Markets Review

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

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Focus Growth Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

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

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

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

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

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

Performance and Attribution Summary

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

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

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

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

Contributors and Detractors for 3Q 2023

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

Contributors

Apple

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

Synopsys

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

Detractors

DexCom

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

Darling Ingredients

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

Recent Portfolio Activity

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

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

Buys

Adobe

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

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

Meta Platforms

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

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

Sells

CrowdStrike Holdings

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

NXP Semiconductors

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

Sage Therapeutics

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

Iovance Biotherapeutics

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

Outlook

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

Markets Review

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

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Large Cap Growth Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

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

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

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

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

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

Performance and Attribution Summary

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

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

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

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

Contributors and Detractors for 3Q 2023

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

Contributors

Synopsys

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

Apple

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

Detractors

DexCom

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

Darling Ingredients

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

Recent Portfolio Activity

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

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

Buys

Meta Platforms

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

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

Adobe

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

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

Uber Technologies

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

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

Sells

Ameriprise Financial

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

CrowdStrike Holdings

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

NXP Semiconductors

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

Sage Therapeutics

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

Iovance Biotherapeutics

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

Outlook

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

Markets Review

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

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

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Core Equity Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

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

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

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

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

Performance and Attribution Summary

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

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

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

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

Contributors and Detractors for 3Q 2023

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

Contributors

Halliburton

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

Chubb

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

Detractors

Darling Ingredients

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

Spirit AeroSystems

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

Recent Portfolio Activity

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

Buys	Sells
Oracle	Microchip Technology
Meta Platforms	Dollar General

Buys

Oracle

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

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

Meta Platforms

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

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

Sells

Microchip Technology

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

Dollar General

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

Outlook

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

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

Markets Review

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

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

Annual Markets Review

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

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

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

Performance and Attribution Summary

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

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

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

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

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

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

Recent Portfolio Activity

Buys	Sells
Daikin Industries	Dassault Systèmes
	Sandoz

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

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

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

Daikin Industries, Ltd.

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

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

High-Quality Business

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

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

Attractive Valuation

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

Compelling Catalysts

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

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

Conclusion

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

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

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

Markets Review

China’s recovery remained sluggish amid an ongoing property slump and lackluster consumer spending. Meanwhile, high levels of inflation persisted across many regions of the world, although inflation in the U.S., eurozone and the U.K. eased significantly from levels seen earlier in the year.  Consistent with the progress, the IMF trimmed its global inflation projection to 6.8% from its prior estimate of 7.0% in April but warned inflation could remain high or reaccelerate due to factors such as geopolitics and weather-related events.

By contrast, in Asia, Japanese inflation edged down to 3.2% in August, and the Bank of Japan diverged from its Western counterparts by keeping short-term interest rates steady. China also took an easier approach to its monetary policy, cutting both short- and medium-term lending rates, as the country has struggled to recover following the pandemic. The People’s Bank of China hopes to combat weak consumer spending, falling exports and the country’s real estate crisis. Chinese property developers have come under increased scrutiny, as Evergrande filed for bankruptcy protection in the U.S. while Country Garden warned investors of significant losses.

On the geopolitical front, Ukraine continues to push its counteroffensive in the eastern and southern portions of the country. Western nations have largely remained dedicated to their support of Ukraine, as countries such as the U.S., Canada and the U.K. have all pledged to provide additional aid. In Taiwan, China carried out military exercises in the Taiwan Strait following the Taiwanese vice president’s visit to New York and San Francisco. Despite tense relations between the U.S. and China, the Biden Administration announced $345 million in military aid for Taiwan.

Performance and Attribution Summary

For the third quarter of 2023, Aristotle Capital’s International Equity ADR Composite posted a total return of -3.79% gross of fees (-3.91% net of fees), outperforming the MSCI EAFE Index, which returned -4.11%, and underperforming the MSCI ACWI ex USA Index, which returned -3.77%. Please refer to the table below for detailed performance.

Performance (%)	3Q23	YTD	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity ADR Composite (gross)	-3.79	7.91	23.31	7.19	4.00	4.94	5.39
International Equity ADR Composite (net)	-3.91	7.50	22.73	6.65	3.53	4.44	4.89
MSCI EAFE Index (net)	-4.11	7.08	25.65	5.75	3.24	3.82	4.43
MSCI ACWI ex USA Index (net)	-3.77	5.34	20.39	3.74	2.58	3.35	3.75

Pan Pacific International, the Japanese discount and general merchandise retailer, was a top contributor for the period. After being closed for over two and a half years, Japan’s reopening has led to a sharp recovery in retail traffic. In response, Pan Pacific has implemented an aggressive strategy of increasing the number of cash registers and strengthening staffing to boost sales while also focusing on improving procurement capabilities, expanding its private label strategy and improving its inventory turnover. As a result of these actions, along with favorable weather and a strong holiday season, the company’s sales exceeded pre-pandemic levels, and operating margin eclipsed 5% for the first time in five years. Furthermore, we are encouraged by Pan Pacific’s announcement that it will accelerate the opening of new stores with 25 openings in Japan and 12 stores overseas this year. We believe Pan Pacific is well positioned to continue gaining market share in Japan, further penetrate the overseas market and maintain strong levels of profitability.

TotalEnergies, one of the world’s largest energy companies, was also a primary contributor for the quarter. The company continues to execute on its strategic plan to reach net-zero emissions by 2050 which, in contrast to many European energy providers, it looks to achieve through expanding ownership of renewable power and low-carbon assets rather than purely divestment. The company expects to more than double its gross renewable generation capacity by 2025 (primarily in solar) and invest over 30% of its total spending in low-carbon businesses through 2030. As such, we believe TotalEnergies is uniquely positioned to benefit from the increase in global demand for clean energy. In recent years, TotalEnergies’ reduction in capex and operating expenses has improved its FREE cash flow generation, now further aided by the favorable energy environment. This has supported its continued ability to return cash to shareholders, one of our catalysts, as demonstrated by the $3.8 billion returned through share buybacks and dividends during the second quarter.

Japan-based FANUC, the global manufacturer of industrial robots as well as control systems for machine tools, was the largest detractor for the period. During the June quarter, orders for the company’s robots fell 23% year-on-year following ten consecutive quarters of annual increases. This abrupt decline may have been due to inventory adjustments in China and the Americas as many manufacturers became more cautious over capital investments. Looking past the short-term headwinds, we will continue to monitor the company’s progress shifting its revenue mix toward higher-margin service and IoT capabilities, which should improve profitability. This includes its FIELD platform, which offers predictive maintenance, optimization and self-learning that customers can utilize to reduce production downtime and energy costs. Moreover, we believe long-term prospects for the company are underappreciated since FANUC, as the industrial robot market leader, is uniquely positioned to benefit from further penetration of factory automation and robot usage across geographies.

LVMH Moët Hennessy Louis Vuitton, the luxury goods company, was a primary detractor for the quarter. After doubling sales over the past three years, LVMH is experiencing a slowdown, with organic growth in the recent semi-annual period of only 17%. Regionally, the luxury retail environment is mixed, as strong performance in Asia contrasts with softer demand in the U.S. and a lack of tourist activity from Chinese nationals. Additionally, the company maintained its long-term investment philosophy with increased advertising and promotional spending, which has pressured margins. Despite these near-term challenges, we believe LVMH’s actions will enhance profitability and expand market share in the long run. This includes the company’s continued shift toward Jewelry, which is now the business’s second-largest segment by profit, market share gains in the Selective Retailing segment due to strong performance from Sephora and DFS (Duty Free Shoppers), the successful integration of brands such as Christian Dior Couture, and ongoing integration of Tiffany & Co., which reopened its New York City flagship store “The Landmark” earlier this year.

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

Rather than attempting to predict short-term market dynamics, at Aristotle Capital, we stay focused on understanding company fundamentals while carefully monitoring the long-term evolution of our portfolio of holdings. Our approach to understanding individual businesses reveals more insightful conclusions than would undue time spent concentrating on ever-changing and often unclear macroeconomic signals. While we strive to remain macro aware, our goal instead is to invest in businesses which are run by what we believe are capable and proven management teams that have the skill to navigate changing factors such as inflation, interest rates and government policy. We also analyze how such factors could alter the fundamentals of a business and whether those impacts are long term in nature.

We aim to find companies with high-quality characteristics that can succeed over full market cycles. It is our belief that a disciplined, research-oriented approach to finding great companies, as well as a consistent, well-executed portfolio management process, is how we can add the most value for our clients.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

The Russell 2000 reversed course after rising over 6% in the month of July, falling -10.6% in August and September, and closing out the quarter with a return of -5.13%. Performance was weaker down the cap spectrum with the Russell 2000 trailing the Russell 1000 for the fourth consecutive quarter, bringing the year-to-date gap between the two indices to 10.47% in favor of large caps. In spite of large caps recent streak of outperformance, many have noted the narrowness of the large cap market rally this year, with a select group of mega cap stocks coined the ‘Magnificent 7’ having driven the vast majority of large cap index gains so far this year. Surging oil prices and treasury yields, a broader and more protracted United Auto Workers strike, and the resumption of student loan payments all contributed to subdued market sentiment into quarter end. On the policy front, even as decades-high inflation showed meaningful signs of slowing, the Fed disappointed some investors’ expectations of a quick pivot to cutting rates. Instead, the central bank indicated its resolve to keep interest rates higher for longer in mid-June, deciding to hold off on raising interest rates as it takes stock of how its prior rate hikes are impacting the real economy.

Stylistically, value stocks proved relatively resilient versus their more expensive growth counterparts during the quarter as evidenced by the Russell 2000 Value Index returning -2.96% compared to -7.32% for the Russell 2000 Growth Index. The gap between the two styles remains wide on a year-to-date basis, however, with the Russell 2000 Growth Index having outperformed its value counterpart by more than 5% so far in 2023.

At the sector level, nine of the eleven sectors in the Russell 2000 Index generated negative returns during the third quarter and only three sectors generated returns ahead of the broader index, representing a second consecutive quarter of narrow sector leadership for the Index. Energy and Financials were the only sectors to deliver gains during the period with returns of 18.62% and 1.21%, respectively. Energy is also the only sector to be up in each of the last two quarters and now leads all sectors on a year-to-date basis after lagging through the first half of the year. Health Care (-15.14%) and Utilities (-11.75%) both ended the quarter with double digit declines and are lagging the Index on a year-to-date basis.

Sources: CAPS Composite Hub, Russell Investments

Past performance is not indicative of future results. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Small Cap Equity Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Performance Review

For the third quarter of 2023, the Aristotle Small Cap Equity Composite posted a total return of -5.77% net of fees (-5.57% gross of fees), trailing the -5.13% total return of the Russell 2000 Index. Underperformance was driven by a combination of security selection and allocation effects. Overall, security selection was weakest within the Consumer Staples, Financials and Consumer Discretionary sectors and strongest in Health Care, Information Technology and Utilities. From an allocation perspective, the portfolio benefited from underweights in Health Care and Consumer Discretionary, however, this was offset by underweights in Energy and Financials.

Relative Contributors	Relative Detractors
Huron Consulting Group	Euronet Worldwide
MACOM Technology Solutions	Dycom
Oceaneering International	Merit Medical Systems
HealthEquity	Monro
PetIQ	Nu Skin Enterprises

CONTRIBUTORS

Huron Consulting Group (HURN), a specialty consulting company that provides financial, operational, and digital consulting services to health care, education and commercial clients, appreciated after delivering strong results highlighted by continued momentum within the company’s health care and education segments. We maintain our investment, as we believe the company remains well-positioned to capitalize on a demand backdrop aided by financial and operational pressures in its largest end-markets, along with secular tailwinds supporting digital transformation, analytics and cloud consulting.

MACOM Technology Solutions (MTSI), a designer and manufacturer of high-performance semiconductor products, appreciated amid strength within its Industrial and Defense segment along with positive commentary around future AI data center demand. We maintain our position, as we believe the company’s meaningful exposure to growing demand from Data Center and 5G end market applications along with the integration of recent acquisitions should drive additional shareholder value in periods to come.

DETRACTORS

Euronet Worldwide (EEFT), a provider of electronic payment and financial transaction solutions, declined during the period amid inflationary pressures and rising travel costs, leaving consumers with fewer funds for discretionary tourism spending and ultimately resulting in a negative impact on its Electronic Funds Transfer segment. We maintain our investment, as we believe the company’s expansion into mobile and digital payments combined with a continued recovery in international travel can benefit shareholders in the periods to come.

Dycom (DY), a provider of engineering and construction services to the telecommunications and cable television industries, declined amid uncertainty regarding near term customer capital spending initiatives and their ensuing impact on fiber capex plans. 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.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Patterson-UTI Energy	CalAmp
TKO Group Holdings	NexTier Oilfield Solutions
	U.S. Xpress Enterprises
	World Wrestling Entertainment

BUYS/ACQUISITIONS

Patterson-UTI Energy (PTEN), an oilfield services company focused on drilling and pressure pumping solutions was added to the portfolio following its merger with NexTier Oilfield Solutions. Overall, we maintain a positive view on the business combination as the merging of the two entities creates a comprehensive drilling and completions franchise with leadership positions in contract drilling, pressure pumping and directional drilling. Furthermore, we believe the company will benefit from greater size and scale, synergistic cost savings initiatives, and a more diversified suite of offerings to serve its customers.

TKO Group Holdings (TKO), a global sports and entertainment company formed through the merger of UFC and WWE, was added to the portfolio during the quarter. With assets spanning media & content, live events, sponsorship and licensing, we believe the company should be able to continue to capitalize on the booming global sports and entertainment ecosystem. Additionally, we believe the company’s diverse global fan base and strategic international expansion plans position the company well amidst favorable industry growth trends and an ever-evolving media rights landscape.

SELLS/LIQUIDATIONS

CalAmp (CAMP), a supplier of Mobile Resource Management solutions that allow for the remote collection of data from vehicles and other assets was removed from the portfolio during the quarter. In spite of the company’s efforts to convert its customer base from a hardware to a subscription model, redesign its customer support systems, and introduce new products in recent years, a variety of factors contributed to the harvesting of these efforts being pushed out, unfavorably impacting the risk-reward profile of the business. Therefore, we decided to eliminate the position.

NexTier Oilfield Solutions (NEX), a provider of hydraulic fracturing and other completion-oriented oilfield services to exploration and production companies in the U.S. was removed from the portfolio by virtue of its merger with Patterson-UTI Energy.

U.S. Xpress Enterprises (USX), a Tennessee-based trucking company was removed from the portfolio after being acquired by Knight-Swift Transportation.

World Wrestling Entertainment (WWE), an integrated media and entertainment company, was removed from the portfolio following its merger with Endeavor Group-owned UFC. The new publicly listed company that will combine the two entities will operate under the name TKO Group Holdings.

Outlook

Outside of a few major surprises, including the regional banking situation and an overly optimistic period of AI euphoria, it is perhaps surprising how little market risks and narratives have shifted over the last nine months. The two big uncertainties that many investors highlighted at the start of the year (i) whether inflation would persist and, (ii) whether there would be a recession, remain largely unresolved. While it is clear in the hard data that inflation has dropped over the course of the year, recent readings remain uncomfortably above the Federal Reserve’s target levels. Rapid increases in food and energy prices also persisted throughout the quarter fueling further uncertainty in the outlook. On the economy, the consensus view at the start of 2023 was that we were heading into a recession, with the only questions being when it would kick in, and how deep it would be. To this point, those questions still remain. One reason for market resiliency this year has been the performance of the economy, which has managed to not only avoid a recession to this point but also deliver strong employment numbers. Against this uncertain backdrop, the market may continue swinging between wild optimism, where inflation is no longer viewed as a threat and the economy has a soft landing, and extreme pessimism, where inflation comes roaring back, and the economy falls into a recession. Because of the difficulty in forecasting these macroeconomic outcomes, we have always strived to avoid making such predictions. Instead, we will – as always – stay focused on forecasting the underlying fundamentals of the companies in which we invest rather than making top-down investment or portfolio decisions. We do, however, believe that a normalization of financial conditions through higher rates (nominal and real) and QT should result in a more favorable market environment for quality companies with strong fundamentals better than it had been in the years leading up to, and through the pandemic/2021 period during which “Easy Money Policy” distorted market and style dynamics. Thus far in 2023, including the third quarter, we have seen short-term periods where more reasonably valued companies have recovered on a relative basis, but this has not been a linear shift in the market as much of the first half rally was more sentiment-driven than fundamentally supported, in our view. Ultimately, we believe business fundamentals and valuations are the key determinants of investment returns over extended periods and that remains our focus.

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 (12.3x P/E for the Russell 2000 Index vs. 21.2x P/E for the Russell 1000 Index). Based upon relative P/E alone, there has been no other time in the Russell 2000’s history that has been as attractive relative to large cap as in recent times. Additionally, earnings and sales growth are expected to improve for small caps in 2024 and outpace that of large caps, which we believe provides further fundamental support and potential upside for the asset class. A peak in US large cap market concentration has also historically been followed by sustained small cap outperformance. Small caps are less vulnerable to a top-heavy market, helping reduce the index’s sensitivity to individual company performance. Moreover, small caps tend to outperform large caps when inflation falls from high levels as well as during recovery periods coming out of economic downturns. Investors thinking of positioning around these trends may benefit from moving down in market capitalization, in our opinion.

Positioning

As always, we remain focused on long-term business fundamentals, even in the face of elevated short-term volatility. 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.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

The Russell 2500 reversed course after rising 4.97% in the month of July, falling -9.29% in August and September, and closing out the quarter with a return of -4.78%. Performance was weaker down the cap spectrum with the Russell 2500 trailing the Russell 1000 for the third consecutive quarter, bringing the year-to-date gap between the two indices to 9.42% in favor of large caps. In spite of large caps recent streak of outperformance, many have noted the narrowness of the large cap market rally this year, with a select group of mega cap stocks coined the ‘Magnificent 7’ having driven the vast majority of large cap index gains so far this year. Surging oil prices and treasury yields, a broader and more protracted United Auto Workers strike, and the resumption of student loan payments all contributed to  subdued market sentiment into quarter end. On the policy front, even as decades-high inflation showed meaningful signs of slowing, the Fed disappointed some investors’ expectations of a quick pivot to cutting rates. Instead, the central bank indicated its resolve to keep interest rates higher for longer in mid-June, deciding to hold off on raising interest rates as it takes stock of how its prior rate hikes are impacting the real economy.

Stylistically, value stocks proved relatively resilient versus their more expensive growth counterparts during the quarter as evidenced by the Russell 2500 Value Index returning -3.66% compared to –6.84% for the Russell 2500 Growth Index. The gap between the two styles remains elevated on a year-to-date basis, however, with the Russell 2500 Growth Index having outperformed its value counterpart by 3.68% so far in 2023.

At the sector level, nine of the eleven sectors in the Russell 2500 Index generated negative returns during the third quarter and only four sectors generated returns ahead of the broader index, representing a second consecutive quarter of narrow sector leadership for the Index. Energy and Financials were the only sectors to deliver positive returns during the period with returns of 17.18% and 1.31%, respectively. Health Care (-14.22%) and Communication Services (-11.18%) both ended the quarter with double digit declines and are lagging the Index on a year-to-date basis.

Sources: CAPS Composite Hub, Russell Investments

Past performance is not indicative of future results. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Small Cap Equity Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

Performance Review

For the third quarter of 2023, the Aristotle Small/Mid Cap Equity Composite generated a total return of -3.54% net of fees (-3.40% gross of fees), outperforming the -4.78% total return of the Russell 2500 Index. Outperformance was driven by a combination of security selection and allocation effects. Overall, security selection was strongest within the Health Care, Information Technology, and Industrials sectors and weakest in Financials, Consumer Discretionary and Consumer Staples. From an allocation perspective, underweights in Consumer Discretionary and Real Estate contributed to relative returns but were modestly offset by an overweight in Health Care and an underweight in Financials.

Relative Contributors	Relative Detractors
MACOM Technology Solutions	Dycom
Huron Consulting Group	Euronet Worldwide
Oceaneering	Wolverine World Wide
Diamondback Energy	Merit Medical Systems
Range Resources	Monro

CONTRIBUTORS

MACOM Technology Solutions (MTSI), a designer and manufacturer of high-performance semiconductor products, appreciated amid strength within its Industrial and Defense segment along with positive commentary around future AI data center demand.  We maintain our position, as we believe the company’s meaningful exposure to growing demand from Data Center and 5G end market applications along with the integration of recent acquisitions should drive additional shareholder value in periods to come.

Huron Consulting Group (HURN), a specialty consulting company that provides financial, operational, and digital consulting services to health care, education and commercial clients, appreciated after delivering strong results highlighted by continued momentum within the company’s health care and education segments. We maintain our investment, as we believe the company remains well-positioned to capitalize on a demand backdrop aided by financial and operational pressures in its largest end-markets, along with secular tailwinds supporting digital transformation, analytics and cloud consulting.

DETRACTORS

Dycom (DY), a provider of engineering and construction services to the telecommunications and cable television industries, declined amid uncertainty regarding near term customer capital spending initiatives and their ensuing impact on fiber capex plans. 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.

Euronet Worldwide (EEFT), a provider of electronic payment and financial transaction solutions, declined during the period amid inflationary pressures and rising travel costs, leaving consumers with fewer funds for discretionary tourism spending and ultimately resulting in a negative impact on its Electronic Funds Transfer segment. We maintain our investment, as we believe the company’s expansion into mobile and digital payments combined with a continued recovery in international travel can benefit shareholders in the periods to come.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Patterson-UTI Energy	CalAmp
TKO Group Holdings	NexTier Oilfield Solutions
	World Wrestling Entertainment

BUYS/ACQUISITIONS

Patterson-UTI Energy (PTEN), an oilfield services company focused on drilling and pressure pumping solutions was added to the portfolio following its merger with NexTier Oilfield Solutions. Overall, we maintain a positive view on the business combination as the merging of the two entities creates a comprehensive drilling and completions franchise with leadership positions in contract drilling, pressure pumping and directional drilling. Furthermore, we believe the company will benefit from greater size and scale, synergistic cost savings initiatives, and a more diversified suite of offerings to serve its customers.

TKO Group Holdings (TKO), a global sports and entertainment company formed through the merger of UFC and WWE, was added to the portfolio during the quarter. With assets spanning media & content, live events, sponsorship and licensing, we believe the company should be able to continue to capitalize on the booming global sports and entertainment ecosystem. Additionally, we believe the company’s diverse global fan base and strategic international expansion plans position the company well amidst favorable industry growth trends and an ever-evolving media rights landscape.

SELLS/LIQUIDATIONS

CalAmp (CAMP), a supplier of Mobile Resource Management solutions that allow for the remote collection of data from vehicles and other assets was removed from the portfolio during the quarter. In spite of the company’s efforts to convert its customer base from a hardware to subscription model, redesign its customer support systems, and introduce new products in recent years, a variety of factors contributed to the harvesting of these efforts being pushed out, unfavorably impacting the risk-reward profile of the business. Therefore, we decided to eliminate the position.

NexTier Oilfield Solutions (NEX), a provider of hydraulic fracturing and other completion-oriented oilfield services to exploration and production companies in the U.S. was removed from the portfolio by virtue of its merger with Patterson-UTI Energy.

World Wrestling Entertainment (WWE), an integrated media and entertainment company, was removed from the portfolio following its merger with Endeavor Group-owned UFC. The new publicly listed company that will combine the two entities will operate under the name TKO Group Holdings.

Outlook

Outside of a few major surprises, including the regional banking situation and an overly optimistic period of AI euphoria, it is perhaps surprising how little market risks and narratives have shifted over the last nine months. The two big uncertainties that many investors highlighted at the start of the year (i) whether inflation would persist and, (ii) whether there would be a recession, remain largely unresolved. While it is clear in the hard data that inflation has dropped over the course of the year, recent readings remain uncomfortably above the Federal Reserve’s target levels. Rapid increases in food and energy prices also persisted throughout the quarter fueling further uncertainty in the outlook. On the economy, the consensus view at the start of 2023 was that we were heading into a recession, with the only questions being when it would kick in, and how deep it would be. To this point, those questions still remain. One reason for market resiliency this year has been the performance of the economy, which has managed to not only avoid a recession to this point but also deliver strong employment numbers. Against this uncertain backdrop, the market may continue swinging between wild optimism, where inflation is no longer viewed as a threat and the economy has a soft landing, and extreme pessimism, where inflation comes roaring back, and the economy falls into a recession. Because of the difficulty in forecasting these macroeconomic outcomes, we have always strived to avoid making such predictions. Instead, we will – as always – stay focused on forecasting the underlying fundamentals of the companies in which we invest rather than making top-down investment or portfolio decisions. We do, however, believe that a normalization of financial conditions through higher rates (nominal and real) and QT should result in a more favorable market environment for quality companies with strong fundamentals better than it had been in the years leading up to, and through the pandemic/2021 period during which “Easy Money Policy” distorted market and style dynamics. Thus far in 2023, including the third quarter, we have seen short-term periods where more reasonably valued companies have recovered on a relative basis, but this has not been a linear shift in the market as much of the first half rally was more sentiment-driven than fundamentally supported, in our view. Ultimately, we believe business fundamentals and valuations are the key determinants of investment returns over extended periods and that remains our focus.

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 (13.2x P/E for the Russell 2500 Index vs. 21.2x P/E for the Russell 1000 Index). Based upon relative P/E alone, there has been no other time in the Russell 2500’s history that has been as attractive relative to large cap as in recent times. Additionally, earnings and sales growth are expected to improve for small & mid caps in 2024 and outpace that of large caps, which we believe provides further fundamental support and potential upside for the asset class. A peak in US large-cap market concentration has also historically been followed by sustained small & mid cap outperformance. Small & mid caps are less vulnerable to a top-heavy market, helping reduce the index’s sensitivity to individual company performance. Moreover, small & mid caps tend to outperform large caps when inflation falls from high levels as well as during recovery periods coming out of economic downturns. Investors thinking of positioning around these trends may benefit from moving down in market capitalization, in our opinion.

Positioning

As always, we remain focused on long-term business fundamentals, even in the face of elevated short-term volatility. 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.

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

Markets Review

China’s recovery remained sluggish amid an ongoing property slump and lackluster consumer spending. Meanwhile, high levels of inflation persisted across many regions of the world, although inflation in the U.S., eurozone and the U.K. eased significantly from levels seen earlier in the year. As such, the IMF trimmed its global inflation projection to 6.8% from its prior estimate of 7.0% in April but warned inflation could remain high or reaccelerate due to factors such as geopolitics and weather-related events.

By contrast, in Asia, Japanese inflation edged down to 3.2% in August, and the Bank of Japan diverged from its Western counterparts by keeping short-term interest rates steady. China also took an easier approach to its monetary policy, cutting both short- and medium-term lending rates, as the country has struggled to recover following the pandemic. The People’s Bank of China hopes to combat weak consumer spending, falling exports and the country’s real estate crisis. Chinese property developers have come under increased scrutiny, as Evergrande filed for bankruptcy protection in the U.S. while Country Garden warned investors of significant losses.

On the geopolitical front, Ukraine continues to push its counteroffensive in the eastern and southern portions of the country. Western nations have largely remained dedicated to their support of Ukraine, as countries such as the U.S., Canada and the U.K. have all pledged to provide additional aid. In Taiwan, China carried out military exercises in the Taiwan Strait following the Taiwanese vice president’s visit to New York and San Francisco. Despite tense relations between the U.S. and China, the Biden Administration announced $345 million in military aid for Taiwan.

Performance and Attribution Summary

For the third quarter of 2023, Aristotle Capital’s Global Equity Composite posted a total return of -4.06% gross of fees (-4.13% net of fees), underperforming the MSCI World Index, which returned -3.46%, and the MSCI ACWI Index, which returned -3.40%. Please refer to the table below for detailed performance.

Performance (%)	3Q23	YTD	1 Year	3 Years	5 Years	10 Years	Since Inception*
Global Equity Composite (gross)	-4.06	7.30	20.99	7.79	7.51	8.92	9.26
Global Equity Composite (net)	-4.13	7.05	20.62	7.46	7.16	8.54	8.83
MSCI World Index (net)	-3.46	11.10	21.95	8.08	7.25	8.26	8.82
MSCI ACWI Index (net)	-3.40	10.06	20.80	6.89	6.46	7.55	7.92

Contributors and Detractors for 3Q 2023

Relative Contributors	Relative Detractors
Cameco	FMC
Amgen	LVMH
TotalEnergies	FANUC
FirstCash	Nemetschek
Oshkosh	Microchip Technology

Japan-based FANUC, the global manufacturer of industrial robots as well as control systems for machine tools, was a primary detractor for the period. During the June quarter, orders for the company’s robots fell 23% year-on-year following ten consecutive quarters of annual increases. This abrupt decline may have been due to inventory adjustments in China and the Americas as many manufacturers became more cautious over capital investments. Looking past the short-term headwinds, we will continue to monitor the company’s progress shifting its revenue mix toward higher-margin service and IoT capabilities, which should improve profitability. This includes its FIELD platform, which offers predictive maintenance, optimization and self-learning that customers can utilize to reduce production downtime and energy costs. Moreover, we believe long-term prospects for the company are underappreciated since FANUC, as the industrial robot market leader, is uniquely positioned to benefit from further penetration of factory automation and robot usage across geographies.

Microchip Technology, the microcontroller (MCU) and analog semiconductor producer, was a primary detractor for the period. Despiteposting record levels of sales, margins and gross profit, management indicated it expects a challenging near-term demand environment due to weakness in China, a slowdown in Europe and early signs of weakness in auto. The company has also accommodated some push-out requests from customers, which will translate into lower sales for the coming months. Despite operating in a cyclical industry, Microchip has been able to generate 15+ years of robust FREE cash flow and margins, while lowering its debt (has paid down $6.8 billion of debt over the last 20 quarters, reducing net leverage to 1.29x) and consistently returning money to shareholders. This, we believe, speaks to management’s proven ability to manage the business through economic cycles, while taking advantage of its broad portfolio to continue gaining share in areas including IoT, 5G infrastructure, autonomous driving and data centers.

Amgen, the biopharmaceutical company, was one of the top contributors for the quarter. The company continues to leverage its innovative platform to strengthen its product portfolio, offset maturing products, such as Epogen and Neulasta, and increase market share. Over the past year, Amgen has reported double-digit volume growth, operating margin expansion to over 40% and record levels of sales for cholesterol drug Repatha, bone-strengthening drug Prolia and cancer drug Blincyto. Additionally, the company remains well positioned to benefit from the continued development and commercialization of biosimilars such as Amgevita, the first biosimilar to Humira, and the successful integration of Otezla to bolster its inflammation segment. Lastly, the FTC agreed to allow Amgen to proceed with its $27.8 billion acquisition of Horizon Therapeutics. We note that this is yet another unsuccessful attempt by the FTC to block an M&A transaction of one of our holdings (see below re: Activision Blizzard). The transaction closed on October 6, 2023 and brings expertise in rare disease therapies (including bulging eye-drug Tepezza), as well as adds to Amgen’s immunology portfolio.

TotalEnergies, one of the world’s largest energy companies, was also a primary contributor for the quarter. The company continues to execute on its strategic plan to reach net-zero emissions by 2050 which, in contrast to many European energy providers, it looks to achieve through expanding ownership of renewable power and low-carbon assets rather than purely divestment. The company expects to more than double its gross renewable generation capacity by 2025 (primarily in solar) and invest over 30% of its total spending in low-carbon businesses through 2030. As such, we believe TotalEnergies is uniquely positioned to benefit from the increase in global demand for clean energy. In recent years, TotalEnergies’ reduction in capex and operating expenses has improved its FREE cash flow generation, now further aided by the favorable energy environment. This has supported its continued ability to return cash to shareholders, one of our catalysts, as demonstrated by the $3.8 billion returned through share buybacks and dividends during the second quarter.

Recent Portfolio Activity

Buys	Sells
Jazz Pharmaceuticals	Magna International

During the quarter, we sold our position in Magna International and invested in a new position, Jazz Pharmaceuticals.

We first invested in Magna International, a Canada-based global auto parts, systems and assembly company, in the first quarter of 2020. The company, in our opinion, has a unique capability of supplying parts for an increasingly electrified and autonomous fleet of vehicles. This includes Magna’s specialty in lightweighting vehicles—a necessity for heavy electric cars—as well as its years of investment in self-driving technologies. In addition, with leading market share positions in many of its core markets and products, we believe Magna remains well positioned to benefit as content-per-vehicle increases and automotive parts and systems become more complex. Though the company continues to meet each of our criteria for investment, we decided to exit our position in Magna to fund our purchase of Jazz Pharmaceuticals, which we view as a more optimal investment.

Jazz Pharmaceuticals plc

Founded in 2003, Jazz Pharmaceuticals is a global biopharmaceutical company headquartered in Ireland. The drugmaker’s portfolio of nine approved products focuses on conditions with limited therapeutic treatments in neuroscience (~75% of 2022 revenue) and oncology (~25%).

Jazz’s drug Xyrem was added to its portfolio in 2005 and was approved for use in patients with narcolepsy. The drug’s strong efficacy propelled it to be the standard of care for this incurable sleep condition and has achieved wide adoption for the treatment of excessive daytime sleepiness and cataplexy (episodes of loss of muscle control).

Xyrem’s patent exclusivity ended in January 2023, and authorized generic versions of the product have entered the market. To prepare for the patent cliff, the company developed Xywav, a lower-sodium version of Xyrem, which is touted for its potentially better heart safety. The drug has received FDA approval for the treatment of narcolepsy and idiopathic hypersomnia and has orphan drug exclusivity through 2027.

Jazz has focused on adding new products to its portfolio through both internal innovation and acquisitions. At the end of 2022, 63% of Jazz’s net product sales were generated from products launched or acquired over the past three years, while 75% of net product sales were generated by a single drug—Xyrem—in 2018. Within oncology, Jazz received recent approvals for Zepzelca (for small cell lung cancer) and Rylaze (for acute lymphoblastic leukemia). In addition, through the acquisition of GW Pharmaceuticals in 2021, Jazz added Epidiolex for the treatment of severe (and rare) forms of epilepsy.

High-Quality Business

Some of the quality characteristics we have identified for Jazz Pharmaceuticals include: 

• Decades of success developing and marketing novel treatments for rare conditions using biopharmaceuticals;
• Jazz’s extensive network of sleep doctors provides the company with a competitive edge to promote new therapies;
• History of strong FREE cash flow generation with a track record of accretive acquisitions; and
• Pricing power, as the company’s key drugs treat rare diseases where alternative options are limited.

Attractive Valuation

Based on our estimates, shares of the company are attractively valued. We believe continued market share gains for several of the company’s therapies will lead to higher levels of normalized FREE cash flow than are currently appreciated by the market. Though not (yet) incorporated into our estimates, we view the company’s strong neuroscience and oncology pipeline assets as “free options.”

Compelling Catalysts

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

• Continued market share gains for Xywav, as this recently released drug has already achieved market-leading adoption in narcolepsy and increased patient usage for idiopathic hypersomnia;
• Increased penetration of Epidiolex, which has demonstrated strong efficacy and where there are limited therapeutic substitutes for the rare forms of epilepsy it treats; and
• Further uptake of Zepzelca—a well-established, second-line cancer treatment that is also being studied for potential usage as a first-line treatment.

Conclusion

Rather than attempting to predict short-term market dynamics, at Aristotle Capital, we stay focused on understanding company fundamentals while carefully monitoring the long-term evolution of our portfolio of holdings. Our approach to understanding individual businesses reveals more insightful conclusions than would undue time spent concentrating on ever-changing and often unclear macroeconomic signals. While we strive to remain macro aware, our goal instead is to invest in businesses which are run by what we believe are capable and proven management teams that have the skill to navigate changing factors such as inflation, interest rates and government policy. We also analyze how such factors could alter the fundamentals of a business and whether those impacts are long term in nature.

We aim to find companies with high-quality characteristics that can succeed over full market cycles. It is our belief that a disciplined, research-oriented approach to finding great companies, as well as a consistent, well-executed portfolio management process, is how we can add the most value for our clients.

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

Markets Review

China’s recovery remained sluggish amid an ongoing property slump and lackluster consumer spending. Meanwhile, high levels of inflation persisted across many regions of the world, although inflation in the U.S., eurozone and the U.K. eased significantly from levels seen earlier in the year.  Consistent with the progress, the IMF trimmed its global inflation projection to 6.8% from its prior estimate of 7.0% in April but warned inflation could remain high or reaccelerate due to factors such as geopolitics and weather-related events.

By contrast, in Asia, Japanese inflation edged down to 3.2% in August, and the Bank of Japan diverged from its Western counterparts by keeping short-term interest rates steady. China also took an easier approach to its monetary policy, cutting both short- and medium-term lending rates, as the country has struggled to recover following the pandemic. The People’s Bank of China hopes to combat weak consumer spending, falling exports and the country’s real estate crisis. Chinese property developers have come under increased scrutiny, as Evergrande filed for bankruptcy protection in the U.S. while Country Garden warned investors of significant losses.

On the geopolitical front, Ukraine continues to push its counteroffensive in the eastern and southern portions of the country. Western nations have largely remained dedicated to their support of Ukraine, as countries such as the U.S., Canada and the U.K. have all pledged to provide additional aid. In Taiwan, China carried out military exercises in the Taiwan Strait following the Taiwanese vice president’s visit to New York and San Francisco. Despite tense relations between the U.S. and China, the Biden Administration announced $345 million in military aid for Taiwan.

Performance and Attribution Summary

For the third quarter of 2023, Aristotle Capital’s International Equity Composite posted a total return of -4.53% gross of fees (-4.65% net of fees), underperforming the MSCI EAFE Index, which returned -4.11%, and the MSCI ACWI ex USA Index, which returned -3.77%. Please refer to the table below for detailed performance.

Performance (%)	3Q23	YTD	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity Composite (gross)	-4.53	7.36	22.38	6.12	3.41	4.54	5.06
International Equity Composite (net)	-4.65	6.97	21.80	5.61	2.91	4.03	4.56
MSCI EAFE Index (net)	-4.11	7.08	25.65	5.75	3.24	3.82	2.16
MSCI ACWI ex USA Index (net)	-3.77	5.34	20.39	3.74	2.58	3.35	1.78

Japan-based FANUC, the global manufacturer of industrial robots as well as control systems for machine tools, was the largest detractor for the period. During the June quarter, orders for the company’s robots fell 23% year-on-year following ten consecutive quarters of annual increases. This abrupt decline may have been due to inventory adjustments in China and the Americas as many manufacturers became more cautious over capital investments. Looking past the short-term headwinds, we will continue to monitor the company’s progress shifting its revenue mix toward higher-margin service and IoT capabilities, which should improve profitability. This includes its FIELD platform, which offers predictive maintenance, optimization and self-learning that customers can utilize to reduce production downtime and energy costs. Moreover, we believe long-term prospects for the company are underappreciated since FANUC, as the industrial robot market leader, is uniquely positioned to benefit from further penetration of factory automation and robot usage across geographies.

LVMH Moët Hennessy Louis Vuitton, the luxury goods company, was a primary detractor for the quarter. After doubling sales over the past three years, LVMH is experiencing a slowdown, with organic growth in the recent semi-annual period of only 17%. Regionally, the luxury retail environment is mixed, as strong performance in Asia contrasts with softer demand in the U.S. and a lack of tourist activity from Chinese nationals. Additionally, the company maintained its long-term investment philosophy with increased advertising and promotional spending, which has pressured margins. Despite these near-term challenges, we believe LVMH’s actions will enhance profitability and expand market share in the long run. This includes the company’s continued shift toward Jewelry, which is now the business’s second-largest segment by profit, market share gains in the Selective Retailing segment due to strong performance from Sephora and DFS (Duty Free Shoppers), the successful integration of brands such as Christian Dior Couture, and ongoing integration of Tiffany & Co., which reopened its New York City flagship store “The Landmark” earlier this year.

Pan Pacific International, the Japanese discount and general merchandise retailer, was a top contributor for the period. After being closed for over two and a half years, Japan’s reopening has led to a sharp recovery in retail traffic. In response, Pan Pacific has implemented an aggressive strategy of increasing the number of cash registers and strengthening staffing to boost sales while also focusing on improving procurement capabilities, expanding its private label strategy and improving its inventory turnover. As a result of these actions, along with favorable weather and a strong holiday season, the company’s sales exceeded pre-pandemic levels, and operating margin eclipsed 5% for the first time in five years. Furthermore, we are encouraged by Pan Pacific’s announcement that it will accelerate the opening of new stores with 25 openings in Japan and 12 stores overseas this year. We believe Pan Pacific is well positioned to continue gaining market share in Japan, further penetrate the overseas market and maintain strong levels of profitability.

TotalEnergies, one of the world’s largest energy companies, was also a primary contributor for the quarter. The company continues to execute on its strategic plan to reach net-zero emissions by 2050 which, in contrast to many European energy providers, it looks to achieve through expanding ownership of renewable power and low-carbon assets rather than purely divestment. The company expects to more than double its gross renewable generation capacity by 2025 (primarily in solar) and invest over 30% of its total spending in low-carbon businesses through 2030. As such, we believe TotalEnergies is uniquely positioned to benefit from the increase in global demand for clean energy. In recent years, TotalEnergies’ reduction in capex and operating expenses has improved its FREE cash flow generation, now further aided by the favorable energy environment. This has supported its continued ability to return cash to shareholders, one of our catalysts, as demonstrated by the $3.8 billion returned through share buybacks and dividends during the second quarter.

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

Rather than attempting to predict short-term market dynamics, at Aristotle Capital, we stay focused on understanding company fundamentals while carefully monitoring the long-term evolution of our portfolio of holdings. Our approach to understanding individual businesses reveals more insightful conclusions than would undue time spent concentrating on ever-changing and often unclear macroeconomic signals. While we strive to remain macro aware, our goal instead is to invest in businesses which are run by what we believe are capable and proven management teams that have the skill to navigate changing factors such as inflation, interest rates and government policy. We also analyze how such factors could alter the fundamentals of a business and whether those impacts are long term in nature.

We aim to find companies with high-quality characteristics that can succeed over full market cycles. It is our belief that a disciplined, research-oriented approach to finding great companies, as well as a consistent, well-executed portfolio management process, is how we can add the most value for our clients.