Key Takeaways:

• Applying a “sustainable lens” to investing in Aristotle Atlantic’s secular themes can reveal positive sustainability attributes that can enhance the long-term potential of an investment.
• Secular themes represent significant long-term shifts in spending patterns across industries and geographies, with many presenting unique opportunities that we believe can be aligned with the UN SDGs.
• Cloud computing is a revolutionary technology that can provide cost reduction, efficiency improvement, cybersecurity enhancement and environmental sustainability.
• Personalized health utilizes genetic data to optimize therapeutic outcomes, reduce waste and improve access to healthcare.
• Secular themes that we identify as having positive sustainable attributes can enhance an investment view while aligning investment strategies with positive societal and environmental impacts.

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

Luck is often defined as when preparation meets opportunity.  So it was on June 10^th when thoroughbred racehorse Arcangelo won the 155^th running of the Belmont Stakes, the third leg of horse racing’s Triple Crown, amongst the most famous annual races in the sport.

Not (yet) a household name, Arcangelo, a gray colt, was surely prepared for the greatest race day of his 3-year-old life.  As reported by The Daily Racing Form publication, he was sired by Arrogate out of the Tapit mare Modeling. His great-grandparents included Unbridled (winner of the 1990 Kentucky Derby and Breeders’ Cup Classic) and Storm Cat (a stallion whose breeding fee during the peak of his stud career was $500,000, the highest in North America at the time – now that’s a nice night’s work!).  Arcangelo, a Kentucky bred, is trained by Jena M. Antonucci.   He has improved his time, speed rating and placement in each of his races, culminating in this Belmont Stakes win.  But he had few races under his belt and was, therefore, perhaps overlooked in the betting.

To read the full article, please use the link below. 

Markets Review

The U.S. equity market continued its rebound, as the S&P 500 Index rose 8.74% during the quarter. However, the market rally has been remarkably concentrated, with just 25% of stocks outperforming the S&P 500 in the first 6-months of 2023. This makes it the narrowest market breadth in history for the first half of a year.¹ Concurrently, the Bloomberg U.S. Aggregate Bond Index slightly declined, returning -0.84% for the quarter. In terms of style, the Russell 1000 Growth Index outperformed its value counterpart by 8.74%.

Sources: SS&C Advent, 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.

Nine out of the eleven sectors within the Russell 1000 Growth Index finished higher for the quarter, with Information Technology, Communication Services and Consumer Discretionary gaining the most. Meanwhile, Energy, Real Estate and Consumer Staples were the worst-performing sectors.

Despite the positive trajectory of the market, economic data points were mixed. After expanding by 2.6% year-over-year in the fourth quarter of last year, growth in the U.S. slowed in the first quarter to 2.0% as private inventory investment and residential fixed investment declined. Nevertheless, personal consumption expenditures remained strong, increasing by 4.2% from last year. Meanwhile, inflation remained above its historical average of 3.8%, but the CPI continued to decline, as the figure fell from 4.9% to 4.0% for the 12-month periods ending in April and May, respectively. The moderation in prices was driven by a decline in the major energy component indexes. Lastly, the labor market remained tight, with unemployment at 3.7% in May.

In addition to economic data, lingering stress at regional banks, as well as political risk, came into focus during the period. Although significant efforts were previously made to provide stability to the U.S. banking system, the collapse of First Republic Bank, the largest banking failure since 2008, reignited concerns. However, the government quickly seized the bank and sold it to JPMorgan Chase, reassuring depositors. The government’s action, combined with minimal increases in default rates, resilient asset performance and loan growth, and stable deposits at other regional banks, eased fears surrounding the industry. Subsequently, attention turned to the approaching deadline to raise the federal debt ceiling. Concerns of a potential U.S. default mounted as the political parties refused to budge on concessions for a deal. After weeks of negotiations, an agreement was eventually reached to suspend the federal debt ceiling for two years while limiting the growth of federal discretionary spending during that same time span.

With the volatile and uncertain macroeconomic backdrop and continued pattern of disinflation, the Federal Reserve (Fed) held rates steady in June, marking the first pause after a ten-meeting hiking campaign that brought the benchmark rate to a range of 5.00% to 5.25%. The Federal Reserve Open Market Committee emphasized the need to account for the cumulative tightening of monetary policy and the lagging effects of monetary policy decisions, as well as other economic and financial developments, in order to determine whether additional policy firming would be needed to achieve the 2% goal for inflation.

On the corporate earnings front, S&P 500 companies reported a decline in earnings of 2.2%, the second straight quarter of a year-over-year decrease. However, results were better than initial expectations of a 6.7%² decline, as companies referenced successful cost cutting, improved operational efficiency and waning inflationary pressures. Overall, 78% of S&P 500 companies exceeded EPS estimates (above the five-year average of 77%), and the number of companies mentioning inflation on earnings calls declined by over 12%.

Performance and Attribution Summary

For the second quarter of 2023, Aristotle Atlantic’s Focus Growth Composite posted a total return of 11.65% gross of fees (11.63% net of fees), underperforming the 12.81% total return of the Russell 1000 Growth Index.

Performance (%)	2Q23	1 Year	3 Years	5 Years	Since Inception*
Focus Growth Composite (gross)	11.65	22.92	7.60	11.77	12.00
Focus Growth Composite (net)	11.63	22.80	7.50	11.53	11.74
Russell 1000 Growth Index	12.81	27.11	13.73	15.13	14.72

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 second quarter, the portfolio’s underperformance relative to the Russell 1000 Growth Index was due to allocation effects, while security selection contributed. Security selection in Financials, as well as overweights in Consumer Staples and Health Care, detracted the most from performance. Conversely, security selection in Information Technology and Consumer Discretionary, as well as an underweight in Industrials, contributed to relative results.

Contributors and Detractors for 2Q 2023

Relative Contributors	Relative Detractors
Nvidia	MSCI
Guardant Health	Dollar General
ServiceNow	Adaptive Biotechnologies
Amazon	Prologis
KLA	Visa

Contributors

Nvidia

Nvidia contributed to outperformance, as the company benefits from increased demand for its Graphic Processing Unit (GPU) semiconductor systems used in accelerated computing that is used to power Artificial Intelligence (AI) and Large Language Models (LLM). The company reported strong first fiscal quarter 2024 results and issued guidance for the second quarter and fiscal year 2024 that was ahead of consensus due to continuing strong demand trends for its data center GPU systems.

Guardant Health

Guardant shares ended the quarter strong, recovering to some extent from the previous weakness in the quarter, as the company reported accelerating clinical volume growth and raised earnings guidance. In addition, the company announced additional U.S. commercial insurance coverage for their Guardant 360 test in the U.S. and government reimbursement in Japan. Lasty, the company completed a successful secondary offering, raising approximately $250 million. 

Detractors

Prologis

Prologis underperformed in the second quarter along with the real estate sector, as the appetite for risk in the broad market increased. Prologis’ results have shown less cyclicality during the recent downturn in the sector, so there is less scope for an earnings recovery as is the case in more beaten-down real estate companies. The company announced the acquisition of a 14 million square foot portfolio of industrial properties from Blackstone for $3.1 billion at the end of the second quarter. 

Adaptive Biotechnologies

Adaptive Biotechnology shares ended the quarter lower despite the company reporting a small revenue beat and accelerating clinical volumes. Clinical volumes rose 54% year-over-year in the quarter and grew 15% sequentially. The company is well-funded, and momentum is building in their minimal residual testing business. Additionally, the company’s drug development partner, Genetech, reported Food and Drug Administration’s (FDA) acceptance of an investigational new drug application on the collaboration’s first T-cell receptor-based therapy. The weakness during the quarter was most likely attributable to increasing interest rates and the negative implication of higher rates for emerging growth companies.    

Recent Portfolio Activity

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

Buys	Sells
Netflix	Dollar General
S&P Global	MSCI

Buys

Netflix

Netflix is one of the leaders in streaming entertainment services that offers a broad selection of movies, TV series, documentaries and original content across numerous genres to its 223 million paid subscribers in over 190 countries. The company was initially founded as a DVD-by-mail service but has evolved into the world’s largest streaming-only platform and became one of the largest producers of original video content globally. Netflix offers a variety of subscription-only and ad-supported memberships, and its focus on original content and investment in technology to improve the user experience have enabled it to maintain a significant competitive advantage over streaming peers.

We initiated a position in Netflix and see new initiatives and further international expansion which can reaccelerate subscriber additions. The company recently introduced an advertising-supported membership plan that should enable it to augment revenue growth by tapping into the growing market for digital advertising while not cannibalizing its existing subscription-only plans. In addition, the company has recently implemented password-sharing restrictions, suggesting that the conversion of former password sharers to paying subscribers is tracking much better than expected. Netflix has led the transition from traditional linear TV to streaming and remains the dominant platform globally.

S&P Global

S&P Global provides financial information and analytics, including credit ratings, financial market benchmarks and workflow solutions. Originally McGraw-Hill Financial, the company changed its name in 2016. The company’s operations consist of five segments: ratings, commodity insights, indices, market intelligence and mobility.

We see S&P Global’s diversified business model as primarily subscription-based, which generates a sizeable recurring revenue stream and helps it navigate various market or macroeconomic environments. The company has a significant competitive advantage that provides substantial barriers to entry and sustainable competitive supremacy. We believe that technology-focused strategic investments made over the past few years should help accelerate organic growth over the next few years, as the company continuously seeks to improve its existing offerings while striving to meet ever-evolving client needs.

Sells

Dollar General

We sold our position in Dollar General, following a weaker-than-expected quarterly earnings report and a lowered earnings outlook. The company’s core consumer, while still employed, continues to be impacted by higher inflation. Additionally, we saw the negative impacts of lower-than-expected tax refunds and reductions in the Federal Supplemental Nutrition Assistance Program (SNAP). Dollar General remained committed to spending on customer experience and investing in price to help their customers through the tougher economic environment, as a result, reducing the earnings guidance by a greater amount than the sales reductions.

MSCI

We sold our position in MSCI, as its fast-growing ESG and Climate segment experienced a significant revenue growth deceleration in the most recently completed quarter, primarily driven by regulatory uncertainty in Europe and increasing anti-ESG sentiment in the U.S. However, the company remains well-positioned in the global ESG and Climate market long-term, but we feel S&P Global offers a more compelling opportunity currently.

Outlook

The equity markets in the second quarter were helped by a resilient economy that has been able to absorb an aggressive tightening cycle. There are segments of the economy, such as housing, that have bottomed out and started a recovery phase. This may complicate the Fed’s task of bringing down inflation and necessitate further rate hikes. One area that continues to garner attention is the commercial office real estate market. Cash flows on many commercial real estate properties will be challenged due to occupancy rates well below historical levels and the re-financing of debt at much higher levels. This may put a spotlight back on regional banks where many of these loans are held. On a positive note, AI has entered a new phase of significant investment. This has resulted in a build-up of computing power at many of the large technology companies. The result has been an equity market posting positive returns year-to-date but in a very narrow area of AI beneficiaries. A broadening out-of-equity market returns will depend on averting a recession. On the geopolitical front, the war in Ukraine has become more unstable with the recent turmoil within the Russian military. With many challenges to the economy, there are opportunities, as consumers have shifted to spending on services and the government enacted laws to get funding into areas, such as infrastructure, semiconductors and clean energy. Our focus remains at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

¹ Source: Bank of America

² Source: FactSet earnings insight

Markets Review

The U.S. equity market continued its rebound, as the S&P 500 Index rose 8.74% during the quarter. However, the market rally has been remarkably concentrated, with just 25% of stocks outperforming the S&P 500 in the first 6-months of 2023. This makes it the narrowest market breadth in history for the first half of a year.¹ Concurrently, the Bloomberg U.S. Aggregate Bond Index slightly declined, returning -0.84% for the quarter. In terms of style, the Russell 1000 Growth Index outperformed its value counterpart by 8.74%.

On a sector basis, nine out of eleven sectors within the S&P 500 Index finished higher for the quarter, with Information Technology, Consumer Discretionary and Communication Services posting the largest gains. The worst performers were Utilities, Energy and Consumer Staples.

Sources: SS&C Advent, 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.

Despite the positive trajectory of the market, economic data points were mixed. After expanding by 2.6% year-over-year in the fourth quarter of last year, growth in the U.S. slowed in the first quarter to 2.0% as private inventory investment and residential fixed investment declined. Nevertheless, personal consumption expenditures remained strong, increasing by 4.2% from last year. Meanwhile, inflation remained above its historical average of 3.8%, but the CPI continued to decline, as the figure fell from 4.9% to 4.0% for the 12-month periods ending in April and May, respectively. The moderation in prices was driven by a decline in the major energy component indexes. Lastly, the labor market remained tight, with unemployment at 3.7% in May.

In addition to economic data, lingering stress at regional banks, as well as political risk, came into focus during the period. Although significant efforts were previously made to provide stability to the U.S. banking system, the collapse of First Republic Bank, the largest banking failure since 2008, reignited concerns. However, the government quickly seized the bank and sold it to JPMorgan Chase, reassuring depositors. The government’s action, combined with minimal increases in default rates, resilient asset performance and loan growth, and stable deposits at other regional banks, eased fears surrounding the industry. Subsequently, attention turned to the approaching deadline to raise the federal debt ceiling. Concerns of a potential U.S. default mounted as the political parties refused to budge on concessions for a deal. After weeks of negotiations, an agreement was eventually reached to suspend the federal debt ceiling for two years while limiting the growth of federal discretionary spending during that same time span.

With the volatile and uncertain macroeconomic backdrop and continued pattern of disinflation, the Federal Reserve (Fed) held rates steady in June, marking the first pause after a ten-meeting hiking campaign that brought the benchmark rate to a range of 5.00% to 5.25%. The Federal Reserve Open Market Committee emphasized the need to account for the cumulative tightening of monetary policy and the lagging effects of monetary policy decisions, as well as other economic and financial developments, in order to determine whether additional policy firming would be needed to achieve the 2% goal for inflation.

On the corporate earnings front, S&P 500 companies reported a decline in earnings of 2.2%, the second straight quarter of a year-over-year decrease. However, results were better than initial expectations of a 6.7%² decline, as companies referenced successful cost cutting, improved operational efficiency and waning inflationary pressures. Overall, 78% of S&P 500 companies exceeded EPS estimates (above the five-year average of 77%), and the number of companies mentioning inflation on earnings calls declined by over 12%.

Performance and Attribution Summary

For the second quarter of 2023, Aristotle Atlantic’s Core Equity Composite posted a total return of 9.29 % gross of fees (9.18% net of fees), outperforming the S&P 500 Index, which recorded a total return of 8.74%.

Performance (%)	2Q23	1 Year	3 Years	5 Years	7 Years	Since Inception*
Core Equity Composite (gross)	9.29	17.30	11.93	12.26	13.84	13.06
Core Equity Composite (net)	9.18	16.83	11.46	11.80	13.38	12.54
S&P 500 Index	8.74	19.59	14.60	12.30	13.38	12.41

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 second quarter, the portfolio’s outperformance relative to the S&P 500 Index was due to security selection and allocation effects. Security selection in Information Technology and Industrials, as well as an underweight in Energy, contributed the most to relative performance. Conversely, security selection in Health Care, Communication Services and Materials detracted from relative performance.

Contributors and Detractors for 2Q 2023

Relative Contributors	Relative Detractors
Broadcom	Adaptive Biotechnologies
Guardant Health	Catalent
NVIDIA	Estee Lauder
Chart Industries	Dollar General
Microsoft	Thermo Fisher Scientific

Contributors

Broadcom

Broadcom contributed to outperformance, as the company is seen as a key beneficiary of the investment in generative Artificial Intelligence (AI) and Large Language Models (LLM). The company’s Application-Specific Integrated Circuit (ASIC) chips are being custom-built for customers to use in their data centers for accelerated computing. Broadcom’s networking chipsets are also expected to see increased levels of demand, as customers increase investments to enable the high-speed data transfer required by advanced AI training and inference. The company also announced a new multi-year supplier relationship with Apple, the company’s largest customer.

Guardant Health

Guardant shares ended the quarter strong, recovering to some extent from the previous weakness in the quarter, as the company reported accelerating clinical volume growth and raised earnings guidance. In addition, the company announced additional U.S. commercial insurance coverage for their Guardant 360 test in the U.S. and government reimbursement in Japan. Lasty, the company completed a successful secondary offering, raising approximately $250 million.

Detractors

Adaptive Biotechnologies

Adaptive Biotechnology shares ended the quarter lower despite the company reporting a small revenue beat and accelerating clinical volumes. Clinical volumes rose 54% year-over-year in the quarter and grew 15% sequentially. The company is well-funded, and momentum is building in their minimal residual testing business. Additionally, the company’s drug development partner, Genetech, reported Food and Drug Administration’s (FDA) acceptance of an investigational new drug application on the collaboration’s first T-cell receptor-based therapy. The weakness during the quarter was most likely attributable to increasing interest rates and the negative implication of higher rates for emerging growth companies.

Estee Lauder

Estee Lauder shares were weak during the second quarter, following an inline earnings report where Estee again pushed out the timing of a recovery in their travel retail business due to sluggish travel trends in China and an inventory overhand in that end market. Estee reduced fiscal 2023 earnings guidance again and pushed the timing of the recovery toward the end of this calendar year. Outside of travel retail, growth was solid in the Americas, Europe, APAC, Emerging Markets and China.

Recent Portfolio Activity

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

Buys	Sells
Synopsys	Catalent
Netflix	The Walt Disney Company

Buys

Synopsys

Synopsys provides products and services used across the entire Silicon to Software™ spectrum to bring Smart Everything to life. From engineers creating advanced semiconductors to product teams developing advanced electronic systems to software developers seeking to ensure the security and quality of their code, its customers trust that its technologies will enable them to meet new requirements for low power as well as reliability, mobility and security.

We initiated a position in Synopsys, as we see the company to be a key beneficiary of the continued long-term growth in semiconductor systems for use in the automotive, mobile and communications infrastructure, data center, networking and AI end markets. The research and design requirements for these semiconductors continue to increase in complexity, and semiconductor companies will continue to leverage Synopsys’ design tools to enhance efficiencies and reduce the time and cost of the design and manufacturing cycle.

Netflix

Netflix is one of the leaders in streaming entertainment services that offers a broad selection of movies, TV series, documentaries and original content across numerous genres to its 223 million paid subscribers in over 190 countries. The company was initially founded as a DVD-by-mail service but has evolved into the world’s largest streaming-only platform and became one of the largest producers of original video content globally. Netflix offers a variety of subscription-only and ad-supported memberships, and its focus on original content and investment in technology to improve the user experience have enabled it to maintain a significant competitive advantage over streaming peers.

We initiated a position in Netflix and see new initiatives and further international expansion which can reaccelerate subscriber additions. The company recently introduced an advertising-supported membership plan that should enable it to augment revenue growth by tapping into the growing market for digital advertising while not cannibalizing its existing subscription-only plans. In addition, the company has recently implemented password-sharing restrictions, suggesting that the conversion of former password sharers to paying subscribers is tracking much better than expected. Netflix has led the transition from traditional linear TV to streaming and remains the dominant platform globally.

Sells

Catalent

We sold our position in Catalent, following an unexpected pre-announcement of productivity issues and high costs at three of their largest production facilities. This announcement came less than a month after Catalent provided a positive update at a broker conference. In addition, the CFO was replaced concurrent with this warning. Our concerns were with the ongoing execution, as during the previous quarter the company attempted to assure investors that quality was their number one priority. These additional issues raised competitive concerns, as other scale contract drug manufacturing companies were executing better. While rumors were in the marketplace that Catalent could be an acquisition target, we believe these most recent issues would lead a potential suitor to be more cautious, and we do not believe the fundamentals of the story warrant continued investment in the company. 

The Walt Disney Company

We sold our position in Disney, as the shift to streaming since the launch of Disney Plus nearly three years ago has been more challenging than expected. Overall company margins have declined, primarily driven by losses in the streaming segment, as Disney Plus strives to attract more subscribers. The focus on growth and profitability in streaming has come at the expense of reduced licensing revenues, as content shifts from the company’s traditional linear networks to Disney Plus. Additionally, Disney is going through this challenging transition amidst upheaval in senior management.

Outlook

The equity markets in the second quarter were helped by a resilient economy that has been able to absorb an aggressive tightening cycle. There are segments of the economy, such as housing, that have bottomed out and started a recovery phase. This may complicate the Fed’s task of bringing down inflation and necessitate further rate hikes. One area that continues to garner attention is the commercial office real estate market. Cash flows on many commercial real estate properties will be challenged due to occupancy rates well below historical levels and the re-financing of debt at much higher levels. This may put a spotlight back on regional banks where many of these loans are held. On a positive note, AI has entered a new phase of significant investment. This has resulted in a build-up of computing power at many of the large technology companies. The result has been an equity market posting positive returns year-to-date but in a very narrow area of AI beneficiaries. A broadening out-of-equity market returns will depend on averting a recession. On the geopolitical front, the war in Ukraine has become more unstable with the recent turmoil within the Russian military. With many challenges to the economy, there are opportunities, as consumers have shifted to spending on services and the government enacted laws to get funding into areas, such as infrastructure, semiconductors and clean energy. Our focus remains at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

¹Source: Bank of America

²Source: FactSet earnings insight

Markets Review

The U.S. equity market continued its rebound, as the S&P 500 Index rose 8.74% during the quarter. However, the market rally has been remarkably concentrated, with just 25% of stocks outperforming the S&P 500 in the first 6-months of 2023. This makes it the narrowest market breadth in history for the first half of a year.¹ Concurrently, the Bloomberg U.S. Aggregate Bond Index slightly declined, returning -0.84% for the quarter. In terms of style, the Russell 1000 Growth Index outperformed its value counterpart by 8.74%.

Sources: SS&C Advent, 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.

Nine out of the eleven sectors within the Russell 1000 Growth Index finished higher for the quarter, with Information Technology, Communication Services and Consumer Discretionary gaining the most. Meanwhile, Energy, Real Estate and Consumer Staples were the worst-performing sectors.

Despite the positive trajectory of the market, economic data points were mixed. After expanding by 2.6% year-over-year in the fourth quarter of last year, growth in the U.S. slowed in the first quarter to 2.0% as private inventory investment and residential fixed investment declined. Nevertheless, personal consumption expenditures remained strong, increasing by 4.2% from last year. Meanwhile, inflation remained above its historical average of 3.8%, but the CPI continued to decline, as the figure fell from 4.9% to 4.0% for the 12-month periods ending in April and May, respectively. The moderation in prices was driven by a decline in the major energy component indexes. Lastly, the labor market remained tight, with unemployment at 3.7% in May.

In addition to economic data, lingering stress at regional banks, as well as political risk, came into focus during the period. Although significant efforts were previously made to provide stability to the U.S. banking system, the collapse of First Republic Bank, the largest banking failure since 2008, reignited concerns. However, the government quickly seized the bank and sold it to JPMorgan Chase, reassuring depositors. The government’s action, combined with minimal increases in default rates, resilient asset performance and loan growth, and stable deposits at other regional banks, eased fears surrounding the industry. Subsequently, attention turned to the approaching deadline to raise the federal debt ceiling. Concerns of a potential U.S. default mounted as the political parties refused to budge on concessions for a deal. After weeks of negotiations, an agreement was eventually reached to suspend the federal debt ceiling for two years while limiting the growth of federal discretionary spending during that same time span.

With the volatile and uncertain macroeconomic backdrop and continued pattern of disinflation, the Federal Reserve (Fed) held rates steady in June, marking the first pause after a ten-meeting hiking campaign that brought the benchmark rate to a range of 5.00% to 5.25%. The Federal Reserve Open Market Committee emphasized the need to account for the cumulative tightening of monetary policy and the lagging effects of monetary policy decisions, as well as other economic and financial developments, in order to determine whether additional policy firming would be needed to achieve the 2% goal for inflation.

On the corporate earnings front, S&P 500 companies reported a decline in earnings of 2.2%, the second straight quarter of a year-over-year decrease. However, results were better than initial expectations of a 6.7%² decline, as companies referenced successful cost cutting, improved operational efficiency and waning inflationary pressures. Overall, 78% of S&P 500 companies exceeded EPS estimates (above the five-year average of 77%), and the number of companies mentioning inflation on earnings calls declined by over 12%.

Performance and Attribution Summary

For the second quarter of 2023, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of 13.28% gross of fees (13.19% net of fees), outperforming the 12.81% return of the Russell 1000 Growth Index.

Performance (%)	2Q23	1 Year	3 Years	5 Years	Since Inception*
Large Cap Growth Composite (gross)	13.28	23.84	9.77	13.80	16.57
Large Cap Growth Composite (net)	13.19	23.40	9.36	13.35	16.12
Russell 1000 Growth Index	12.81	27.11	13.73	15.13	17.46

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 second quarter, the portfolio’s outperformance relative to the Russell 1000 Growth Index was due to security selection, while allocation effects modestly detracted. Security selection in Industrials, Information technology and Consumer Discretionary contributed the most to relative performance. Conversely, security selection and an overweight in Health Care, as well as security selection in Consumer Staples, detracted from relative returns.

Contributors and Detractors for 2Q 2023

Relative Contributors	Relative Detractors
Nvidia	Adaptive Biotechnologies
Guardant Health	Dollar General
Take-Two Interactive Software	Thermo Fisher Scientific
ServiceNow	Estee Lauder
Chart Industries	Tenable Holdings

Contributors

Nvidia

Nvidia contributed to outperformance, as the company benefits from increased demand for its Graphic Processing Unit (GPU) semiconductor systems used in accelerated computing that is used to power Artificial Intelligence (AI) and Large Language Models (LLM). The company reported strong first quarter 2024 results and issued guidance for the second quarter and fiscal year 2024 that was ahead of consensus due to continuing strong demand trends for its data center GPU systems.

Guardant Health

Guardant shares ended the quarter strong, recovering to some extent from the previous weakness in the quarter, as the company reported accelerating clinical volume growth and raised earnings guidance. In addition, the company announced additional U.S. commercial insurance coverage for their Guardant 360 test in the U.S. and government reimbursement in Japan. Lasty, the company completed a successful secondary offering, raising approximately $250 million.

Detractors

Adaptive Biotechnologies

Adaptive Biotechnology shares ended the quarter lower despite the company reporting a small revenue beat and accelerating clinical volumes. Clinical volumes rose 54% year-over-year in the quarter and grew 15% sequentially. The company is well-funded, and momentum is building in their minimal residual testing business. Additionally, the company’s drug development partner, Genetech, reported Food and Drug Administration’s (FDA) acceptance of an investigational new drug application on the collaboration’s first T-cell receptor-based therapy. The weakness during the quarter was most likely attributable to increasing interest rates and the negative implication of higher rates for emerging growth companies.

Thermo Fisher

Shares of Thermo Fisher were weak during the second quarter, following an inline earnings report where the company maintained full-year guidance. There were some concerns after the CEO referred to the guidance as ”ambitious” on the earnings call and concerns grew as several bioprocessing suppliers warned of sluggish sales. The company is more diversified than its peers; however, the warnings affected the entire life science and tools sector. In addition, the company conveyed a moderately more cautious tone on the most recent earnings call, stating that the macroeconomic backdrop was beginning to cause customers to exercise more caution. We believe Thermo Fisher is well-positioned to continue to gain market share.

Recent Portfolio Activity

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

Buys	Sells
Netflix	Dollar General
S&P Global	MSCI

Buys

Netflix

Netflix is one of the leaders in streaming entertainment services that offers a broad selection of movies, TV series, documentaries and original content across numerous genres to its 223 million paid subscribers in over 190 countries. The company was initially founded as a DVD-by-mail service but has evolved into the world’s largest streaming-only platform and became one of the largest producers of original video content globally. Netflix offers a variety of subscription-only and ad-supported memberships, and its focus on original content and investment in technology to improve the user experience have enabled it to maintain a significant competitive advantage over streaming peers.

We initiated a position in Netflix and see new initiatives and further international expansion which can reaccelerate subscriber additions. The company recently introduced an advertising-supported membership plan that should enable it to augment revenue growth by tapping into the growing market for digital advertising while not cannibalizing its existing subscription-only plans. In addition, the company has recently implemented password-sharing restrictions, suggesting that the conversion of former password sharers to paying subscribers is tracking much better than expected. Netflix has led the transition from traditional linear TV to streaming and remains the dominant platform globally.

S&P Global

S&P Global provides financial information and analytics, including credit ratings, financial market benchmarks and workflow solutions. Originally McGraw-Hill Financial, the company changed its name in 2016. The company’s operations consist of five segments: ratings, commodity insights, indices, market intelligence, and mobility.

We see S&P Global’s diversified business model as primarily subscription-based, which generates a sizeable recurring revenue stream, and helps it navigate various market or macroeconomic environments. The company has a significant competitive advantage that provides substantial barriers to entry and sustainable competitive supremacy. We believe that technology-focused strategic investments made over the past few years should help accelerate organic growth over the next few years as the company continuously seeks to improve its existing offerings while striving to meet ever-evolving client needs.

Sells

Dollar General

We sold our position in Dollar General, following a weaker-than-expected quarterly earnings report and a lowered earnings outlook. The company’s core consumer, while still employed, continues to be impacted by higher inflation. Additionally, we saw the negative impacts of lower-than-expected tax refunds and reductions in the Federal Supplemental Nutrition Assistance Program (SNAP). Dollar General remained committed to spending on customer experience and investing in price to help their customers through the tougher economic environment, as a result, reducing the earnings guidance by a greater amount than the sales reductions.

MSCI

We sold our position in MSCI, as its fast-growing ESG and Climate segment experienced a significant revenue growth deceleration in the most recently completed quarter, primarily driven by regulatory uncertainty in Europe and increasing anti-ESG sentiment in the U.S. However, the company remains well-positioned in the global ESG and Climate market long-term, but we feel S&P Global offers a more compelling opportunity currently.

Outlook

The equity markets in the second quarter were helped by a resilient economy that has been able to absorb an aggressive tightening cycle. There are segments of the economy, such as housing, that have bottomed out and started a recovery phase. This may complicate the Fed’s task of bringing down inflation and necessitate further rate hikes. One area that continues to garner attention is the commercial office real estate market. Cash flows on many commercial real estate properties will be challenged due to occupancy rates well below historical levels and the re-financing of debt at much higher levels. This may put a spotlight back on regional banks where many of these loans are held. On a positive note, AI has entered a new phase of significant investment. This has resulted in a build-up of computing power at many of the large technology companies. The result has been an equity market posting positive returns year-to-date but in a very narrow area of AI beneficiaries. A broadening out-of-equity market returns will depend on averting a recession. On the geopolitical front, the war in Ukraine has become more unstable with the recent turmoil within the Russian military. With many challenges to the economy, there are opportunities, as consumers have shifted to spending on services and the government enacted laws to get funding into areas, such as infrastructure, semiconductors and clean energy. Our focus remains at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

¹ Source: Bank of America

² Source: FactSet earnings insight

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

Markets Review

In addition to the dampened outlook, elevated levels of inflation persisted, and progress toward disinflation was mixed on a regional basis. The U.S. and eurozone reported inflation of 4.0% and 6.1% in May, respectively, down from 4.9% and 7.0% in April. However, improvement in U.K. inflation stalled, and Japan’s index that excludes fuel rose 4.3 % in May from a year earlier, its highest mark in 42 years. Overall, the IMF increased its projection for global inflation to 7.0% from 6.6% for the year. Given the mixed inflation data, there was a wide range of central bank policy actions during the quarter. Central banks in some areas, including the eurozone and U.K., continued to increase rates to combat inflation. However, the U.S. Federal Reserve held rates steady in June after raising them in May, and the Bank of Japan maintained its highly accommodative stance.

Meanwhile, China cut the interest rate on its one-year medium-term lending facility as the country’s industrial output and retail sales growth missed forecasts. Despite the relaxation of the strict zero-COVID guidelines, sluggish demand, potential deflation and increased COVID cases have deterred a smooth recovery.

On the geopolitical front, tensions in Asia continued to build as the U.S. and Taiwan signed the U.S.-Taiwan Initiative on 21^st Century Trade, which furthers trade interests between the two countries. However, the U.S. and China kept dialogue open, as U.S. Secretary of State Antony Blinken met with President Xi Jinping in Beijing. In Eastern Europe, Ukrainian troops initiated a counteroffensive intended to secure additional ground in eastern Ukraine. Western countries reaffirmed their support for Ukraine, as the U.S. committed an additional $1.3 billion of aid and the European Union offered €50 billion through 2027 to rebuild the nation.

Performance and Attribution Summary

For the second quarter of 2023, Aristotle Capital’s Global Equity Composite posted a total return of 5.40% gross of fees
(5.32% net of fees), underperforming the MSCI World Index, which returned 6.83%, and the MSCI ACWI Index, which returned 6.18%. Please refer to the table below for detailed performance.

Performance (%)	2Q23	YTD	1 Year	3 Years	5 Years	10 Years	Since Inception*
Global Equity Composite (gross)	5.40	11.84	17.61	12.24	9.16	10.32	9.81
Global Equity Composite (net)	5.32	11.67	17.24	11.88	8.77	9.92	9.37
MSCI World Index (net)	6.83	15.09	18.51	12.18	9.07	9.50	9.31
MSCI ACWI Index (net)	6.18	13.93	16.53	10.99	8.10	8.75	8.38

Contributors and Detractors for 2Q 2023

Relative Contributors	Relative Detractors
Martin Marietta Materials	FMC
Norwegian Cruise Line Holdings	DSM-Firmenich
Lennar	Amgen
Adobe	Danaher
Cameco	Qualcomm

DSM-Firmenich (DSM), previously known as Koninklijke DSM, a nutrition, health and ingredients company, was one of the largest detractors for the period. The company completed its merger with Firmenich International during the quarter. We expect that a successful integration of the two companies will further solidify DSM’s leading market position in health, nutrition, flavors and fragrances. DSM also completed the sale of its Engineering Materials business, culminating two decades of transitioning into a “pure-play” nutrition, health and ingredients company. Despite the milestone, the company continues to manage weak near-term market dynamics that have caused soft volumes across most of its segments, especially vitamins, and elevated levels of high-priced inventories. As is usually the case, we will be aware of such short-term headwinds but will focus our attention on ensuring fundamentals improve and catalysts realize over time.

Qualcomm, a leading wireless communications technology company, was one of the largest detractors for the period. Weaker demand for handsets, elevated channel inventory and an underwhelming Chinese economic recovery resulted in a more difficult-than-expected short-term outlook. Qualcomm executives are navigating the short-term challenges by actively managing operating expenses. In recent years, despite threats of large clients developing in-house chips (e.g., Apple and Samsung), Qualcomm has been able to retain its high market share forged by a history of high spending in R&D and what we consider to be technological superiority. Longer term, we believe Qualcomm will continue to benefit from 5G penetration, as well as from the execution of its diversification strategy, as Internet of Things and Automotive remain attractive end markets. As the world continues on the path toward a proliferation of connectivity between varying devices (e.g., smart phones, tablets, wearable technology, Wi-Fi access points, factory automation and infotainment systems in autos), we are convinced the company is in a strong position to continue to win market share in both existing and new end markets, and to continue to return FREE cash flow to shareholders.

Aggregates producer Martin Marietta Materials was the top contributor for the period. In 2022 the company’s share price declined as the sharp rise in energy costs resulted in lower profit margins. Despite cost pressures and a stock price decline, in our view, fundamentals remained intact. We outlined in a previous commentary our confidence in management’s ability to navigate short-term setbacks given the company’s leading market position, geographically advantaged asset base and pricing power. Since then, management’s “value-over-volume” commercial strategy, the institution of multiple price increases and an improved cost structure have led to robust margin expansion and record first quarter results. We remain optimistic about the firm’s strategic plan, which emphasizes responsible growth through acquisitions, reinvestment in existing operations and the consistent return of capital to shareholders.

Cameco, the world’s largest publicly traded uranium producer, was one of the top contributors during the period. Over the past year, there has been a rise in support from governments and policymakers for nuclear energy as countries realize it can play a crucial role in lowering dependence on fossil fuels to meet environmental pledges and goals. In addition, Russia’s war in Ukraine had led to an increase in the price of competing carbon fuels and heightened attention on energy security. Although such global market dynamics have likely favored Cameco in the short term, we believe the company will benefit long term from its financial discipline and advantaged assets. (Its Canadian mines—Cigar Lake and McArthur River/Key Lake—produce some of the world’s highest-grade uranium.) Cameco has also slowly ramped up production while obtaining long‐term contracts. As such, in 2022, Cameco signed a record number of long-term supply contracts and conversion services (where yellow cake is processed and readied for enrichment operations). This success has continued into 2023, with Cameco having recently secured an additional 12-year contract with Energoatom, Ukraine’s state-owned nuclear energy company, as well as a 10-year agreement with Bulgaria. Central and Eastern Europe are new markets for Cameco, and this supports our belief that the company is well-positioned to win new business in the regions that were historically dominated by Russia. Moreover, we look forward to Cameco’s planned acquisition of Westinghouse Electric Company (expected to close during the second half of 2023), as we believe Westinghouse’s market-leading downstream capabilities will align well with Cameco’s production and fuel services to offer a highly competitive nuclear fuel solution.

Recent Portfolio Activity

Buys	Sells
None	None

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

Conclusion

At Aristotle Capital, we take a bottom-up approach to studying businesses. While macroeconomic factors such as inflation, monetary policy decisions and geopolitical conflicts may continue to dominate the current news cycle, we take a long-term perspective, attempting to identify, what we believe to be, high-quality companies that can successfully navigate periods of boom and bust.  We spend very little time attempting to predict the outcome of macro or geopolitical events but rather spend considerable time attempting to identify businesses that are resilient. In our view, the fundamentals of a business are the most important determinants of its long-term stock price performance. Consequently, we believe the best way to consistently add value for our clients is to maintain a long-term view and focus on deeply understanding individual companies’ key attributes, value drivers and progress toward improvement.

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

Markets Review

In addition to the dampened outlook, elevated levels of inflation persisted, and progress toward disinflation was mixed on a regional basis. The U.S. and eurozone reported inflation of 4.0% and 6.1% in May, respectively, down from 4.9% and 7.0% in April. However, improvement in U.K. inflation stalled, and Japan’s index that excludes fuel rose 4.3 % in May from a year earlier, its highest mark in 42 years. Overall, the IMF increased its projection for global inflation to 7.0% from 6.6% for the year. Given the mixed inflation data, there was a wide range of central bank policy actions during the quarter. Central banks in some areas, including the eurozone and U.K., continued to increase rates to combat inflation. However, the U.S. Federal Reserve held rates steady in June after raising them in May, and the Bank of Japan maintained its highly accommodative stance.

Meanwhile, China cut the interest rate on its one-year medium-term lending facility as the country’s industrial output and retail sales growth missed forecasts. Despite the relaxation of the strict zero-COVID guidelines, sluggish demand, potential deflation and increased COVID cases have deterred a smooth recovery.

On the geopolitical front, tensions in Asia continued to build as the U.S. and Taiwan signed the U.S.-Taiwan Initiative on 21^st Century Trade, which furthers trade interests between the two countries. However, the U.S. and China kept dialogue open, as U.S. Secretary of State Antony Blinken met with President Xi Jinping in Beijing. In Eastern Europe, Ukrainian troops initiated a counteroffensive intended to secure additional ground in eastern Ukraine. Western countries reaffirmed their support for Ukraine, as the U.S. committed an additional $1.3 billion of aid and the European Union offered €50 billion through 2027 to rebuild the nation.

Performance and Attribution Summary

For the second quarter of 2023, Aristotle Capital’s International Equity Composite posted a total return of 4.99% gross of fees (4.87% net of fees), outperforming the MSCI EAFE Index, which returned 2.95%, and the MSCI ACWI ex USA Index, which returned 2.44%. Please refer to the table below for detailed performance.

Performance (%)	2Q23	YTD	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity Composite (gross)	4.99	12.44	18.04	9.61	5.24	5.97	5.46
International Equity Composite (net)	4.87	12.19	17.48	9.10	4.74	5.46	4.95
MSCI EAFE Index (net)	2.95	11.67	18.77	8.93	4.39	5.41	2.47
MSCI ACWI ex USA Index (net)	2.44	9.47	12.72	7.22	3.51	4.75	2.06

Cameco, the world’s largest publicly traded uranium producer, was the top contributor during the period. Over the past year, there has been a rise in support from governments and policymakers for nuclear energy as countries realize it can play a crucial role in lowering dependence on fossil fuels to meet environmental pledges and goals. In addition, Russia’s war in Ukraine had led to an increase in the price of competing carbon fuels and heightened attention on energy security. Although such global market dynamics have likely favored Cameco in the short term, we believe the company will benefit long term from its financial discipline and advantaged assets. (Its Canadian mines—Cigar Lake and McArthur River/Key Lake—produce some of the world’s highest-grade uranium.) Cameco has also slowly ramped up production while obtaining long‐term contracts. As such, in 2022, Cameco signed a record number of long-term supply contracts and conversion services (where yellow cake is processed and readied for enrichment operations). This success has continued into 2023, with Cameco having recently secured an additional 12-year contract with Energoatom, Ukraine’s state-owned nuclear energy company, as well as a 10-year agreement with Bulgaria. Central and Eastern Europe are new markets for Cameco, and this supports our belief that the company is well-positioned to win new business in the regions that were historically dominated by Russia. Moreover, we look forward to Cameco’s planned acquisition of Westinghouse Electric Company (expected to close during the second half of 2023), as we believe Westinghouse’s market-leading downstream capabilities will align well with Cameco’s production and fuel services to offer a highly competitive nuclear fuel solution.

Alcon, the eye care devices, equipment and consumables provider, was also a leading contributor during the quarter. In addition to a backdrop of resilient and robust demand across all of its segments, Alcon’s focus on executing its commercial strategy, pricing improvements and product development demonstrates the strength of the business. As an innovative leader in the eye care industry, Alcon develops cutting-edge products such as Total30, the first reusable lenses using water gradient technology created for astigmatic wearers, and the ARGOS Biometer, which enables surgeons to conduct 3D digital image-guided cataract surgery. Products such as these have allowed Alcon to further penetrate its primary end markets and win market share from competitors. While the company continues to navigate challenges such as inflation and supply-chain inefficiencies, we believe Alcon’s prudent decisions that have helped maintain operational efficiency, its thoughtful approach to acquisitions, and the advantageous industry dynamics highlight the high-quality nature of the company and the long-term sustainability of its business model.

DSM-Firmenich (DSM), previously known as Koninklijke DSM, a nutrition, health and ingredients company, was the largest detractor for the period. The company completed its merger with Firmenich International during the quarter. We expect that a successful integration of the two companies will further solidify DSM’s leading market position in health, nutrition, flavors and fragrances. DSM also completed the sale of its Engineering Materials business, culminating two decades of transitioning into a “pure-play” nutrition, health and ingredients company. Despite the milestone, the company continues to manage weak near-term market dynamics that have caused soft volumes across most of its segments, especially vitamins, and elevated levels of high-priced inventories. As is usually the case, we will be aware of such short-term headwinds but will focus our attention on ensuring fundamentals improve and catalysts realize over time.

Heineken, the Dutch brewer that owns a global portfolio of beer brands, was one of the largest detractors. The company saw volumes weaken in several emerging markets. They included Nigeria, whose consumers faced a grain crisis, and Vietnam, which experienced an uptick in unemployment as well as a real estate crisis. Heineken may have been slow to react to the changing conditions and is thus working through high stock levels. As we look past cyclical disruptions, our conviction remains that Heineken’s brands possess the pricing power to overcome inflationary pressures and are singularly poised to gain share in developing markets as consumers switch to premium beers. In addition, we appreciate Heineken’s more balanced approach between price and volume, as well as cost reduction, which could drive further improvements in profitability.

Recent Portfolio Activity

Buys	Sells
None	None

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

Conclusion

At Aristotle Capital, we take a bottom-up approach to studying businesses. While macroeconomic factors such as inflation, monetary policy decisions and geopolitical conflicts may continue to dominate the current news cycle, we take a long-term perspective, attempting to identify, what we believe to be, high-quality companies that can successfully navigate periods of boom and bust.  We spend very little time attempting to predict the outcome of macro or geopolitical events but rather spend considerable time attempting to identify businesses that are resilient. In our view, the fundamentals of a business are the most important determinants of its long-term stock price performance. Consequently, we believe the best way to consistently add value for our clients is to maintain a long-term view and focus on deeply understanding individual companies’ key attributes, value drivers and progress toward improvement.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

After posting negative returns in April and May SMID caps rebounded in June to exit the quarter in positive territory.  Investor optimism largely overshadowed concerns about interest rates, inflation, and a recession during the quarter as enthusiasm over technology advances fueled a rally in a narrow group of mega-cap stocks seen as the big winners from the artificial intelligence revolution. These outsized gains drove strong returns for the tech-heavy Russell 1000 Index, which posted a total return of 8.58% during the quarter, leading the Russell 2500 Index of SMID caps, which returned 5.22%. On the policy front, in mid-June the Federal Reserve decided to hold off on raising interest rates as it takes stock of how its prior rate hikes are impacting the real economy. While this ends a streak of 10 consecutive rate increases, central bank officials were quick to point out that the tightening cycle is not necessarily over, indicating that additional rate hikes may be required. With a strong labor market, restabilized banking sector and resilient growth, it appears the Fed does not yet believe that economic conditions are restrictive enough to bring inflation back to their 2% target.

Within SMID cap markets, growth continued to outperform value during the quarter as evidenced by the Russell 2500 Growth Index returning 6.41% compared to 4.37% for the Russell 2500 Value Index. On a factor basis, companies with higher betas, high short interest ratios, and negative earnings outperformed the overall index, while profitable companies generally lagged in the second quarter. More specifically, companies expected to lose money over the next twelve months outperformed those with expected profits by 4.69% during the period. While this dispersion would be extreme in any market environment, we believe it is even more unique given the uncertain macroeconomic backdrop, rising cost of capital, and uptick in bankruptcy filings which typically correlates to a more favorable relative performance backdrop for profitable companies with sound fundamentals.

At the sector level, nine of the eleven sectors in the Russell 2500 Index generated positive returns during the second quarter, however, only three generated gains above that of the broader index. Industrials (+10.71%), Information Technology (+8.24%), and Health Care (+7.01%) were the only sectors to outperform during the period while Utilities (-3.10%), Materials (-0.38%), and Financials (1.36%) lagged. Further demonstrating the narrowness of the market is the fact that 61% of the Russell 2500 Index’s quarterly contribution to return came from just four industries (Capital Goods, BioPharma, Software & Services, and Technology Hardware). This type of concentrated market leadership has historically made it difficult for diversified active managers to outperform.

Sources: SS&C Advent; 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 second quarter of 2023, the Aristotle Small/Mid Cap Equity Composite generated a total return of 1.04% net of fees (1.18% gross of fees), trailing the 5.22% total return of the Russell 2500 Index. Underperformance was driven by security selection while allocation effects positively contributed. Overall, security selection was weakest within the Information Technology and Health Care sectors and strongest in Communication Services and Energy. From an allocation perspective, an overweight to Industrials contributed to relative returns but was modestly offset by an overweight to Energy.

Relative Contributors	Relative Detractors
Dycom	Catalent
Itron	Infinera
Enviri	Supernus Pharmaceuticals
Summit Materials	MACOM Technology Solutions
AZEK	Monro

CONTRIBUTORS

Dycom (DY), a provider of engineering and construction services to the telecommunications and cable television industries, benefitted from continued growth in its core business and expanding margins as demand for wireline services continues to grow. We maintain a position as we believe the company remains well positioned for longer term growth alongside secular trends for expanding fiber deployments to support faster broadband connectivity speeds and opportunities to deploy fiber to rural or underserved areas across the country.

Itron (ITRI), a global manufacturer and distributor of electric, water and gas meters and advanced meter systems, benefitted from an improving operational outlook for its business, which has been held back in recent periods by supply chain constraints leading to delays of product deliveries. We maintain a position, as we believe the company remains well-positioned to benefit from power grid modernization efforts, which should continue to drive demand for the company’s smart metering and grid monitoring solutions. Additionally, we believe an acceleration in the company’s services and SaaS-based revenue will improve the earnings and margin profile of the business moving forward.

DETRACTORS

Catalent (CTLT), a pharmaceutical contract development and manufacturing organization, declined due to operational issues at three of its largest plants, broader macro headwinds associated with the constrained biotech funding environment, and weakness within the company’s consumer health business. Management expects operational issues to be transitory and does not see customer losses as a result, in fact, the company continues to win business while noting the expansion of its contracts with large clients including Novo Nordisk and Samsung Bioepis. We maintain a position, as we believe the long-term value creation opportunity for the company remains intact, driven by favorable outsourcing trends and the company’s competitive position in biologics, particularly within the company’s cell and gene therapy sub-segments.

Infinera (INFN), a provider or optical transport networking equipment, software and services to telecommunications, internet, cable and enterprise customers, declined during the period. While the company’s fundamentals continued to advance during the quarter, as evidenced by strong top- and bottom-line growth reported during the period, its shares declined amid broader macro caution from service providers and near-term delays in orders which have been pushed out but not cancelled.  We maintain a position, as we believe the company remains well positioned to benefit from the increasing demand for bandwidth given its large backlog, strong pipeline, progress on new products and vertical integration.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
GXO Logistics	Adeia
Pool Corporation	Albemarle
	Star Holdings

BUYS/ACQUISITIONS

GXO Logistics (GXO), a pure-play contract logistics company that offers warehousing, distribution, fulfillment, e-commerce, reverse logistics, and other custom solutions, was added to the portfolio. As one of the largest warehouse logistics providers in the world, we believe the company remains well positioned to benefit from a variety of secular tailwinds including: increases in outsourcing of fulfillment capabilities, automation of warehouse operations, global e-commerce growth and adoption, and nearshoring of warehouse and distribution networks.

Pool Corporation (POOL), the world’s largest wholesale distributor of swimming pool supplies and equipment offering pool maintenance, construction, renovation, irrigation, landscape and outdoor living products, was added to the portfolio. We believe the company’s overwhelming leadership position in wholesale distribution, coupled with its high level of recurring, non-discretionary sales should enable the business to continue to deliver strong operating performance in periods to come.  New products, investments in technology, and penetration outside of the U.S. also serve as catalysts for future shareholder value creation, in our opinion.

SELLS/LIQUIDATIONS

Adeia (ADEA) is an intellectual property (IP) licensing business with patent assets focused on the media and semiconductor end markets. The company was spun off and rebranded from our former portfolio holding Xperi, and after further analysis, we decided to sell our position.

Albemarle (ALB), the world’s largest lithium producer was sold from the portfolio amidst the announcement from Chile’s president that he would nationalize the country’s lithium industry and in time transfer control from SQM and Albemarle to a separate state-owned company effectively changing long-term risk/reward ratio of the stock, in our view.

Star Holdings (STHO) is a separate public company that was spun off and created as a result of the merger between our existing holdings iStar and Safehold. This newly created entity consists of iStar’s historical non-ground lease related commercial real estate businesses. We decided to liquidate our position as we believe the future value of iStar’s legacy portfolio remains within its ground lease REIT business rather than its multi-use non-ground lease property portfolio.

Outlook

Several macroeconomic events that occurred during the first half of the year did in fact play out how many investors anticipated: Inflation trended lower, U.S. economic growth slowed from the prior year, the Federal Reserve appears to be near(ing) the latter stages of its rate-hike cycle, and the U.S. government debt ceiling standoff was resolved before a potential default. One perhaps unexpected outcome has been the strength and leadership of the broader stock market. The first half of 2023 has produced strong returns across most equity markets, driven by investor optimism following a tumultuous 2022. While the second half of 2023 may hold the potential for fewer surprises, the lagging effects of tightening in the real economy, sticky and stubborn inflation, and a muted outlook for corporate earnings suggest the path ahead remains uncertain. As a result, we believe prudence dictates remaining true to our long-term approach, quality-orientation, and valuation discipline.

From an asset class perspective, 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 (14.0x P/E for the Russell 2500 Index vs. 21.4x P/E for the Russell 1000 Index). SMID caps, as represented by the Russell 2500 Index, also remain historically attractive on an absolute basis and are trading near their lowest levels in over 30 years, slightly above the lows during the GFC and below the COVID-19 recession and 2001 recession lows. Concentration within the large cap market also remains high, with the top five stocks comprising over 24% of the S&P 500 at quarter end, eclipsing prior highs experienced during the 2000 and 1973 periods. Investors who piled into a small group of large cap names during these time periods learned a painful lesson as valuations stretched too far, sentiment shifted and returns rapidly reversed, giving way to greater participation down the cap spectrum and jumpstarting a multiyear cycle of outperformance for SMID caps. So, while past performance is not always indicative of future returns, and the near-term outlook remains uncertain, decades of investing have taught us that these can be the most rewarding times to be invested in SMID caps for the long-term.  

Positioning

As always, 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 recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. 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 fueled in part by government backed stimulus payments. 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.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

After posting negative returns in April and May small caps rebounded in June to exit the quarter in positive territory.  Investor optimism largely overshadowed concerns about interest rates, inflation, and a recession during the quarter as enthusiasm over technology advances fueled a rally in a narrow group of mega-cap stocks seen as the big winners from the artificial intelligence revolution. These outsized gains drove strong returns for the tech-heavy Russell 1000 Index, which posted a total return of 8.58% during the quarter, leading the Russell 2000 Index of small caps, which returned 5.21%. On the policy front, in mid-June the Federal Reserve decided to hold off on raising interest rates as it takes stock of how its prior rate hikes are impacting the real economy. While this ends a streak of 10 consecutive rate increases, central bank officials were quick to point out that the tightening cycle is not necessarily over, indicating that additional rate hikes may be required. With a strong labor market, restabilized banking sector and resilient growth, it appears the Fed does not yet believe economic conditions are restrictive enough to bring inflation back to their 2% target.

Within small cap markets, growth continued to outperform value in the quarter as evidenced by the Russell 2000 Growth Index returning 7.05% compared to 3.18% for the Russell 2000 Value Index. The year-to-date differential exiting the second quarter is the 3^rd largest between growth vs. value to begin the year since the benchmarks were created. Penny stocks, highly shorted stocks, and unprofitable companies also outperformed during the quarter, while profitable companies generally lagged. More specifically, companies expected to lose money over the next twelve months outperformed those with expected profits by 6.85% during the period. While this dispersion would be extreme in any market environment, we believe it is even more unique given the uncertain macroeconomic backdrop, rising cost of capital, and uptick in bankruptcies which typically correlates to a more favorable relative performance backdrop for profitable companies with sound fundamentals.

At the sector level, nine of the eleven sectors in the Russell 2000 Index generated positive returns during the second quarter, however, only three generated gains above that of the broader index. Health Care (+11.48%), Industrials (+9.91%), and Information Technology (+8.71%) were the only sectors to outperform during the period while Utilities (-3.60%), Financials  (-1.08%), and Communication Services (0.02%) lagged. Further demonstrating the narrowness of the market is the fact that 75% of the Russell 2000 Index’s quarterly contribution to return came from just four industries (Capital Goods, BioPharma, Health Care Equipment & Services, and Technology Hardware). This type of concentrated market leadership has historically made it challenging for diversified active managers to outperform.

Sources: SS&C Advent; 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 second quarter of 2023, the Aristotle Small Cap Equity Composite posted a total return of 1.16% net of fees (1.33% gross of fees), trailing the 5.21% total return of the Russell 2000 Index. Underperformance was driven by security selection while allocation effects positively contributed. Overall, security selection within the Health Care, and Information Technology and Consumer Discretionary sectors detracted the most from relative performance while security selection in Communication Services and Materials along with an overweight to Industrials contributed.

Relative Contributors	Relative Detractors
Itron	ModivCare
Dycom	Mercury Systems
Customers Bancorp	Ardmore Shipping
Summit Materials	Infinera
AZEK	Aspen Technology

CONTRIBUTORS

Itron (ITRI), a global manufacturer and distributor of electric, water and gas meters and advanced meter systems, benefitted from an improving operational outlook for its business, which has been held back in recent periods by supply chain constraints leading to delays of product deliveries. We maintain a position, as we believe the company remains well-positioned to benefit from power grid modernization efforts, which should continue to drive demand for the company’s smart metering and grid monitoring solutions. Additionally, we believe an acceleration in the company’s services and SaaS-based revenue will improve the earnings and margin profile of the business moving forward.

Dycom (DY), a provider of engineering and construction services to the telecommunications and cable television industries, benefitted from continued growth in its core business and expanding margins as demand for wireline services continues to grow. We maintain a position as we believe the company remains well positioned for longer term growth alongside secular trends for expanding fiber deployments to support faster broadband connectivity speeds and opportunities to deploy fiber to rural or underserved areas across the country.

DETRACTORS

ModivCare (MODV), a Colorado-based health care services company that provides non-emergency medical transportation (NEMT), homecare services, and remote monitoring to Medicaid and Medicare populations declined during the period. We believe the catalyst for the pullback appears to be a function of concerns around potential reimbursement rate cuts. Nevertheless, we continue to maintain a position, as we believe that any potential cuts are overly discounted in the share price, and that the fundamental outlook for the business remains attractive.

Mercury Systems (MRCY), a provider of secure sensor and safety-critical processing subsystems for the aerospace and defense markets, declined amid supply chain and logistical challenges, a resulting increase in lead times, and labor cost headwinds. We maintain a position, as we believe the company remains well-positioned to capitalize on continued outsourcing of subsystem development, modernization initiatives, and continued technological innovation under a new incoming leadership team.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
GXO Logistics	Adeia
Cerence	Star Holdings

BUYS/ACQUISITIONS

GXO Logistics (GXO), a pure-play contract logistics company that offers warehousing, distribution, fulfillment, e-commerce, reverse logistics, and other custom solutions, was added to the portfolio. As one of the largest warehouse logistics providers in the world, we believe the company remains well positioned to benefit from a variety of secular tailwinds including: increases in outsourcing of fulfillment capabilities, automation of warehouse operations, global e-commerce growth and adoption, and nearshoring of warehouse and distribution networks.

Cerence (CRNC), a provider of artificial intelligence (AI)-powered voice recognition software and services to automotive original equipment manufacturers (OEMs), was added to the portfolio. The company’s products provide voice, motion, control, safety and a user experience interface for drivers and passengers. As a market share leader in voice AI, we believe the company remains uniquely positioned to drive increased content per vehicle over the next several years as the OEMs continue to incorporate new technologies into their vehicles.

SELLS/LIQUIDATIONS

Adeia (ADEA) is an intellectual property (IP) licensing business with patent assets focused on the media and semiconductor end markets. The company was spun off and rebranded from our former portfolio holding Xperi, and after further analysis, we decided to sell our position.

Star Holdings (STHO) is a separate public company that was spun off and created as a result of the merger between our existing holdings iStar and Safehold. This newly created entity consists of iStar’s historical non-ground lease related commercial real estate businesses. We decided to liquidate our position as we believe the future value of iStar’s legacy portfolio remains within its ground lease REIT business rather than its multi-use non-ground lease property portfolio.

Outlook

Several macroeconomic events that occurred during the first half of the year did in fact play out how many investors anticipated: Inflation trended lower, U.S. economic growth slowed from the prior year, the Federal Reserve appears to be near(ing) the latter stages of its rate-hike cycle, and the U.S. government debt ceiling standoff was resolved before a potential default. One perhaps unexpected outcome has been the strength and leadership of the broader stock market. The first half of 2023 has produced strong returns across most equity markets, driven by investor optimism following a tumultuous 2022. While the second half of 2023 may hold the potential for fewer surprises, the lagging effects of tightening in the real economy, sticky and stubborn inflation, and a muted outlook for corporate earnings suggest the path ahead remains uncertain. As a result, we believe prudence dictates remaining true to our long-term approach, quality-orientation, and valuation discipline.

From an asset class perspective, 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 (11.5x P/E for the Russell 2000 Index vs. 21.4x P/E for the Russell 1000 Index). Small caps, as represented by the Russell 2000, also remain historically attractive on an absolute basis and are trading near their lowest levels in over 30 years, slightly above the lows during the GFC and below the COVID-19 recession and 2001 recession lows. Concentration within the large cap market also remains high, with the top five stocks comprising over 24% of the S&P 500 at quarter end, eclipsing prior highs experienced during the 2000 and 1973 periods. Investors who piled into a small group of large cap names during these time periods learned a painful lesson as valuations stretched too far, sentiment shifted and returns rapidly reversed, giving way to greater participation down the cap spectrum and jumpstarting a multiyear cycle of outperformance for small caps. So, while past performance is not always indicative of future returns, and the near-term outlook remains uncertain, decades of investing have taught us that these can be the most rewarding times to be invested in small caps for the long-term.

Positioning

As always, 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 recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. 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 fueled in part by government backed stimulus payments. While the portfolio’s allocation to Health Care is modestly below that of the benchmark’s, 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 the rising levels of volatility and the apparent short-term disconnect between certain areas of the market and business fundamentals, we believe it is important to remain patient in identifying investment opportunities to ensure they offer a compelling risk-reward trade-off and a sufficient margin of safety. Furthermore, we remain focused on trying to understand the risks associated with each investment position within the context of our fundamentally oriented research process and managing those risks through a disciplined approach to portfolio construction and management.