Markets Review

The U.S. equity market began 2025 with a modest decline, with the S&P 500 Index falling 4.27% during the first quarter. In contrast, bonds provided a measure of stability, as the Bloomberg U.S. Aggregate Bond Index rose 2.78%.

On a sector basis, negative performance was led by four of the eleven sectors within the S&P 500 Index in the first quarter of 2025. The weakest sectors were Consumer Discretionary and Information Technology. The best-performing sectors were Energy and Health Care.

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.

U.S. economic data reported during the quarter presented a mixed picture. Real GDP growth slowed to an annualized rate of 2.4%, while inflation remained stable. The Consumer Price Index (CPI) rose 2.8% year-over-year in February, reflecting moderate inflationary pressures. Meanwhile, the labor market remained resilient, with the unemployment rate hovering around 4%. However, consumer strength showed signs of strain, as retail sales slowed from levels seen late last year, potentially impacted by adverse weather and broader macroeconomic uncertainty.

Trade policy was a major source of uncertainty during the quarter. President Trump announced a series of new tariffs on imports from Canada, Mexico and China, citing concerns over illegal immigration, drug trafficking and intellectual property theft. Targeted industries included autos, steel, aluminum and energy, particularly Venezuelan oil. While tariffs initially raised concerns, the administration’s selective enforcement and flexible implementation approach helped ease market anxiety. In response to the evolving economic landscape, the Federal Reserve (Fed) maintained its target range for the federal funds rate at 4.25% to 4.50%. The central bank acknowledged potential inflationary pressures from tariffs and moderated expectations for economic growth in 2025.

Despite broader economic headwinds, corporate earnings remained strong. S&P 500 companies reported impressive 17.8% year-over-year earnings growth, the highest rate since 2021. However, tariff-related uncertainties loomed large, with more than 220 companies referencing tariffs in their earnings calls and nearly 15% issuing negative earnings guidance.

On the domestic front, a government shutdown was averted, as President Trump signed a six-month funding bill. Senate Democratic Leader Chuck Schumer supported the measure, believing that a shutdown would have allowed the Department of Government Efficiency (DOGE) to terminate government services at a faster rate.

Geopolitically, the U.S. continued its mediation efforts in the Middle East and Ukraine. While a temporary ceasefire agreement was reached between Israel and Hamas in January, tensions flared again in March over disputes regarding hostage releases in Gaza. In Ukraine, U.S. aid was briefly paused following a contentious White House meeting between presidents Trump and Zelensky. Financial and intelligence support resumed after Ukraine signaled it was open to a ceasefire and agreed to revisit terms of a potential mineral deal, aiming to offset the costs of U.S. assistance.

Performance and Attribution Summary

For the first quarter of 2025, Aristotle Atlantic’s Core Equity Composite posted a total return of -5.90% gross of fees (-5.99% net of fees), underperforming the S&P 500 Index, which recorded a total return of -4.27%.

Source: FactSet
Past performance is not indicative of future results. Sector attribution shows how much of a portfolio’s overall return is directly attributable to stock selection and asset allocation decisions within the portfolio, highlighting which sectors contributed or detracted to the total return. Attribution includes the reinvestment of income. Please see important disclosures at the end of this document.

During the first quarter, the portfolio’s underperformance relative to the S&P 500 Index was due to a mix of security selection and allocation effects. Security selection in Information Technology and Industrials detracted the most from relative performance; conversely, security selection in Consumer Discretionary and Utilities contributed the most to relative performance.

Contributors and Detractors for 1Q 2025

Detractors

Boradcom

Broadcom detracted from performance in the first quarter. The release of the DeepSeek AI model and analysis of technological specifications stunned investors. This raised concerns about a rapid decline in AI model development costs and the effect that will have on capex spending for new infrastructure and advanced semiconductors used for accelerated computing needs. The entire AI infrastructure investment space saw significant declines in the final week of January following the DeepSeek announcements and continued to see further weakness in March as concerns around AI capex cuts increased.

ServiceNow

ServiceNow detracted from performance in the first quarter, as the company reported guidance during the fourth quarter earnings call that was below investor expectations. Investors have also begun to incorporate tougher macroeconomic headwinds and negative impacts from the DOGE government spending cuts into their weaker outlook for software revenue growth in 2025.

Contributors

Intercontinental Exchange

Intercontinental Exchange was a relative contributor in the first quarter following a solid fourth quarter earnings report highlighted by continued strong trading activity in energy and interest rate products, additional efficiency gains, and positive commentary about the Mortgage Technology business. In addition, optimism improved following the company’s annual ICE Experience conference, which highlighted new AI solutions in its Mortgage Technology product suite. The company’s AI efforts in Mortgage Technology are accelerating progress toward improving and digitizing workflows and positioning it to gain an increasing share of the long-term market opportunity in the mortgage industry.

Guardant Health

Guardant Health was a relative contributor in the first quarter following several positive announcements and solid fourth quarter earnings. Guardant announced Advanced Diagnostic Laboratory Test (ADLT) pricing from Medicare on its Guardant Shield test and a contract with the VA hospital system to cover patients over 45 years of age. This follows strong momentum and positive full-year revenue guidance.

Recent Portfolio Activity

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

Buys

Analog Devices

Analog Devices is a global semiconductor leader dedicated to solving customers’ most complex engineering challenges. The company delivers innovations that connect technology to human breakthroughs and play a critical role at the intersection of the physical and digital worlds by providing the building blocks to sense, measure, interpret, connect and power. Analog designs, manufactures, tests and markets a broad portfolio of solutions. These solutions include integrated circuits, software and subsystems that leverage high-performance analog, mixed-signal and digital signal processing technologies. Its comprehensive product portfolio, deep domain expertise and advanced manufacturing span high-performance precision and high-speed mixed-signal, power management and processing technologies, including data converters, amplifiers, power management, radio frequency, integrated circuits, edge processors and other sensors. The company’s customers include original equipment manufacturers and customers that build electronic subsystems for integration into larger systems.

We see the company’s analog products providing exposure to high-growth trends, including automotive electrification and driver assistance systems, factory intelligence and automation, the Intelligent Edge, Internet of Things device proliferation and sustainable energy. We expect the company to return excess free cash flow, benefiting shareholders.

Sells

There were no sales in the first quarter of 2025.

Outlook

The equity markets in the first quarter declined as investors digested the potential impact of wide-ranging tariffs, along with concerns of a peak in the capital spending cycle around AI. Interest rates declined in the quarter, with the 10-year U.S. Treasury yield down about 35 basis points. The prospects of tariffs pushing prices higher could put the Fed on hold in a period when the economy starts to weaken. Economic data was mostly in line with expectations, reflecting a moderately growing economy. Although equity market valuations have pulled back, they are still in elevated territory with growing concerns of a slowdown in corporate profits. 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.

The subscription ecosystem represents a transformative shift in how businesses engage with customers and generate revenue, moving from one-time transactional-based models to longer-term subscription-based relationships. This emerging business model delivers consistent customer value over extended periods, providing businesses with predictable revenue streams, deeper customer insights, and enhanced scalability opportunities. As the ecosystem continues to grow, subscription-based revenues are projected to encompass nearly $1 trillion in spending by the end of 2028, driven by a range of business models such as SaaS, streaming media, e-commerce and consumer products. With the ability to collect and analyze customer data, companies can tailor product or service offerings, predict customer behavior and optimize marketing strategies, ultimately improving customer satisfaction and reducing churn. Despite challenges from consumers and regulators, the subscription ecosystem presents attractive long-term investment opportunities, driven by enhanced revenue generation, scalability and enduring customer loyalty.

To read the full thought piece, please use the link below. 

Markets Review

The U.S. equity market ended the year on a strong note, with the S&P 500 Index rising 2.41% during the period. In contrast, the Bloomberg U.S. Aggregate Bond Index declined, falling 3.06% for the quarter.

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.

On a sector basis, gains were made from six of the eleven sectors within the Russell 1000 Growth Index, led by Consumer Discretionary and Energy. The worst-performing sectors were Real Estate and Materials.

The U.S. economy continued to demonstrate resilience, with real GDP growing at an annualized rate of 3.1%, according to the BEA’s most recent report. Increases in consumer spending, exports, nonresidential fixed investment and federal government spending drove the economic expansion. Retail sales rose 3.8% year-over-year in November, supported by a 2.7% increase in disposable personal income for the most recent quarter.

The labor market remained tight but showed signs of softening, as the unemployment rate edged up to 4.2% in November. Inflation remained relatively stable, rising modestly to an annual rate of 2.7%, as measured by the Consumer Price Index (CPI).

As was widely expected, the Federal Reserve (Fed) implemented two rate cuts during the quarter, setting the federal funds target rate at 4.25% to 4.50%. Fed Chair Jerome Powell emphasized the importance of finding a balance—reducing policy restraint too rapidly could hinder progress on inflation, while acting too slowly could weaken economic activity and the labor market. Still, he indicated that both the economy and monetary policy are on solid footing.

Corporate earnings also showed strength, as S&P 500 companies reported 5.8% earnings growth, marking the fifth consecutive quarter of positive results. A majority of companies exceeded EPS expectations, with only 61 companies issuing negative EPS guidance—the lowest figure since the fourth quarter of 2021. Looking ahead to 2025, consensus estimates project earnings growth of 14.8% for the calendar year, signaling optimism among analysts.

On the political front, Donald Trump was elected as the 47th president of the United States, becoming the first Republican to win the popular vote since 2004. The Republican Party also won the Senate and kept control of the House of Representatives, though with narrow majorities.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Atlantic’s Focus Growth Composite posted a total return of 5.05% gross of fees (5.03% net of fees), underperforming the 7.07% total return of the Russell 1000 Growth Index.

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 fourth quarter, the portfolio’s underperformance relative to the Russell 1000 Growth index was due to a combination of allocation effects and security selection. Security selection in Consumer Discretionary and Information Technology detracted the most from relative performance. Conversely, security selection in Health Care and Communication Services contributed.

Contributors and Detractors for 4Q 2024

Detractors

UnitedHealth

UnitedHealth Group detracted from performance in the fourth quarter following the tragic shooting of its insurance division CEO and increased focus on health insurance industry practices. A bipartisan bill was introduced that could force companies that own pharmacy benefit managers to divest their pharmacy operations, which would impact United’s Optum unit.

Trane Technologies

Trane Technologies detracted from performance in the fourth quarter of 2024. The company reported better than expected revenue and earnings growth at the end of October. The stock declined in December despite two investor conferences early in the month where the company reiterated expectations that current strong trends in commercial HVAC will continue into 2025, the service business is continuing to experience low double-digit growth, and the residential business is expected to improve from a lull in 2024. Higher interest rates have been a drag on industrial stock performance generally in December. Strength in the US dollar in 2025 will impact large cap companies like Trane, which have international exposure.

Contributors

Expedia

Expedia contributed to performance in the fourth quarter of 2024. In early November, the company reported better-than-expected EBITDA and EPS for the third quarter. Full-year guidance for 2024 was increased. The vacation rental business, Vrbo, returned to modest growth after a few quarters of decline. The balance sheet is close to target leverage ratio. There is a share repurchase authorization for approximately 13% of outstanding shares.

Eli Lilly

Eli Lilly contributed to performance in the fourth quarter. While shares underperformed, our underweight position versus the benchmark resulted in a positive contribution to relative returns. Lilly shares were weak following an uncharacteristic third quarter earnings miss driven by softer-than-expected sales of its blockbuster diabetes and obesity drugs. The company blamed this partly on wholesaler destocking. Lilly reinforced its view that end demand for the drugs remains strong.

Recent Portfolio Activity

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

Buys

Eli Lilly

Eli Lilly is a leading pharmaceutical company that develops diabetes, oncology, immunology and neuroscience medicines. The company generates over half of its revenue in the U.S. from its leading drugs Trulicity, Verzenio and Taltz. The company operates in a single business segment: human pharmaceutical products.

Eli Lilly has a deep pipeline in treatment areas focused on metabolic disorders, oncology, immunology and central nervous system disorders. Currently, there are two phase-three assets: orforglipron, an oral GLP-1, and retatrutide, a triple incretin agonist, which could possibly expand upon the potential success of Mounjaro. We believe that Mounjaro has the potential to commercialize beyond Type 2 diabetes and obesity, potentially in the areas of heart disease, sleep apnea, fatty liver disease and chronic kidney disease. We believe the premium valuation is supported by this outsized growth profile.

Sells

Dexcom

We sold Dexcom after the surprisingly weak second quarter earnings report and only a modest recovery in the third quarter. The U.S. sales trends remain weak, and we believe that it could take a while for Dexcom to regain the premium multiple it has historically enjoyed. Dexcom is working to fix the durable medical equipment (DME) sales channel, and this could take time. The recently announced Stelo product for non-diabetic users could add an additional level of variability to quarterly earnings reports as well.

Outlook

The equity markets in the fourth quarter moved higher as investors anticipated a market benefit from a full sweep by Republicans in the November election. Interest rates for the quarter were little changed but did move sharply intraquarter due to a shift in the Fed away from a more accommodative policy. Expectations for 2025 include a couple of further rate reductions by the Fed and earnings increasing over 10% for the year. The markets will track closely the new administration’s stance on certain policies, along with the pace and level of reductions in regulations. Tariffs will be a focal point, as any action could add to concerns for higher inflation. Valuation levels remain elevated, and equity price appreciation will largely be dependent on earnings growth for the year. 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

The U.S. equity market ended the year on a strong note, with the S&P 500 Index rising 2.41% during the period. In contrast, the Bloomberg U.S. Aggregate Bond Index declined, falling 3.06% for the quarter.

On a sector basis, gains were made from six of the eleven sectors within the Russell 1000 Growth Index, led by Consumer Discretionary and Energy. The worst-performing sectors were Real Estate and Materials.

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.

The U.S. economy continued to demonstrate resilience, with real GDP growing at an annualized rate of 3.1%, according to the BEA’s most recent report. Increases in consumer spending, exports, nonresidential fixed investment and federal government spending drove the economic expansion. Retail sales rose 3.8% year-over-year in November, supported by a 2.7% increase in disposable personal income for the most recent quarter.

The labor market remained tight but showed signs of softening, as the unemployment rate edged up to 4.2% in November. Inflation remained relatively stable, rising modestly to an annual rate of 2.7%, as measured by the Consumer Price Index (CPI).

As was widely expected, the Federal Reserve (Fed) implemented two rate cuts during the quarter, setting the federal funds target rate at 4.25% to 4.50%. Fed Chair Jerome Powell emphasized the importance of finding a balance—reducing policy restraint too rapidly could hinder progress on inflation, while acting too slowly could weaken economic activity and the labor market. Still, he indicated that both the economy and monetary policy are on solid footing.

Corporate earnings also showed strength, as S&P 500 companies reported 5.8% earnings growth, marking the fifth consecutive quarter of positive results. A majority of companies exceeded EPS expectations, with only 61 companies issuing negative EPS guidance—the lowest figure since the fourth quarter of 2021. Looking ahead to 2025, consensus estimates project earnings growth of 14.8% for the calendar year, signaling optimism among analysts.

On the political front, Donald Trump was elected as the 47th president of the United States, becoming the first Republican to win the popular vote since 2004. The Republican Party also won the Senate and kept control of the House of Representatives, though with narrow majorities.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of 6.29% gross of fees (6.15% net of fees), underperforming the 7.07% return of the Russell 1000 Growth Index.

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 fourth quarter, the portfolio’s underperformance relative to the Russell 1000 Growth Index was due to a combination of allocation effects and security selection. Security selection in Information Technology and Consumer Discretionary detracted the most from relative performance. Conversely, security selection in Health Care and Industrials contributed.

Contributors and Detractors for 4Q 2024

Detractors

Tesla

Tesla detracted from performance in the fourth quarter of 2024. The stock had a strong performance in the fourth quarter, and our portfolio has an underweight position relative to the benchmark weight. Tesla reported better-than-expected third quarter earnings in late October. Given the CEO of Tesla’s position as an advisor to President-elect Trump, performance in the shares accelerated following the U.S. presidential election. There are expectations that regulation for autonomous driving will be centralized with the federal government. There have been reports in the press that tax incentives for electric vehicles will be eliminated or reduced, which could have a negative impact on Tesla’s subscale competitors.

UnitedHealth Group

UnitedHealth Group detracted from performance in the fourth quarter following the tragic shooting of its insurance division CEO and increased focus on health insurance industry practices. A bipartisan bill was introduced that could force companies that own pharmacy benefit managers to divest their pharmacy operations, which would impact United’s Optum unit.

Contributors

Expedia

Expedia contributed to performance in the fourth quarter of 2024. In early November, the company reported better-than-expected EBITDA and EPS for the third quarter. Full-year guidance for 2024 was increased. The vacation rental business, Vrbo, returned to modest growth after a few quarters of decline. The balance sheet is close to target leverage ratio. There is a share repurchase authorization for approximately 13% of outstanding shares.

Eli Lilly

Eli Lilly was a relative contributor in the fourth quarter, as shares underperformed and we are underweight versus the benchmark. Lilly shares were weak following an uncharacteristic third quarter earnings miss driven by softer-than-expected sales of its blockbuster diabetes and obesity drugs. The company blamed this partly on wholesaler destocking. Lilly reinforced its view that end demand for the drugs remains strong.

Recent Portfolio Activity

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

Buys

Amphenol

Amphenol is one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors and interconnect systems; antennas; sensors and sensor-based products; and coaxial and high-speed specialty cable. The company estimates, based on recent reports of industry analysts, that worldwide sales of interconnect and sensor-related products were approximately $235 billion in 2023. The company aligns its businesses into three reportable business segments: Harsh Environment Solutions, Communications Solutions, and Interconnect and Sensor Systems. The company sells products to customers in a diversified set of end markets.

We see Amphenol benefiting from increased spending by cloud service providers, hyperscalers and enterprises on new datacenter architectures that enable AI computing technologies. The increased interconnect content that AI-enabled datacenters require, we believe, will underpin a double-digit sales growth outlook for the company over the next few years. The company has attractive end-market diversification, with exposure to both short-cycle and long-cycle, and no single end-market vertical represents more than 25% of revenues. Additionally, Amphenol has strong free cash flow generation, which has supported a successful M&A strategy that has driven enhanced advancement.

Sells

Dexcom

We sold Dexcom after the surprisingly weak second quarter earnings report and only a modest recovery in the third quarter. The U.S. sales trends remain weak, and we believe that it could take a while for Dexcom to regain the premium multiple it has historically enjoyed. Dexcom is working to fix the durable medical equipment (DME) sales channel, and this could take time. The recently announced Stelo product for non-diabetic users could add an additional level of variability to quarterly earnings reports as well.

Honeywell

We sold Honeywell in the Large Cap Growth strategy to reduce our overweight in Industrials. We plan to reallocate the proceeds into Information Technology companies with what we consider to be better growth prospects.

Outlook

The equity markets in the fourth quarter moved higher as investors anticipated a market benefit from a full sweep by Republicans in the November election. Interest rates for the quarter were little changed but did move sharply intraquarter due to a shift in the Fed away from a more accommodative policy. Expectations for 2025 include a couple of further rate reductions by the Fed and earnings increasing over 10% for the year. The markets will track closely the new administration’s stance on certain policies, along with the pace and level of reductions in regulations. Tariffs will be a focal point, as any action could add to concerns for higher inflation. Valuation levels remain elevated, and equity price appreciation will largely be dependent on earnings growth for the year. 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

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle International Equity ADR 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 Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Global equity markets ended the year slightly down, with the MSCI ACWI Index returning -0.99% in the fourth quarter. Concurrently, the Bloomberg Global Aggregate Bond Index fell by 5.10%. In terms of style, value stocks lagged their growth counterparts during the quarter, with the MSCI ACWI Value Index underperforming the MSCI ACWI Growth Index by 7.35%.

The MSCI EAFE Index fell 8.11% during the fourth quarter, while the MSCI ACWI ex USA Index dropped 7.60%. Within the MSCI EAFE Index, Europe & Middle East was the weakest performer, while Asia declined the least. On a sector basis, all eleven sectors within the MSCI EAFE Index posted negative returns, with Materials, Health Care and Real Estate generating the largest losses. Conversely, Financials, Consumer Discretionary and Communication Services fell the least.

Geopolitics continued to make headlines, as the conflicts in Ukraine and the Middle East escalated. For the first time during the war, Ukraine launched U.S.-made missiles deep into Russian territory, while Russia continued to bombard Ukraine’s power grid in the midst of winter. Russian President Vladimir Putin announced that aggression from a non-nuclear country – with the direct or indirect participation of a nuclear country – would be considered a joint attack on Russia, lowering the bar for the use of nuclear weapons.

In the Middle East, a tenuous ceasefire was made between Israel and Hezbollah, as well as seeming progress toward a ceasefire between Israel and Hamas. However, tensions also escalated as Israel, in response to an Iranian missile attack, conducted a precision strike on military targets in Iran. Concerns over a regional conflict have intensified, as the two countries have drawn closer to a potentially more forceful direct encounter. The Middle East also experienced a shock in politics, as the Islamist militant group Hayat Tahrir al-Sham overthrew the Iranian and Russian-backed dictator Bashar al-Assad in Syria. Europe and Asia were not immune to instability, as the French parliament passed a vote of no confidence against Prime Minister Michel Barnier, and the South Korean National Assembly voted to impeach President Yoon Suk Yeol after he declared martial law.

Even with the continued uncertainty stoked by geopolitical conflicts and political regime changes across the globe, the IMF projects global economic growth to hold steady at 3.2% for 2024 and 2025. Additionally, global inflation continues to decline, resulting in global headline inflation projections of 3.5% for 2025 – below the 2000-2019 average of 3.6%. As western countries continue to target a 2% annual rate of inflation, the Federal Reserve, European Central Bank and Bank of England all cut key interest rates during the period. In Asia, Japan’s index of service-sector inflation hit its highest level since 1995, as rising wages have caused companies to pass on higher costs. Though the Bank of Japan did not raise rates at its most recent meeting, Governor Kazuo Ueda has indicated that the central bank would continue to raise rates if inflation sustainably hit a 2% annual rate. Meanwhile, China announced a $1.4 trillion stimulus package to address local government debt issues and support its economy. The Chinese government hopes to repair municipal balance sheets rather than directly injecting money into the economy (which it has done in the past).

Annual Markets Review

Global equity markets continued climbing in 2024 following a strong year in 2023, as the MSCI ACWI posted a full-year return of 17.49%. Additionally, growth outperformed value, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 13.46% in 2024. Meanwhile, fixed income markets lagged, as the Bloomberg Global Aggregate Bond Index fell by 1.69%.

Although the equity market remained strong in 2024 amid resilient global growth, uncertainty heading into 2025 is high, as geopolitical conflicts remain unsolved, central bank policy effects have yet to fully play out and countries’ governments are changing leadership.

Therefore, rather than trying to predict the unpredictable, we choose to focus on individual businesses and their long-term prospects. We believe by focusing on what is analyzable in the long run, we will be able to weather short-term volatility and provide attractive returns over the long term for our clients.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Capital’s International Equity ADR Composite posted a total return of -7.28% gross of fees (-7.34% net of fees), outperforming the MSCI EAFE Index, which returned -8.11%, and the MSCI ACWI ex USA Index, which returned -7.60%. Please refer to the table below for detailed performance.

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.

From a sector perspective, the portfolio’s outperformance relative to the MSCI EAFE Index can be attributed to both security selection and allocation effects. Security selection in Energy, Consumer Staples and Health Care contributed the most to the portfolio’s relative performance. Conversely, security selection in Industrials and Materials, as well as an overweight in Consumer Staples, detracted from relative returns.

Regionally, allocation effects were responsible for the portfolio’s outperformance, while security selection had a negative impact. Exposure to Canada and security selection in Asia contributed the most to relative performance, while security selection in the Europe & Middle East, as well as U.K., detracted.

Contributors and Detractors for 4Q 2024

Relative Contributors	Relative Detractors
Brookfield	DSM-Firmenich
Cameco	Ashtead Group
DBS Group	Symrise
Sony Group	Michelin
Erste Group Bank	Experian

Cameco, one of the world’s largest uranium producers, was a major contributor during the period. With the continued focus on artificial intelligence and clean energy, the demand for nuclear energy remained robust. Some of the largest companies in the world, such as Amazon, Google and Meta, announced nuclear power agreements in the quarter. Given Cameco’s tier-one assets in reliable jurisdictions, proven operating experience and strong reputation, we believe the company is in a unique position to benefit as various industries and governments pursue clean, reliable and scalable sources of energy. Correspondingly, Cameco increased its production outlook, having already secured commitments that net an average of 29 million pounds per year over the next four years. We believe Cameco’s continued ability to efficiently increase production while securing long-term contracts will lead to sustainably higher levels of normalized FREE cash flow. While its Canada-based mines and Westinghouse unit are executing well, production was recently suspended at Cameco’s Inkai joint venture in Kazakhstan. We believe production will restart soon and note that Cameco’s share of Inkai’s production amounts to less than 10% of total Cameco volumes, a figure that can be offset with increased production at the company’s MacArthur River and Key Lake mines in Canada.

Sony, the global provider of videogames and consoles, image sensors, music, and movies, was a top contributor for the period. The company reported strong results driven by third-party gaming revenue and record PlayStation 5 console profitability. This was achieved despite lower console sales, which, in our view, exemplifies the strength of PlayStation’s network effects. PlayStation is the world’s largest gaming platform with 116 million monthly active users, making it an attractive market for game developers and allowing users to play the most advanced games at lower costs than PCs. In its Pictures segment, Crunchyroll (the anime business Sony acquired from AT&T in 2020) signed a distribution agreement with YouTube Primetime Channels, the market share leader in streaming services, which we believe will increase Crunchyroll’s subscriber base. Though a singular example, it illustrates management’s ability to better execute and further improve the segment’s profitability, a catalyst we previously identified. In addition, Sony reported improved sales of image sensors for mobile products as the global smartphone market continued its gradual recovery. Sony’s image sensor business has the largest global market share, and we believe, longer term, it is uniquely positioned to benefit from increasing demand for both autonomous driving technology in vehicles and improved image quality in smartphone cameras. As such, we continue to admire Sony’s capacity to build on its industry leadership and optimize its operations, which includes its plan for a partial spinoff of its Financial Services segment in October 2025.

DSM-Firmenich (DSM), the Dutch-Swiss nutrition, health and bioscience company, was the leading detractor for the quarter. Despite a decline in share price, the company continued to increase its sales across segments following customer destocking in 2023. Within its largest segment – Perfumery & Beauty – we believe DSM will uniquely benefit, as customers look to differentiate their products and increase fragrance dosage levels. The company has also made progress on the integration of its 2023 merger with Firmenich, a catalyst we previously identified, which we expect to create further sales and product development synergies. With low leverage, the company is in a strong position to pursue additional bolt-on acquisitions and return cash to shareholders, all while it executes on shedding lower-margin segments. As such, during the quarter, the company completed the sale of its yeast extracts and marine lipid business and remains on track with plans to divest its Animal Nutrition & Health segment. We believe this should enhance overall profitability, as DSM’s global scale, close relationships with customers and ability to innovate allow the company to continue to gain global market share across the businesses it operates.

Ashtead Group, a U.K.-headquartered equipment rental company, was one of the largest detractors. Though rental revenues grew 2% year-over-year, shares declined as weaker local commercial construction markets weighed on growth and fleet utilization. In December, Ashtead also announced its intention to move to a U.S. primary listing (while retaining a U.K. listing), a reflection of the company’s large U.S. footprint. This process will take time, as management intends to first discuss the proposal with shareholders before putting forward a formal resolution. Despite the cyclical nature of the construction industry, which can impact short-term results, we believe Ashtead will continue to gain market share in North America as more customers choose to rent rather than purchase equipment. We estimate rental penetration in the U.S. (~90% of EBITDA) is roughly 55% compared to 75% in the U.K., which provides ample runway. During our nearly four years as shareholders, Ashtead has further consolidated the rental industry, which we believe should result in a more disciplined and attractive market. The company also continues to make progress on the catalyst of growing its higher-margin specialty business, which includes HVAC equipment and scaffolding. Moreover, we believe Ashtead will be able to further utilize its national footprint and procurement power to increase its market share and enhance its FREE cash flow (of which it plans to return up to $1.5 billion to shareholders via buybacks over the next 18 months).

Recent Portfolio Activity

Consistent with our long-term horizon and low turnover, there were no new purchases or sales completed during the quarter.

Conclusion

While investment managers are typically judged by their performance, we often remind our clients and prospects that performance is an outcome of an investment process. Short-term performance, in particular, can be fleeting.  We are proud to report that our strategy outperformed its benchmarks in 2024; however, we highlight that this is a result of our focus on the inputs of our time-tested investment process, not a focus on performance. Our process involves identifying what we believe to be high-quality businesses that are trading at a discount to their intrinsic value. While there are myriad variables – both micro and macro – that influence stock prices on a short-term basis, we believe the ultimate worth of a business is determined by company specific fundamentals. As such, regardless of short-term market influences or performance outcomes, we will remain true to our investment process.  

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

Markets Review

Sources: CAPS CompositeHub^TM, 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. 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 Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Global equity markets ended the year slightly down, with the MSCI ACWI Index returning -0.99% in the fourth quarter. Concurrently, the Bloomberg Global Aggregate Bond Index fell by 5.10%. In terms of style, value stocks lagged their growth counterparts during the quarter, with the MSCI ACWI Value Index underperforming the MSCI ACWI Growth Index by 7.35%.

Latin America and Europe were the weakest regions, while North America was the only positive performer and Japan declined the least. On a sector basis, seven out of the eleven sectors within the MSCI ACWI Index finished lower, with Materials, Health Care and Real Estate falling the most. Meanwhile, Consumer Discretionary, Communication Services and Information Technology were the strongest performers.

Geopolitics continued to make headlines, as the conflicts in Ukraine and the Middle East escalated. For the first time during the war, Ukraine launched U.S.-made missiles deep into Russian territory, while Russia continued to bombard Ukraine’s power grid in the midst of winter. Russian President Vladimir Putin announced that aggression from a non-nuclear country – with the direct or indirect participation of a nuclear country – would be considered a joint attack on Russia, lowering the bar for the use of nuclear weapons.

In the Middle East, a tenuous ceasefire was made between Israel and Hezbollah, as well as seeming progress toward a ceasefire between Israel and Hamas. However, tensions also escalated as Israel, in response to an Iranian missile attack, conducted a precision strike on military targets in Iran. Concerns over a regional conflict have intensified, as the two countries have drawn closer to a potentially more forceful direct encounter. The Middle East also experienced a shock in politics, as the Islamist militant group Hayat Tahrir al-Sham overthrew the Iranian and Russian-backed dictator Bashar al-Assad in Syria. Europe and Asia were not immune to instability, as the French parliament passed a vote of no confidence against Prime Minister Michel Barnier, and the South Korean National Assembly voted to impeach President Yoon Suk Yeol after he declared martial law.

Even with the continued uncertainty stoked by geopolitical conflicts and political regime changes across the globe, the IMF projects global economic growth to hold steady at 3.2% for 2024 and 2025. Additionally, global inflation continues to decline, resulting in global headline inflation projections of 3.5% for 2025 – below the 2000-2019 average of 3.6%. As western countries continue to target a 2% annual rate of inflation, the Federal Reserve, European Central Bank and Bank of England all cut key interest rates during the period. In Asia, Japan’s index of service-sector inflation hit its highest level since 1995, as rising wages have caused companies to pass on higher costs. Though the Bank of Japan did not raise rates at its most recent meeting, Governor Kazuo Ueda has indicated that the central bank would continue to raise rates if inflation sustainably hit a 2% annual rate. Meanwhile, China announced a $1.4 trillion stimulus package to address local government debt issues and support its economy. The Chinese government hopes to repair municipal balance sheets rather than directly injecting money into the economy (which it has done in the past).

Annual Markets Review

Global equity markets continued climbing in 2024 following a strong year in 2023, as the MSCI ACWI posted a full-year return of 17.49%. Additionally, growth outperformed value, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 13.46% in 2024. Meanwhile, fixed income markets lagged, as the Bloomberg Global Aggregate Bond Index fell by 1.69%.

Although the equity market remained strong in 2024 amid resilient global growth, uncertainty heading into 2025 is high, as geopolitical conflicts remain unsolved, central bank policy effects have yet to fully play out and countries’ governments are changing leadership.

Therefore, rather than trying to predict the unpredictable, we choose to focus on individual businesses and their long-term prospects. We believe by focusing on what is analyzable in the long run, we will be able to weather short-term volatility and provide attractive returns over the long term for our clients.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Capital’s Global Equity Composite posted a total return of -7.72% gross of fees (-7.80% net of fees), underperforming the MSCI ACWI Index, which returned -0.99%, and the MSCI World Index, which returned -0.16%. Please refer to the table below for detailed performance.

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.

From a sector perspective, the portfolio’s underperformance relative to the MSCI ACWI Index can be primarily attributed to security selection, while allocation effects also had a negative impact. Security selection in Information Technology and Consumer Discretionary and an overweight in Materials detracted the most from the portfolio’s relative performance. Conversely, security selection in Materials, an overweight in Consumer Discretionary and a lack of exposure to Utilities contributed to relative return.

Regionally, security selection was primarily responsible for the portfolio’s underperformance relative to the MSCI ACWI Index, while allocation effects also had a negative impact. Security selection in North America and Europe detracted the most from relative performance, while security selection in Japan and an underweight in Emerging Markets contributed.

Contributors and Detractors for 4Q 2024

Relative Contributors	Relative Detractors
Cameco	Lennar
Norwegian Cruise Line Holdings	Microchip Technology
Sony	DSM-Firmenich
DBS Group	Amgen
Brookfield	Michelin

Microchip Technology, the microcontroller (MCU) and analog semiconductor producer, was one of the largest detractors for the period. Revenues continued to decline amid the severe inventory correction, which has persisted in most end markets other than defense and aerospace since early 2023. In addition, Microchip’s board unexpectedly announced that CEO Ganesh Moorthy (who led the company since 2021) would retire with the current chairman and long-tenured former CEO Steve Sanghi returning. Mr. Sanghi returned on an interim basis, allowing the company to focus on turnaround efforts without near-term plans to search for a replacement. We have admired Mr. Sanghi’s skill at navigating past chip cycles and will closely track the company’s ability to execute on restructuring initiatives, which aim to resize its manufacturing footprint and reduce inventory. This includes plans to soon shut down the company’s wafer fabrication facility in Arizona, which the company expects should generate annual cash savings of approximately $90 million. Despite recent missteps in inventory management that were exacerbated by cyclical headwinds, we are optimistic about management’s plans to right-size its business. Moreover, we remain confident that Microchip’s broad portfolio is uniquely positioned to increase its market share in 16- and 32-bit MCUs and areas including IoT, 5G infrastructure, autonomous driving and data centers.

DSM-Firmenich (DSM), the Dutch-Swiss nutrition, health and bioscience company, was one of the largest detractors. Despite a decline in share price, the company continued to increase its sales across segments following customer destocking in 2023. Within its largest segment – Perfumery & Beauty – we believe DSM will uniquely benefit, as customers look to differentiate their products and increase fragrance dosage levels. The company has also made progress on the integration of its 2023 merger with Firmenich, a catalyst we previously identified, which we expect to create further sales and product development synergies. With low leverage, the company is in a strong position to pursue additional bolt-on acquisitions and return cash to shareholders, all while it executes on shedding lower-margin segments. As such, during the quarter, the company completed the sale of its yeast extracts and marine lipid business and remains on track with plans to divest its Animal Nutrition & Health segment. We believe this should enhance overall profitability, as DSM’s global scale, close relationships with customers and ability to innovate allow the company to continue to gain global market share across the businesses it operates.

Norwegian Cruise Line Holdings, one of the world’s largest cruise ship operators, was a major contributor during the quarter. With post pandemic consumer sentiment regarding the cruise industry continuing to improve, the company has seen strong advanced booking trends, improving occupancy levels and an upward momentum in pricing. Norwegian Cruise Line has also simultaneously executed on optimizing ship operating costs and instituting a new fuel purchasing program, which has allowed the company to offset inflation. Furthermore, the company continues to make progress on its multibillion-dollar efforts to upgrade and expand its fleet, with one of the company’s newest ships, Allura, ready to set sail in 2025. We believe the company’s cost-saving initiatives and fleet improvements will lead to higher levels of profitability and FREE cash flow, allowing the company to continue to reduce debt and increase its intrinsic value.

Sony, the global provider of videogames and consoles, image sensors, music, and movies, was a top contributor for the period. The company reported strong results driven by third-party gaming revenue and record PlayStation 5 console profitability. This was achieved despite lower console sales, which, in our view, exemplifies the strength of PlayStation’s network effects. PlayStation is the world’s largest gaming platform with 116 million monthly active users, making it an attractive market for game developers and allowing users to play the most advanced games at lower costs than PCs. In its Pictures segment, Crunchyroll (the anime business Sony acquired from AT&T in 2020) signed a distribution agreement with YouTube Primetime Channels, the market share leader in streaming services, which we believe will increase Crunchyroll’s subscriber base. Though a singular example, it illustrates management’s ability to better execute and further improve the segment’s profitability, a catalyst we previously identified. In addition, Sony reported improved sales of image sensors for mobile products as the global smartphone market continued its gradual recovery. Sony’s image sensor business has the largest global market share, and we believe, longer term, it is uniquely positioned to benefit from increasing demand for both autonomous driving technology in vehicles and improved image quality in smartphone cameras. As such, we continue to admire Sony’s capacity to build on its industry leadership and optimize its operations, which includes its plan for a partial spinoff of its Financial Services segment in October 2025.

Recent Portfolio Activity

Consistent with our long-term horizon and low turnover, there were no new purchases or sales completed during the quarter.

Conclusion

While in 2024 we delivered positive absolute returns, our portfolio’s relative performance is nevertheless disappointing. Despite this, we remain confident in our time-tested investment process which has a longer-term orientation. By definition, value investors often seek to invest in companies that are not “in vogue” with investors. As a result, we believe our quality oriented approach to intrinsic value investing is best measured over a full market cycle, which we define as three to five years. While the market in 2024 was largely driven by narrowly focused investment themes, we remain confident that, over the long term, stock prices will track business fundamentals. 

Markets Review

The U.S. equity market ended the year on a strong note, with the S&P 500 Index rising 2.41% during the period. In contrast, the Bloomberg U.S. Aggregate Bond Index declined, falling 3.06% for the quarter.

On a sector basis, gains were made in four of the eleven sectors within the S&P 500 Index, led by Consumer Discretionary and Communication Services. The worst-performing sectors were Materials and Health Care.

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.

The U.S. economy continued to demonstrate resilience, with real GDP growing at an annualized rate of 3.1%, according to the BEA’s most recent report. Increases in consumer spending, exports, nonresidential fixed investment and federal government spending drove the economic expansion. Retail sales rose 3.8% year-over-year in November, supported by a 2.7% increase in disposable personal income for the most recent quarter.

The labor market remained tight but showed signs of softening, as the unemployment rate edged up to 4.2% in November. Inflation remained relatively stable, rising modestly to an annual rate of 2.7%, as measured by the Consumer Price Index (CPI).

As was widely expected, the Federal Reserve (Fed) implemented two rate cuts during the quarter, setting the federal funds target rate at 4.25% to 4.50%. Fed Chair Jerome Powell emphasized the importance of finding a balance—reducing policy restraint too rapidly could hinder progress on inflation, while acting too slowly could weaken economic activity and the labor market. Still, he indicated that both the economy and monetary policy are on solid footing.

Corporate earnings also showed strength, as S&P 500 companies reported 5.8% earnings growth, marking the fifth consecutive quarter of positive results. A majority of companies exceeded EPS expectations, with only 61 companies issuing negative EPS guidance—the lowest figure since the fourth quarter of 2021. Looking ahead to 2025, consensus estimates project earnings growth of 14.8% for the calendar year, signaling optimism among analysts.

On the political front, Donald Trump was elected as the 47th president of the United States, becoming the first Republican to win the popular vote since 2004. The Republican Party also won the Senate and kept control of the House of Representatives, though with narrow majorities.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Atlantic’s Core Equity Composite posted a total return of 4.11% gross of fees (4.00% net of fees), outperforming the S&P 500 Index, which recorded a total return of 2.41%.

Source: FactSet
Past performance is not indicative of future results. Sector attribution shows how much of a portfolio’s overall return is directly attributable to stock selection and asset allocation decisions within the portfolio, highlighting which sectors contributed or detracted to the total return. Attribution includes the reinvestment of income. Please see important disclosures at the end of this document.

During the fourth quarter, the portfolio’s outperformance relative to the S&P 500 Index was due to a mix of security selection and allocation effects. Security selection in Information Technology and Industrials contributed the most to relative performance. Conversely, security selection in Utilities and Consumer Discretionary detracted the most from relative performance.

Contributors and Detractors for 4Q 2024

Detractors

Cigna

Cigna detracted from performance in the fourth quarter following the tragic shooting of the CEO of UnitedHealthcare and increased focus on insurance industry practices. A bipartisan bill was introduced that could force companies that own pharmacy benefit managers to divest their pharmacy operations, which would impact Cigna’s Evernorth unit.

Avery Dennison

Avery Dennison detracted from performance in the fourth quarter following the company’s third quarter earnings results, which highlighted slower-than-expected growth of the company’s Intelligent Label business unit. In addition, the threat of tariffs from the incoming Trump administration could affect global apparel sales, impacting Avery Dennison’s volumes and earnings growth.

Contributors

Broadcom

Broadcom contributed to performance in the fourth quarter as the company’s third quarter results demonstrated continuing strength for its AI networking and custom accelerator semiconductor business. The company also gave long-term guidance for the service addressable market (SAM) opportunity for its AI-related business, indicating a market opportunity of $60 billion to $90 billion, which only includes contributions from its current three customers. This long-term outlook for AI semiconductor content exceeded investor expectations. Broadcom’s quarterly results also showed the company is ahead on its VMware integration timeline to achieve $8.5 billion in EBITDA, which will support long-term gross and operating margin expansion for the company.

Chart Industries

Chart Industries contributed to performance in the fourth quarter of 2024. Although the company missed consensus estimates for both revenue and earnings when it reported third quarter earnings in early November, the preliminary guidance for 2025 was in line with consensus estimates, and it implies 39% EPS growth. In addition, the company hosted a capital markets day on November 12, where management provided strong medium-term outlooks for most of the company’s end markets. Chart Industries is making progress toward reducing its balance sheet leverage and achieving its 2026 financial targets that were first given back in 2023.

Recent Portfolio Activity

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

Buys

GE Aerospace

GE Aerospace designs and produces commercial and defense aircraft engines, integrated engine components, electric power, and mechanical aircraft systems. The industry has high entry barriers and is concentrated among few players. Despite its cyclical nature, the demand for travel is driven by global middle-class growth. Boeing and Airbus have long order books, ensuring steady demand for engines and spare parts. The company also benefits from high-margin services for existing aircraft fleets, with services accounting for 70% of its commercial engine business. GE Aerospace serves customers worldwide.

We see GE Aerospace making significant strides in its commercial engine business, which is expected to boost future services revenue growth. Over the past five years, the company has undergone substantial restructuring and simplification, including divesting its healthcare and energy businesses. The company now operates in three segments: Commercial Engines & Services (CES), Defense & Propulsion Technologies (DPT) and Insurance. Long-term revenue guidance is for high single-digit growth, and management has a goal of $10 billion in annual operating profit by 2028, with an expected 20% annual earnings growth. Following years of restructuring, we see GE Aerospace now positioned to return capital to shareholders through dividends and share repurchases.

CrowdStrike Holdings

CrowdStrike provides cybersecurity products and services that offer endpoint protection and threat intelligence solutions, enabling customers to prevent damage from targeted attacks, detect advanced malware and search all endpoints. The company’s open cloud architecture enables it and third-party partners to rapidly innovate, build and deploy new cloud modules that can provide customers with enhanced functionality across a myriad of use cases.

We see the cloud cybersecurity market as positioned to experience strong growth over the next few years, driven by continued migration from on-premises to cloud-based architecture. We believe CrowdStrike can benefit from this trend due to its early-mover advantage, multiple product offerings and native integrations with leading cloud platforms. The increasing threats from state-sanctioned cybercriminals using high-performance computing and AI necessitate higher spending on advanced cybersecurity products. The total addressable market (TAM) is projected to grow significantly over the next four calendar years. Additionally, CrowdStrike’s cloud-native architecture and unified platform approach provide competitive advantages, resulting in high customer retention and widespread adoption of multiple modules.

Sells

Spirit AeroSystems Holdings

We sold Spirit AeroSystems following the disclosure that the company reported in its 10-Q that there is a “growing concern risk” that has been driven by the disruption from the Boeing machinists’ strike. Although the strike has been settled, it will be several months before production returns to normal. We are also concerned that Boeing’s agreement to acquire Spirit could be renegotiated at a lower price. Finally, in the unlikely event of a disapproval of the Spirit acquisition by regulators, the shares may be subject to a significant decline.

Microchip Technology

We sold Microchip and see the recovery in industrial and automotive microcontroller and analog semiconductors taking longer to materialize than we expected. The slower recovery has seen multiple cuts in earnings estimates. While the whole semiconductor space is seeing an impact from lower end-market demand for products, we are concerned by the magnitude of revenue and earnings cuts relative to peers. We thus believe there may be market share and pricing headwinds in the longer term and view Microchip’s lack of exposure to high-growth AI datacenter as a competitive disadvantage.

Outlook

The equity markets in the fourth quarter moved higher as investors anticipated a market benefit from a full sweep by Republicans in the November election. Interest rates for the quarter were little changed but did move sharply intraquarter due to a shift in the Fed away from a more accommodative policy. Expectations for 2025 include a couple of further rate reductions by the Fed and earnings increasing over 10% for the year. The markets will track closely the new administration’s stance on certain policies, along with the pace and level of reductions in regulations. Tariffs will be a focal point, as any action could add to concerns for higher inflation. Valuation levels remain elevated, and equity price appreciation will largely be dependent on earnings growth for the year. 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

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle International 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 Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Global equity markets ended the year slightly down, with the MSCI ACWI Index returning -0.99% in the fourth quarter. Concurrently, the Bloomberg Global Aggregate Bond Index fell by 5.10%. In terms of style, value stocks lagged their growth counterparts during the quarter, with the MSCI ACWI Value Index underperforming the MSCI ACWI Growth Index by 7.35%.

The MSCI EAFE Index fell 8.11% during the fourth quarter, while the MSCI ACWI ex USA Index dropped 7.60%. Within the MSCI EAFE Index, Europe & Middle East was the weakest performer, while Asia declined the least. On a sector basis, all eleven sectors within the MSCI EAFE Index posted negative returns, with Materials, Health Care and Real Estate generating the largest losses. Conversely, Financials, Consumer Discretionary and Communication Services fell the least.

Geopolitics continued to make headlines, as the conflicts in Ukraine and the Middle East escalated. For the first time during the war, Ukraine launched U.S.-made missiles deep into Russian territory, while Russia continued to bombard Ukraine’s power grid in the midst of winter. Russian President Vladimir Putin announced that aggression from a non-nuclear country – with the direct or indirect participation of a nuclear country – would be considered a joint attack on Russia, lowering the bar for the use of nuclear weapons.

In the Middle East, a tenuous ceasefire was made between Israel and Hezbollah, as well as seeming progress toward a ceasefire between Israel and Hamas. However, tensions also escalated as Israel, in response to an Iranian missile attack, conducted a precision strike on military targets in Iran. Concerns over a regional conflict have intensified, as the two countries have drawn closer to a potentially more forceful direct encounter. The Middle East also experienced a shock in politics, as the Islamist militant group Hayat Tahrir al-Sham overthrew the Iranian and Russian-backed dictator Bashar al-Assad in Syria. Europe and Asia were not immune to instability, as the French parliament passed a vote of no confidence against Prime Minister Michel Barnier, and the South Korean National Assembly voted to impeach President Yoon Suk Yeol after he declared martial law.

Even with the continued uncertainty stoked by geopolitical conflicts and political regime changes across the globe, the IMF projects global economic growth to hold steady at 3.2% for 2024 and 2025. Additionally, global inflation continues to decline, resulting in global headline inflation projections of 3.5% for 2025 – below the 2000-2019 average of 3.6%. As western countries continue to target a 2% annual rate of inflation, the Federal Reserve, European Central Bank and Bank of England all cut key interest rates during the period. In Asia, Japan’s index of service-sector inflation hit its highest level since 1995, as rising wages have caused companies to pass on higher costs. Though the Bank of Japan did not raise rates at its most recent meeting, Governor Kazuo Ueda has indicated that the central bank would continue to raise rates if inflation sustainably hit a 2% annual rate. Meanwhile, China announced a $1.4 trillion stimulus package to address local government debt issues and support its economy. The Chinese government hopes to repair municipal balance sheets rather than directly injecting money into the economy (which it has done in the past).

Annual Markets Review

Global equity markets continued climbing in 2024 following a strong year in 2023, as the MSCI ACWI posted a full-year return of 17.49%. Additionally, growth outperformed value, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 13.46% in 2024. Meanwhile, fixed income markets lagged, as the Bloomberg Global Aggregate Bond Index fell by 1.69%.

Although the equity market remained strong in 2024 amid resilient global growth, uncertainty heading into 2025 is high, as geopolitical conflicts remain unsolved, central bank policy effects have yet to fully play out and countries’ governments are changing leadership.

Therefore, rather than trying to predict the unpredictable, we choose to focus on individual businesses and their long-term prospects. We believe by focusing on what is analyzable in the long run, we will be able to weather short-term volatility and provide attractive returns over the long term for our clients.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Capital’s International Equity Composite posted a total return of -6.91% gross of fees (-7.02% net of fees), outperforming the MSCI EAFE Index, which returned -8.11%, and the MSCI ACWI ex USA Index, which returned -7.60%. Please refer to the table below for detailed performance.

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.

From a sector perspective, the portfolio’s outperformance relative to the MSCI EAFE Index can be attributed to both security selection and allocation effects. Security selection in Financials, Energy and Consumer Staples contributed the most to the portfolio’s relative performance. Conversely, security selection in Industrials and Materials, as well as an overweight in Consumer Staples, detracted from relative returns.

Regionally, allocation effects were responsible for the portfolio’s outperformance, while security selection had a negative impact. Exposure to Canada and security selection in Asia contributed the most to relative performance, while security selection in the U.K., as well as Europe & Middle East, detracted.

Contributors and Detractors for 4Q 2024

Relative Contributors	Relative Detractors
Brookfield	Ashtead Group
Cameco	DSM-Firmenich
Sony	Symrise
Pan Pacific International	Michelin
Erste Group Bank	Samsung Electronics

Cameco, one of the world’s largest uranium producers, was a major contributor during the period. With the continued focus on artificial intelligence and clean energy, the demand for nuclear energy remained robust. Some of the largest companies in the world, such as Amazon, Google and Meta, announced nuclear power agreements in the quarter. Given Cameco’s tier-one assets in reliable jurisdictions, proven operating experience and strong reputation, we believe the company is in a unique position to benefit as various industries and governments pursue clean, reliable and scalable sources of energy. Correspondingly, Cameco increased its production outlook, having already secured commitments that net an average of 29 million pounds per year over the next four years. We believe Cameco’s continued ability to efficiently increase production while securing long-term contracts will lead to sustainably higher levels of normalized FREE cash flow. While its Canada-based mines and Westinghouse unit are executing well, production was recently suspended at Cameco’s Inkai joint venture in Kazakhstan. We believe production will restart soon and note that Cameco’s share of Inkai’s production amounts to less than 10% of total Cameco volumes, a figure that can be offset with increased production at the company’s MacArthur River and Key Lake mines in Canada.

Sony, the global provider of videogames and consoles, image sensors, music, and movies, was a top contributor for the period. The company reported strong results driven by third-party gaming revenue and record PlayStation 5 console profitability. This was achieved despite lower console sales, which, in our view, exemplifies the strength of PlayStation’s network effects. PlayStation is the world’s largest gaming platform with 116 million monthly active users, making it an attractive market for game developers and allowing users to play the most advanced games at lower costs than PCs. In its Pictures segment, Crunchyroll (the anime business Sony acquired from AT&T in 2020) signed a distribution agreement with YouTube Primetime Channels, the market share leader in streaming services, which we believe will increase Crunchyroll’s subscriber base. Though a singular example, it illustrates management’s ability to better execute and further improve the segment’s profitability, a catalyst we previously identified. In addition, Sony reported improved sales of image sensors for mobile products as the global smartphone market continued its gradual recovery. Sony’s image sensor business has the largest global market share, and we believe, longer term, it is uniquely positioned to benefit from increasing demand for both autonomous driving technology in vehicles and improved image quality in smartphone cameras. As such, we continue to admire Sony’s capacity to build on its industry leadership and optimize its operations, which includes its plan for a partial spinoff of its Financial Services segment in October 2025.

Ashtead Group, a U.K.-headquartered equipment rental company, was the leading detractor for the quarter. Though rental revenues grew 2% year-over-year, shares declined as weaker local commercial construction markets weighed on growth and fleet utilization. In December, Ashtead also announced its intention to move to a U.S. primary listing (while retaining a U.K. listing), a reflection of the company’s large U.S. footprint. This process will take time, as management intends to first discuss the proposal with shareholders before putting forward a formal resolution. Despite the cyclical nature of the construction industry, which can impact short-term results, we believe Ashtead will continue to gain market share in North America as more customers choose to rent rather than purchase equipment. We estimate rental penetration in the U.S. (~90% of EBITDA) is roughly 55% compared to 75% in the U.K., which provides ample runway. During our nearly four years as shareholders, Ashtead has further consolidated the rental industry, which we believe should result in a more disciplined and attractive market. The company also continues to make progress on the catalyst of growing its higher-margin specialty business, which includes HVAC equipment and scaffolding. Moreover, we believe Ashtead will be able to further utilize its national footprint and procurement power to increase its market share and enhance its FREE cash flow (of which it plans to return up to $1.5 billion to shareholders via buybacks over the next 18 months).

DSM-Firmenich (DSM), the Dutch-Swiss nutrition, health and bioscience company, was one of the largest detractors. Despite a decline in share price, the company continued to increase its sales across segments following customer destocking in 2023. Within its largest segment – Perfumery & Beauty – we believe DSM will uniquely benefit, as customers look to differentiate their products and increase fragrance dosage levels. The company has also made progress on the integration of its 2023 merger with Firmenich, a catalyst we previously identified, which we expect to create further sales and product development synergies. With low leverage, the company is in a strong position to pursue additional bolt-on acquisitions and return cash to shareholders, all while it executes on shedding lower-margin segments. As such, during the quarter, the company completed the sale of its yeast extracts and marine lipid business and remains on track with plans to divest its Animal Nutrition & Health segment. We believe this should enhance overall profitability, as DSM’s global scale, close relationships with customers and ability to innovate allow the company to continue to gain global market share across the businesses it operates.

Recent Portfolio Activity

Consistent with our long-term horizon and low turnover, there were no new purchases or sales completed during the quarter.

Conclusion

While investment managers are typically judged by their performance, we often remind our clients and prospects that performance is an outcome of an investment process. Short-term performance, in particular, can be fleeting.  We are proud to report that our strategy outperformed its benchmarks in 2024; however, we highlight that this is a result of our focus on the inputs of our time-tested investment process, not a focus on performance. Our process involves identifying what we believe to be high-quality businesses that are trading at a discount to their intrinsic value. While there are myriad variables – both micro and macro – that influence stock prices on a short-term basis, we believe the ultimate worth of a business is determined by company specific fundamentals. As such, regardless of short-term market influences or performance outcomes, we will remain true to our investment process.