market and tighter credit conditions. The Fed indicated that it would continue to monitor cumulative monetary policy, the lagged effects of policy decisions, and economic and financial developments when determining the extent of additional rate increases.

On the corporate earnings front, S&P 500 companies reported a 4.1% decline in earnings, the third straight quarter that saw a year-over-year decrease. Despite the drop, fewer companies discussed “recession” and “inflation” during the reporting period. Furthermore, aggregate earnings estimates for the third quarter increased by 0.4% (above the 10-year average of -3.4%), the first increase in nearly two years.

Performance and Attribution Summary

For the third quarter of 2023, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of -5.34% gross of fees
(-5.51% net of fees), underperforming the -3.13% return of the Russell 1000 Growth Index.

Performance (%)	3Q23	YTD	1 Year	3 Years	5 Years	Since Inception*
Large Cap Growth Composite (gross)	-5.34	20.44	23.28	4.23	10.25	15.01
Large Cap Growth Composite (net)	-5.51	20.02	22.74	3.82	9.81	14.56
Russell 1000 Growth Index	-3.13	24.98	27.72	7.97	12.41	16.24

Sources: FactSet
Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income. Please see important disclosures at the end of this document.

During the third quarter, the portfolio’s underperformance relative to the Russell 1000 Growth Index was due to both security selection and allocation effects. Security selection in Health Care, Industrials and Financials detracted the most from relative performance. Conversely, security selection in Information Technology and Real Estate, as well as an overweight in Health Care contributed to relative returns.

Contributors and Detractors for 3Q 2023

Relative Contributors	Relative Detractors
Synopsys	Sage Therapeutics
Apple	DexCom
Nvidia	Darling Ingredients
Chart Industries	Bio-Techne
UnitedHealth Group	Iovance Biotherapeutics

Contributors

Synopsys

Synopsys contributed to performance in the quarter as the company reported third quarter revenues that were above consensus, additionally the company raised fiscal year guidance for 2023. Synopsys continues to be a key beneficiary from the demand for semiconductors throughout the entire economy, as well as the increasing complexity of semiconductor design, particularly for silicon used in the aritifical intelligence (AI) technology stack.  The company is also leveraging AI for its design tools which can drive increased usage and improve margins for the company’s tools.

Apple

Apple contributed to outperformance in the third quarter, as a result of the underweight position relative to the benchmark.  Following a very strong first-half performance, the stock saw a pullback ahead of the iPhone 15 launch, as investors weigh the potential growth from the new phone in the face of macroeconomic headwinds and slowing consumer spend. 

Detractors

DexCom

DexCom shares were weaker in the third quarter following Novo Nordisk’s announcement of topline data from the SELECT trial on cardiovascular outcomes on patients using their weight loss drug Wegovy on August 8th.  The trial showed a 20% reduction in major adverse cardiovascular events in patients using the drug.  This led to broad-based pressure on companies in the diabetes space, as well as those exposed to other weight-related maladies. The weakness came despite DexCom reporting 26% organic growth and raising full-year guidance in late July.  We continue to see continuous glucose monitoring devices playing an important role in driving better health outcomes for diabetes patients and believe that given the low penetration rates, DexCom can continue to grow. 

Darling Ingredients

Darling Ingredients shares were weak in the third quarter after the company reported an inline quarter and reaffirmed guidance for the fourth quarter. Diamond Green Diesel had a planned downtime in July when an unexpected fire resulted in 10 days of no production in Norco Los Angeles later in the quarter. Higher interest rates this month pressured companies with outsized leverage, such as Darling Ingredients, and they are working on deleveraging following several acquisitions last year. 

Recent Portfolio Activity

The table below shows all buys and sells completed during the quarter, followed by a brief rationale.

Buys	Sells
Meta Platforms	Ameriprise Financial
Adobe	Crowdstrike Holdings
Uber Technologies	NXP Semiconductors
	Sage Therapeutics
	Iovance Biotherapeutics

Buys

Meta Platforms

Meta Platforms, formerly known as Facebook, is a global technology company specializing in social networking and the development of augmented and virtual reality technologies. Founded in 2004 and headquartered in Menlo Park, CA, the company has expanded its reach to nearly three billion monthly active users worldwide.

We see Meta as well-positioned to capture a significant share of the rapidly growing digital advertising market and has created an interconnected ecosystem of apps that drives higher user engagements. While leveraging AI and machine learning technology, Meta should see an acceleration in the development of targeted digital advertising capabilities and enhance the user experience across its platform. We see near-term catalysts in Rising Reels and Messenger revenue monetization and an expected robust 2024 political and Olympic advertising. Year-to-date, investors have been optimistic about the company’s pivot away from a focus on metaverse investments to an emphasis on profitability and growth in what the company calls its “Year of Efficiency.”

Adobe

Adobe is one of the largest and most diversified software companies in the world. It has been known for brands such as Acrobat, Photoshop and Adobe Document Cloud. Adobe’s business is organized into three reportable segments: Digital Media, Digital Experience, and Publishing and Advertising. The Company’s products allow users to express and use information across all print and electronic media.

We see Adobe as a key enabler of digital transformation initiatives through the Digital Media and Digital Experience business segments. Adobe continues to innovate and integrate new capabilities across all its product suites. We see several products per customer continuing to increase, as Adobe users continue to use more products. We see this as a competitive advantage.

Uber Technologies

Uber Technologies develops and operates proprietary technology applications. The company operates through three segments: Mobility, Delivery and Freight. The Company develops and operates proprietary technology applications supporting a variety of offerings on its platform.

We see the company as the global leader in ride-hailing and one of the few delivery app companies with a strong network effect for both businesses. Uber is experiencing strong revenue growth as adoption and frequency of usage continue to grow in both segments. We expect the company will also benefit from more demand due to the higher frequency of workers attending work in the office, rather than working from their homes. We look for revenue growth as the adoption of Uber’s services increases and the company expands globally.

Sells

Ameriprise Financial

We sold our position in Ameriprise Financial out of the Large Cap Growth strategy to fund our initiation of Meta Platforms. We continue to believe Amerprise’s continued mix-shift to its higher-growth, higher-margin and less capital-intensive Advice & Wealth Management business will increase shareholder value over time; however, META offers a more attractive risk-reward opportunity currently, in our view. In addition, Ameriprise Financial continues to face the near-term headwinds that sustained high-interest rates have on its securities portfolio and customer cash-sorting activity.

CrowdStrike Holdings

We sold CrowdStrike Holdings and believe that recent channel checks and commentary from competitors and software companies indicate increasing headwinds across multiple industry verticals. We also believe that macroeconomic conditions and high interest rates are resulting in shorter contract cycles which also represent headwinds to Free Cash Flow growth.  While the company continues to be an industry leader in endpoint detection, we view a potential slowdown.

NXP Semiconductors

We sold NXP Semiconductors to reduce our exposure to the automotive sector in semiconductors following the strong returns over the past 3 years.  We are seeing early data of slowing global auto sales due to macroeconomic conditions and higher interest rates.  While we think this may be a shorter-term slowdown, the risk is increasing of elevated inventory levels and pricing headwinds.

Sage Therapeutics

We sold Sage Therapeutics following results of the company’s new drug application for Zuranalone that was approved in Post Partem Depression (PPD), but not major depressive disorder (MDD).  The complete response letter (CRL) on MDD stated that the company would need to complete additional trials to prove the efficacy and durability in MDD, so they are evaluating next steps along with Biogen.  Sage was unable to say how committed they or Biogen would be to funding additional studies at this point.  Given the uncertainty surrounding the company, we decided to exit the position.

Iovance Biotherapeutics

We sold Iovance Biotherapeutics following uncertainty which arose from the company canceling out of two investor events.  Iovance is in the late stages of FDA review on their lead candidate Lifileucel in advanced melanoma. These cancellations could stem from issues with site inspections which tend to take place later in the review cycle.  The company has not commented on why it canceled these investor events, and we do not think this bodes well for the prospects of a straightforward approval with a clean, positive label for the company.

Outlook

The equity markets in the third quarter were negatively impacted by a steep rise in interest rates. The move in interest rates reflects the outlook that the Fed will have to keep rates higher for longer to get inflation under control. Rising oil prices did not help the inflation outlook but did result in pushing the Energy sector into positive territory and making the sector the best performer for the period. The consumer is now facing higher gasoline prices at the pump, and those with student loans are now faced with renewed interest payments due to the failed attempt to forgive student debt. This has resulted in an increased probability of slower economic growth due to these challenges. The one bright spot continues to be the strong backlog of orders in the industrial segment of the economy. We have yet to see a material benefit from the recently passed legislative packages that could extend and add to these backlogs. We are now entering a period where the economy should show signs of slowing given the duration and severity of rate hikes on the part of the Fed. The equity markets may very well welcome bad economic news as a sign that the rate cycle is finally coming to an end. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

Markets Review

After three consecutive positive quarters, the U.S. equity market pulled back, as the S&P 500 Index declined 3.27% during the quarter. Concurrently, the Bloomberg U.S. Aggregate Bond Index also fell, dropping 3.23% for the quarter. In terms of style, the Russell 1000 Growth Index slightly outperformed its value counterpart by 0.03%

Declines were broad-based, as nine out of the eleven sectors within the S&P 500 Index finished lower for the quarter. Utilities, Real Estate and Consumer Staples were the worst-performing sectors. Meanwhile, Energy and Communication services were the only two sectors in the green, and Financials declined the least.

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Core Equity Composite 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. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Economic growth in the U.S. remained steady, as data released during the quarter showed real GDP increased at an annual rate of 2.1%. The increase was driven by higher levels of consumer and government spending, as well as nonresidential fixed investment. The labor market remained tight during the period, with a 3.8% unemployment rate in August, while average hourly earnings for all employees increased by 4.3% year-over-year.

There was an uptick in inflation reported during the quarter, as annualized CPI increased from 3.0% in June to 3.7% in August. In addition, oil hit its highest level of the year, with both WTI and Brent eclipsing $90 a barrel. Given the concerns about rebounding inflation, 10-year and 30-year Treasury yields spiked to their highest marks since 2007 and 2011, finishing the quarter at 4.59% and 4.73%, respectively. However, the broader trend of disinflation continues, as the 3.7% August CPI figure is still less than half the 8.3% increase the Index experienced the year prior.

After raising its benchmark federal funds rate to a range of 5.25% to 5.50% in July, the Federal Reserve (Fed) held interest rates steady in September, citing a solid pace of expanding economic activity, a slightly softer—yet still strong—labor market and tighter credit conditions. The Fed indicated that it would continue to monitor cumulative monetary policy, the lagged effects of policy decisions, and economic and financial developments when determining the extent of additional rate increases.

On the corporate earnings front, S&P 500 companies reported a 4.1% decline in earnings, the third straight quarter that saw a year-over-year decrease. Despite the drop, fewer companies discussed “recession” and “inflation” during the reporting period. Furthermore, aggregate earnings estimates for the third quarter increased by 0.4% (above the 10-year average of -3.4%), the first increase in nearly two years.

Performance and Attribution Summary

For the third quarter of 2023, Aristotle Atlantic’s Core Equity Composite posted a total return of -4.87 % gross of fees (-4.98% net of fees), underperforming the S&P 500 Index, which recorded a total return of -3.27%.

Performance (%)	3Q23	YTD	1 Year	3 Years	5 Years	7 Years	Since Inception*
Core Equity Composite (gross)	-4.87	9.65	17.37	7.13	9.20	12.17	12.17
Core Equity Composite (net)	-4.98	9.30	16.87	6.68	8.75	11.65	11.65
S&P 500 Index	-3.27	13.07	21.62	10.15	9.91	11.91	11.72

Source: FactSet
Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income. Please see important disclosures at the end of this document.

During the third quarter, the portfolio’s underperformance relative to the S&P 500 Index was due to both security selection and allocation effects. Security selection in Health Care, Consumer Staples and Industrials detracted the most from relative performance. Conversely, security selection in Materials, Financials and Communication Services contributed to relative performance.

Contributors and Detractors for 3Q 2023

Relative Contributors	Relative Detractors
Halliburton	Darling Ingredients
Chubb	Spirit AeroSystems
Avery Dennison	Bio-Techne
Marriott International	Dollar General
Trane Technologies	Teleflex

Contributors

Halliburton

Halliburton contributed to outperformance in the quarter. The company continues to benefit from higher commodity prices, with both oil and natural gas prices increasing due to supply concerns, as well as improving supply-demand fundamentals in 2024. Investors are focusing on the upside growth benefits to the company in 2024, as North American oil and gas producers begin to increase rig counts, and international oil companies (IOCs) and national oil companies (NOCs) continue to increase their spending on mega projects. Halliburton should see a reacceleration in topline growth and improved margins as the result of the company’s focus over the last few years on higher-margin tools and technology offerings.

Chubb

Chubb contributed to outperformance due to sustained momentum across business units and global regions, a favorable property and casualty (P&C) rate environment and an attractive valuation with shares trading below historical averages. The company’s earnings report early in the quarter highlighted its underwriting and risk-assessment capabilities, with management projecting a continuation of what we believe are positive pricing trends through the remainder of this year. 

Detractors

Darling Ingredients

Darling Ingredients shares were weak in the third quarter after the company reported an inline quarter and reaffirmed guidance for the fourth quarter. Diamond Green Diesel had a planned downtime in July when an unexpected fire resulted in 10 days of no production in Norco Los Angeles later in the quarter. Higher interest rates this month pressured companies with outsized leverage, such as Darling Ingredients, and they are working on deleveraging following several acquisitions last year. 

Spirit AeroSystems

Spirit AeroSystems underperformed in the third quarter. The company reported disappointing earnings in August. Additionally, the company reported its second manufacturing quality issue on its most important aircraft program, the 737 MAX which should result in additional costs to the company and a delay in revenue recognition on the program. The company is also experiencing manufacturing issues on the Boeing 787, Airbus A220 and A350 that need to be resolved with Boeing and Airbus, respectively.  After the end of the quarter, the CEO was replaced, which we view as a positive development.

Recent Portfolio Activity

The table below shows all buys and sells completed during the quarter, followed by a brief rationale.

Buys	Sells
Oracle	Microchip Technology
Meta Platforms	Dollar General

Buys

Oracle

Oracle provides products and services that address enterprise information technology (IT) environments. The company’s products and services include enterprise applications and infrastructure offerings that are delivered worldwide through a variety of flexible and interoperable IT deployment models. The company operates in three segments: cloud and license business, hardware, and services.

We believe Oracle’s cloud infrastructure product, OCI 2.0, continues to demonstrate strong revenue growth over several quarters. Additionally, we see the rapid growth of artificial intelligence (AI) computing needs as being a differentiated growth driver for Oracle. We believe that Oracle will continue to drive positive outcomes for the Cerner business through a better margin structure, as well as topline sales synergies.

Meta Platforms

Meta Platforms, formerly known as Facebook, is a global technology company specializing in social networking and the development of augmented and virtual reality technologies. Founded in 2004 and headquartered in Menlo Park, CA, the company has expanded its reach to nearly three billion monthly active users worldwide.

We see Meta as well-positioned to capture a significant share of the rapidly growing digital advertising market and has created an interconnected ecosystem of apps that drives higher user engagements. While leveraging AI and machine learning technology, Meta should see an acceleration in the development of targeted digital advertising capabilities and enhance the user experience across its platform. We see near-term catalysts in Rising Reels and Messenger revenue monetization and an expected robust 2024 political and Olympic advertising. Year-to-date, investors have been optimistic about the company’s pivot away from a focus on metaverse investments to an emphasis on profitability and growth in what the company calls its “Year of Efficiency.”

Sells

Microchip Technology

We sold Microchip Technology and moved to an equal weight in the semiconductor subsector. We expect to see a couple more quarters of volatility in many of the end markets that the company sells into and expect inventory levels to remain elevated, forcing lower sell-through than expected. 

Dollar General

We sold Dollar General following the company’s earnings report where same-store sales fell 0.1%, which was below expectations. The company cited the deteriorating macro environment affecting an already challenged consumer, including an unanticipated impact from reductions in federal food stamp programs (SNAP) and lower tax refunds. The company lowered its full-year guidance, as the company continues to invest in price, wages and supply chain initiatives. The shifting mix towards lower-margin consumables versus higher-margin discretionary items in store continues to hamper margins. Comparable sales are expected to be negative in the third quarter and improving in the fourth quarter on easing comparisons. Given Dollar General’s commitment to investing in growth initiatives, margin recovery could be delayed versus management’s plans.

Outlook

The equity markets in the third quarter were negatively impacted by a steep rise in interest rates. The move in interest rates reflects the outlook that the Fed will have to keep rates higher for longer to get inflation under control. Rising oil prices did not help the inflation outlook but did result in pushing the Energy sector into positive territory and making the sector the best performer for the period. The consumer is now facing higher gasoline prices at the pump, and those with student loans are now faced with renewed interest payments due to the failed attempt to forgive student debt. This has resulted in an increased probability of slower economic growth due to these challenges. The one bright spot continues to be the strong backlog of orders in the industrial segment of the economy. We have yet to see a material benefit from the recently passed legislative packages that could extend and add to these backlogs. We are now entering a period where the economy should show signs of slowing given the duration and severity of rate hikes on the part of the Fed. The equity markets may very well welcome bad economic news as a sign that the rate cycle is finally coming to an end. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

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

Markets Review

Meanwhile, in Europe, Ukraine’s 2023 counteroffensive against Russia was confirmed as a failure, and Western support for the beleaguered nation seems to be waning. President Putin has stated that Russia’s war goals have not changed, but reports indicate that he may be open to a cease-fire. In Asia, President Xi Jinping claimed that reunification is inevitable, adding to the mounting Chinese pressure on Taiwan ahead of Taiwan’s 2024 election.

On the economic front, global labor markets remained tight, and most countries and regions continued to make inroads in the battle against inflation, as the U.S., U.K., eurozone and Japan all reported slowing annual inflation in November; 3.1%, 3.9%, 2.4% and 2.8%, respectively. In response to the improving conditions, both major western and eastern nations largely kept interest rate policy steady during the quarter. However, future policy direction looks to be divided heading into the new year, as the U.S. signaled potential rate cuts, the U.K. and eurozone rebuffed premature discussions of cuts, and Japan looks to end its policy of negative rates in 2024. Nevertheless, the International Monetary Fund expects global inflation to continue to steadily decline due to overall tighter monetary policy and lower commodity prices, which have been further suppressed by the bursting of China’s property bubble.

Annual Markets Review

After a tumultuous year in 2022, global equity markets rebounded in 2023, as the MSCI ACWI posted a full-year return of 22.20%. Additionally, after underperforming value in 2022 by the largest amount since 2000, growth recovered, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 21.41% in 2023. Meanwhile, fixed income markets also rose, as the Bloomberg Global Aggregate Bond Index increased 5.72%.

Though markets trended in a positive direction, 2023 still had its share of twists and turns in the form of a banking crisis and geopolitical conflicts in Europe, the Middle East and Asia. Furthermore, inflation, corresponding central bank policies, and economic recovery in areas like Europe and Asia generated significant headlines and proved to be key macroeconomic factors.

Given the multitude of headlines in a year and their fickle nature, short-term returns are often volatile and inconsistent. Therefore, we instead choose to focus on business fundamentals over the long term. By finding great businesses that are undervalued with actionable catalysts within our investment time horizon, we believe we can provide consistent and lasting value to our clients.

Performance and Attribution Summary

For the fourth quarter of 2023, Aristotle Capital’s International Equity ADR Composite posted a total return of 9.53% gross of fees (9.42% net of fees), underperforming the MSCI EAFE Index, which returned 10.42%, and the MSCI ACWI ex USA Index, which returned 9.75%. Please refer to the table below for detailed performance.

Performance (%)	4Q23	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity ADR Composite (gross)	9.53	18.18	4.20	8.91	5.43	6.17
International Equity ADR Composite (net)	9.42	17.62	3.67	8.41	4.93	5.66
MSCI EAFE Index (net)	10.42	18.24	4.02	8.16	4.28	5.31
MSCI ACWI ex USA Index (net)	9.75	15.62	1.55	7.08	3.83	4.58

Rentokil Initial, the U.K.-based pest control and hygiene services company, was the largest detractor for the quarter. The company’s pest control segment (which accounts for 94% of total operating profit) reported a slowdown in organic revenue growth from 5.6% in the first half of 2023 to 2.3% in the third quarter. As these results are short term in nature, we will continue to closely monitor the company’s progress on both integration of Terminix and further improvement of its marketing strategy. This includes the recent appointment of Brad Paulsen as CEO of the North America Region and his impact on the company’s most important geography (accounting for ~75% of pest control sales). Over the long term, we remain confident that the Terminix acquisition will create scale efficiencies and in-market densification (with a targeted $200 million in cost synergies by 2025), as well as accelerate the consolidation of the U.S. pest control market. Short-term impacts on the company’s stock price, in our opinion, are overdone given these fundamental improvements coupled with the resilient nature of the pest control business.

Japan-based Nidec, the global supplier of brushless motors, was one of the largest detractors for the quarter. The company’s electric vehicle (EV) traction motor business has disappointed, with shipment assumptions dropping to 350,000 from 949,000 at the start of the fiscal year. Management also withdrew its ambitious target for the EV business to turn profitable this fiscal year, now projecting an operating loss of ¥15 billion, as it noted all motor suppliers to Chinese EV manufacturers are currently experiencing losses due to intensifying price competition. In response, Nidec has announced a shift in its strategy to both increase R&D spending to accelerate product development and shore up profitability with more selective order placement. While we continue to believe Nidec’s expertise in power efficiency provides it with a unique advantage to supply industrial motors across markets (not only for EVs, but also robots, appliances and industrial applications), we are carefully reviewing whether recent setbacks are cyclical issues or more permanent in nature, and we also continue to monitor changes in leadership, including those set to take place in April 2024.

Door and locks manufacturer Assa Abloy was a leading contributor for the period. Despite a softer residential construction market, the company has shown resiliency as it continues to optimize operating leverage through lower material costs, improved cost structures, price realizations and its strong aftermarket business. As a result, Assa Abloy posted a record adjusted operating margin during the period, which adjusts for the impacts of the 2023 acquisition of Spectrum Brands’ Hardware and Home Improvement. Though the transaction is expected to impact short-term results, management has reported that synergies are already starting to be realized, and we believe that, on a normalized basis, unadjusted operating margins will prove higher than current levels. Moreover, we view this acquisition, along with the other 21 companies acquired in 2023, as demonstrative of the company’s dedication to further investing in its business and cements Assa Abloy’s position as a market leader.

Experian, one of the largest credit bureau companies in the world, was a primary contributor during the quarter. Amidtighter lending conditions, the company continues to show its strength. This includes recent product launches and innovation within the company’s Ascend platform, which leverages deeper analytics so that lenders can automate processes and target audiences more effectively. The credit bureau also expanded its position in employer services and verifications and has seen further digital penetration in areas like Auto and Health. During our well over a decade-long ownership of Experian, the company has increasingly found ways to monetize existing data sets and serve new types of customers. We believe Experian’s unique industry structure and massive data library (with data on ~1.5 billion consumers and ~200 million businesses) not only creates an exceptionally scalable business with high barriers to entry, but also makes it uniquely positioned to benefit from the increased need for big data across many industries.

Recent Portfolio Activity

Buys	Sells
Daikin Industries	Dassault Systèmes
	Sandoz

During the quarter, we sold our positions in Dassault Systèmes and Sandoz and invested in a new position in Daikin Industries.

We first invested in Dassault in the first quarter of 2015. During our more than eight-year holding period, the company executed on a number of catalysts, including a profitable transition to a new software platform (i.e., 3DExperience) and successful entry into new verticals such as life sciences via the 2019 acquisition of Medidata. While we continue to view Dassault as a high-quality company, we decided to exit our investment in favor of what we view as a more optimal opportunity in Daikin Industries, which is discussed in detail below.

We have been Novartis shareholders for over a decade. In October of 2023, the company completed the spinoff of Sandoz, its generics and biosimilars business. This divestiture furthers Novartis’s ongoing transition to a focus on branded prescription drugs, having over the last several years also exited its eye care, vaccine, animal health and consumer healthcare businesses. Upon further analysis, we decided to sell the shares received in the Sandoz spinoff and use the proceeds for what we consider to be a more optimal investment.

Daikin Industries, Ltd.

Founded in 1924 and headquartered in Japan, Daikin Industries is the world’s largest commercial and residential air conditioner company. Daikin primarily manufactures and sells air conditioning systems, heat pumps, air purifiers and refrigeration equipment (which accounts for over 90% of revenue). Daikin has long been an industry leader in developing energy-efficient products, which was molded by its roots in Japan, a region with limited natural resources and high energy costs. The company’s R&D consists of a global Technology Innovation Center and 39 other regional development facilities in charge of tailoring offerings to their local markets. Today Daikin’s products are sold in over 170 countries, and the company boasts leading market positions in Japan and China, as well as in the U.S. residential market.

Distribution is particularly important since air conditioning systems are difficult to install. Daikin’s 2012 acquisition of Goodman in the U.S. added hundreds of distribution points across the country, providing Daikin with a leading national market position and platform from which to expand. In China, specialty retail stores (ProShops) sell directly to homeowners, focusing on high-end, multi-unit products at much higher margins than if they were selling to a developer or contractor.

High-Quality Business

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

• Strong brand recognition and a large global distribution network are, in our opinion, strong competitive advantages and serve as high barriers to entry;
• History of technological innovation, particularly in energy-saving inverters and variable refrigerant flow systems; and
• Ability to tailor products to different local preferences across geographies and varied levels of HVAC regulations, thanks to Daikin’s network of global production bases and development facilities.

Attractive Valuation

Based on our estimates, shares of the company are attractively valued. We believe greater global adoption of air conditioning, as well as higher priced and more profitable technologies (i.e., heat pumps and inverters), will lead to higher normalized FREE cash flow than currently appreciated by the market.

Compelling Catalysts

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

• As the largest global supplier and a leader in energy efficiency, Daikin is uniquely positioned to benefit from the increase in worldwide air conditioning adoption rates (projected to triple by 2050) while leveraging its intellectual property in inverters and heat pumps;
• Market share gains in the U.S. as Daikin further leverages its technology in premium residential air conditioning supported by Goodman’s distribution network; and
• Execution of its Fusion 25 strategic plan that includes making improvements in technological development, strengthening sales and service networks, promoting digital transformation, and more.

Conclusion

With volatile economic data points, changing central bank policies, shocks to the banking system and various geopolitical conflicts, 2023 was full of headline-worthy news. However, as the market’s attention quickly shifted from one macro event to the next, we remained true to our bottom up, fundamental investment philosophy.

As such, instead of chasing the next headline or “placing bets” on short-term predictions, our focus remains on business fundamentals and what is analyzable in the long run. For over the past quarter century, we have dedicated ourselves to a “bottom-up” process of identifying high-quality businesses trading at meaningful discounts to intrinsic value, that possess catalysts which are underway and within management’s control. By doing so, we believe we can find long-term success regardless of the macroeconomic environment or news of the day.