ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

Small cap equities began the year on a positive note, with the Russell 2000 rising over 14.3% through the first 22 trading days of the year amid renewed investor optimism, moderating inflation data, and hopes that the Federal Reserve would soon alter their stance. This jolt of enthusiasm translated into outperformance for speculative segments of the small cap market in January, many of which were last year’s losers. Non-profitable and heavily shorted stocks surged throughout the month of January—notching gains reminiscent of those experienced during the meme frenzy in early 2021. This rally, however, was short-lived as rising rates, tighter lending conditions, and the banking system turmoil that emerged near the end of the quarter all contributed to an unsettling backdrop for investors and a 14.0% intra-quarter decline in the Russell 2000 Index. Small cap markets stabilized towards the end of March, however, moving back into positive territory during the final week of the quarter and closing out a volatile period with a modest gain.

Stylistically, growth outperformed value during the quarter, as evidenced by the Russell 2000 Growth Index’s total return of 6.07% versus the -0.66% total return of the Russell 2000 Value Index. The outperformance of growth-oriented companies (as defined by Russell) during the quarter is a reversal of the recent trend that has been in place for much of the past two years. Moreover, Q1 was the Russell 2000 Growth’s 13^th best relative quarter versus the Russell 2000 Value on record (of 177 quarters) making it a top decile relative quarter for Growth over Value. This dispersion was driven in large part by the value index’s higher weightings in the Financials and Energy sectors, which underperformed the broader Index in the face of regional bank related turmoil and falling energy prices.

On a sector basis, Information Technology, Consumer Discretionary, and Materials led first quarter returns, up 14.23%, 11.90%, and 8.78% respectively, with Information Technology outperforming the broader index for the first time in five quarters. Financials (-8.50%) and Energy (-3.82%) were the worst performing sectors during the quarter followed by Health Care (-1.93%) which was negatively impacted by the performance of Biotechnology companies within the sector.

Sources: SS&C Advent; Russell Investments

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

Performance Review

For the first quarter of 2023, the Aristotle Small Cap Equity Composite posted a total return of 0.97% net of fees (1.10% gross of fees), trailing the 2.74% total return of the Russell 2000 Index. Underperformance was driven by security selection while allocation effects positively contributed. Overall, security selection was weakest within the Financials, Industrials and Information Technology sectors and strongest in Energy, Utilities and Communication Services. From an allocation perspective, the portfolio benefited from an underweight in Financials and an overweight in Industrials, however, this was partially offset by underweights in Consumer Discretionary and Materials.

CONTRIBUTORS

Insight Enterprises (NSIT), a provider of branded IT products and services to businesses, appreciated during the quarter as the company’s transition from a transaction-oriented reseller to a services and solutions integrator continues to march on. We maintain a position as we believe the company’s focus on higher value-add areas like Cloud and Digital Solutions can continue to benefit shareholders as its customers seek to refresh and digitally transform their IT systems.

World Wrestling Entertainment (WWE), a media and entertainment company that operates, promotes, merchandises, and licenses live wrestling events worldwide, appreciated amid heightened investor sentiment surrounding the company’s upcoming TV rights renewal cycle and growing expectations that the company would be sold to a strategic buyer. We maintain our position ahead of the company’s anticipated business combination with Endeavor Group, a global sports and entertainment company and owner of UFC, which was announced shortly after quarter end.

DETRACTORS

Signature Bank (SBNY), a full-service commercial bank with offices across the U.S., declined after the New York Department of Financial Services took possession of the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver in mid-March. Shortly thereafter the FDIC entered into an agreement with Flagstar Bank, a subsidiary of New York Community Bancorp (NYSE: NYCB) for substantially all deposits and certain loan portfolios of Signature Bridge Bank on March 20, 2023. We liquidated our remaining position late in the quarter and have provided additional color in the Recent Portfolio Activity section of the commentary below.

Acadia Healthcare (ACHC), a provider of behavioral health and addiction services to patients in a variety of inpatient and outpatient settings, declined following the company’s quarterly earnings results released during the period. While the company’s fundamentals continue to advance, it appears the share price overreaction following the release of company’s earnings can be attributed to some near-term labor cost headwinds that came in higher than expected during the period. Nevertheless, we maintain a position as we believe the company remains well positioned to capitalize on the favorable supply/demand outlook for behavioral health, positive reimbursement trends and continued execution of its growth strategy.

Recent Portfolio Activity

BUYS/ACQUISITIONS

Hannon Armstrong Sustainable Infrastructure Capital (HASI), a Maryland-based sustainable asset financing and investing company, was added to the portfolio. We believe the company remains uniquely positioned to benefit as the demand for sustainable energy and infrastructure continues to grow. Additionally, we believe the company’s diverse portfolio, emphasis on proven technologies and long-term partnerships will result in less cyclical, lower risk, more predictable cash flows which can drive shareholder value in periods to come.

SELLS/LIQUIDATIONS

Altra Industrial Motion (AIMC), a global manufacturer and supplier of motion control, power transmission and automation products was removed from the portfolio after being acquired by Regal Rexnord Corporation (NYSE: RRX).

iStar (STAR), an internally-managed real estate investment trust specializing in ground leases, was removed from the portfolio following the completion of its merger with Safehold Inc. and the spinoff of the company’s non-ground lease assets. We maintain a position in the newly created business entity which now trades under the ticker “SAFE” and operates as the only self-managed, pure-play ground lease company in the public markets.

PacWest Bancorp (PACW), a West Coast relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses, was sold from the portfolio due to our belief that future shareholder value creation may be impeded by uncertainties related to the bank’s exposure to late-stage venture capital sponsored clients, and that the company’s risk/reward potential was no longer justified.

Signature Bank (SBNY), a full-service commercial bank with offices across the U.S, was sold from the portfolio following the FDIC takeover and subsequent carve-out of Signature Bridge Bank. Having followed Signature Bank for almost two decades, our investment thesis was predicated on the belief that Signature Bank was a traditional commercial bank with a diversified clientele and business model. The bank has a history of finding attractive industries/ecosystems that have robust deposit needs, and serving these areas well. Its unique operating model of acquiring experienced private client teams drove strong deposit and loan growth, while the autonomy provided to the teams helped keep overhead costs low. The company continued to acquire teams to further its growth, and we expected its successful integration of these teams to continue, particularly on the West Coast. On a fundamental basis, we believed the company had been executing well, highlighted by record annual earnings in 2022, expanding margins, loan growth, new teams added, and clean credit metrics. However, given the heightened scrutiny of the recent events involving Silicon Valley Bank and Silvergate Capital, some of the bank’s depositors opted to pull their money creating a run on the bank despite significant qualitative and quantitative differences between those two entities and Signature Bank. The company’s digital payments platform appeared to be a source of investor confusion despite its limited financial impact on the bank’s overall business. As part of this business, Signature Bank facilitated crypto-based transactions by holding customer’s U.S. Dollar-backed crypto tokens as deposits. The bank did not, however, engage in crypto-backed lending or trading and did not hold any cryptocurrencies on its balance sheet. Moreover, the company had recently announced its plans to intentionally reduce its digital assets exposure, a move we expected to reduce future earnings power from 2022 levels but would help alleviate some of the negative investor sentiment. Many finite details that prompted regulators to step in, eventually leading to the downfall of Signature Bank, are still unknown, however, we ultimately liquidated our remaining position late in the quarter after shares reopened for trading.

Outlook

After inflationary pressures, rising borrowing costs, and geopolitical turmoil created headwinds for investors in 2022, fears of an impending banking crisis and a slowing economy pose new threats in 2023. While sentiment moderately stabilized into quarter end, continued uncertainty and increased risks of recession will likely keep market participants on edge for the foreseeable future. Against this backdrop, we continue to believe the Federal Reserve will be a key driver of market volatility going forward. Specifically, now that the Fed’s initial batch rate increases are in the rearview mirror, the ongoing debate and positioning around any future Fed activity (or lack thereof) is likely to create continued bouts of volatility in both the equity and fixed income markets due to the implications on the strength of the U.S. economy, inflation expectations, and the resulting impact on corporate profitability. Another key item to watch over the coming months will be the extent to which recent events cause banks to reduce lending. This in turn may weigh on consumer demand and business investment and therefore accelerate any slowdown in the economy. As such, we will be paying close attention to management commentary and financial disclosures throughout this upcoming earnings season, which may unearth or dispel many of these ongoing concerns. Either way, it’s not a stretch to assume that there’s likely to be more volatility in the coming months, making this a good time to remember the benefits of portfolio diversification, remaining disciplined, and staying focused on companies with higher-quality characteristics such as stable earnings, clean balance sheets, and reasonable valuations.

From an asset class perspective, valuations of small versus large remain near multi-decade lows, which we believe suggests a more favorable setup for small caps relative to large caps in the periods to come (11.1x P/E for the Russell 2000 Index vs. 19.2x P/E for the Russell 1000 Index). Small caps, as represented by the Russell 2000, also remain historically attractive on an absolute basis and are trading near their lowest levels in over 30 years, in-line with lows during the GFC and below the COVID-19 recession and 2001 recession lows. Additional benefits from re-shoring efforts, investments in automation amid wage inflation/tight labor markets, and spending to reduce emissions also favor small caps which are beneficiaries of U.S. capex cycles. High and falling inflationary environments have also been favorable market environments for the asset class historically, a scenario we may find ourselves in this year. So, while the near-term outlook remains uncertain, along with the length and severity of any upcoming downturn, decades of investing have taught us that these can be the most rewarding times to be invested in small caps for the long-term. When the dust settles, we are reminded that small caps typically start moving up before many of us know for sure that the economy has begun to reaccelerate, and that missing these early stages of a market recovery can be costly*.

Positioning

As always, our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Overweights in Industrials and Information Technology are mostly a function of recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles of many retail businesses and a potential deceleration in goods spending following a period of strength fueled in part by government backed stimulus payments. We are also underweight in Financials as of quarter end, as we await further details on the potential impact to future bank earnings power amid the recent developments in 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.

*As measured by the average return of the Russell 2000 Index the year following periods of GDP growth <0% since 1980.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

SMID cap equities began the year on a positive note, with the Russell 2500 rising over 14% through the first 22 trading days of the year amid renewed investor optimism, moderating inflation data, and hopes that the Federal Reserve would soon alter their stance. This jolt of enthusiasm translated into outperformance for speculative segments of the SMID market in January, many of which were last year’s losers. Non-profitable and heavily shorted stocks also surged in January—notching gains reminiscent of those experienced during the meme frenzy in early 2021. This rally, however, was short-lived as rising rates, tighter lending conditions, and the banking system turmoil that emerged near the end of the quarter all contributed to an unsettling backdrop for investors and a 13.9% intra-quarter decline in the Russell 2500 Index. SMID cap markets stabilized towards the end of March, however, moving back into positive territory during the final week of the quarter and closing out a volatile period with a modest gain.

Stylistically, growth outperformed value during the quarter, as evidenced by the Russell 2500 Growth Index’s total return of 6.54% versus the 1.40% total return of the Russell 2500 Value Index. The outperformance of growth-oriented companies (as defined by Russell) during the quarter is a reversal of the recent trend that has been in place for much of the past two years. Moreover, Q1 was among the Russell 2500 Growth’s best relative quarters versus the Russell 2500 Value on record (of 149 quarters) making it a top quintile relative quarter for Growth over Value. This dispersion was driven in large part by the value index’s higher weightings in the Financials and Energy sectors, which underperformed the broader Index in the face of regional bank related turmoil and falling energy prices.

On a sector basis, Information Technology, Consumer Discretionary and Communication Services led first quarter returns, up 13.58%, 10.38%, and 8.56% respectively, with Information Technology outperforming the broader index for the first time in five quarters. Energy (-9.08%) and Financials (-7.11%) were the worst performing sectors during the quarter followed by Health Care (-0.08%) which was negatively impacted by the performance of Biotechnology companies within the sector.

Sources: SS&C Advent; Russell Investments

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

Performance Review

For the first quarter of 2023, the Aristotle Small/Mid Cap Equity Composite generated a total return of 0.93% net of fees (1.08% gross of fees), trailing the 3.39% total return of the Russell 2500 Index. Underperformance was driven by security selection while allocation effects positively contributed. Overall, security selection was weakest within the Financials, Information Technology, and Industrials sectors and strongest in Energy, Communication Services and Health Care. From an allocation perspective, the portfolio benefited from overweight exposures in Information Technology and Industrials, however, this was partially offset by underweights in Consumer Discretionary and Communication Services.

CONTRIBUTORS

FTI Consulting (FCN), a global business advisory firm that provides a variety of consulting services to large corporations, benefited from strong fundamental performance driven by increased demand for the company’s services as its clients navigate through increased regulatory scrutiny, corporate finance and restructuring activity, and a proliferation of corporate litigation. We maintain a position, as we believe the firm’s diversified business mix, global reach and management’s efforts to optimize the business can create value for shareholders going forward.

Catalent (CTLT), a pharmaceutical contract development and manufacturing organization, appreciated amid positive momentum within the company’s Biologics segment, a renewed focus on improving efficiencies, and rumblings that the company may be acquired. We maintain a position, as we believe the long-term value creation opportunity for the company remains intact, driven by favorable outsourcing trends and the company’s competitive position in biologics, particularly within the company’s cell and gene therapy sub-segments.

DETRACTORS

Signature Bank (SBNY), a full-service commercial bank with offices across the U.S., declined after the New York Department of Financial Services took possession of the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver in mid-March. Shortly thereafter the FDIC entered into an agreement with Flagstar Bank, a subsidiary of New York Community Bancorp (NYSE: NYCB) for substantially all deposits and certain loan portfolios of Signature Bridge Bank on March 20, 2023. We liquidated our remaining position late in the quarter and have provided additional color in the Recent Portfolio Activity section of the commentary below.

BankUnited (BKU), a bank holding company that provides commercial and consumer banking services in select regions nationally, declined amid broader industry wide pressures that impacted regional banking sentiment during the quarter. We maintain a position, as we believe the company can weather this period of volatility given the diversified nature of its business, strong asset quality metrics, and favorable geographic exposures.

Recent Portfolio Activity

BUYS/ACQUISITIONS

Hannon Armstrong Sustainable Infrastructure Capital (HASI), a Maryland-based sustainable asset financing and investing company was added to the portfolio. We believe the company remains uniquely positioned to benefit as the demand for sustainable energy and infrastructure continues to grow. Additionally, we believe the company’s diverse portfolio, emphasis on proven technologies and long-term partnerships will result in less cyclical, lower risk, more predictable cash flows which can drive shareholder value in periods to come.

Teleflex (TFX), a global provider of primarily single-use medical devices used by hospitals and healthcare providers for common diagnostic, therapeutic procedures, and surgical applications was added to the portfolio on our belief that the company’s diverse portfolio of industry leading brands can drive shareholder value as procedure volumes continue to recover. Furthermore, company specific margin improvement initiatives, product mix shift towards faster growing, more profitable products, and increased penetration internationally should also benefit shareholders over the next several years, in our view.

SELLS/LIQUIDATIONS

Altra Industrial Motion (AIMC), a global manufacturer and supplier of motion control, power transmission and automation products was removed from the portfolio after being acquired by Regal Rexnord Corporation (NYSE: RRX).

iStar (STAR), an internally-managed real estate investment trust specializing in ground leases, was removed from the portfolio following the completion of its merger with Safehold Inc. and the spinoff of the company’s non-ground lease assets. We maintain a position in the newly created business entity which now trades under the ticker “SAFE” and operates as the only self-managed, pure-play ground lease company in the public markets.

PacWest Bancorp (PACW), a West Coast relationship-based community bank focused on providing business banking and treasury management services to small, middle-market, and venture-backed businesses, was sold from the portfolio due to our belief that future shareholder value creation may be impeded by uncertainties related to the bank’s exposure to late-stage venture capital sponsored clients, and that the company’s risk/reward potential was no longer justified.

Signature Bank (SBNY), a full-service commercial bank with offices across the U.S, was sold from the portfolio following the FDIC takeover and subsequent carve-out of Signature Bridge Bank. Having followed Signature Bank for almost two decades, our investment thesis was predicated on the belief that Signature Bank was a traditional commercial bank with a diversified clientele and business model. The bank has a history of finding attractive industries/ecosystems that have robust deposit needs and serving these areas well. Its unique operating model of acquiring experienced private client teams drove strong deposit and loan growth, while the autonomy provided to the teams helped keep overhead costs low. The company continued to acquire teams to further its growth, and we expected its successful integration of these teams to continue, particularly on the West Coast. On a fundamental basis, we believed the company had been executing well, highlighted by record annual earnings in 2022, expanding margins, loan growth, new teams added, and clean credit metrics. However, given the heightened scrutiny of the recent events involving Silicon Valley Bank and Silvergate Capital, some of the bank’s depositors opted to pull their money creating a run on the bank despite significant qualitative and quantitative differences between those two entities and Signature Bank. The company’s digital payments platform appeared to be the source of investor confusion despite its limited financial impact on the bank’s overall business. As part of this business, Signature Bank facilitated crypto-based transactions by holding customer’s U.S. Dollar-backed crypto tokens as deposits. The bank did not, however, engage in crypto-backed lending or trading and did not hold any cryptocurrencies on its balance sheet. Moreover, the company had recently announced its plans to intentionally reduce its digital assets exposure a move we expected to reduce future earnings power from 2022 levels but would help alleviate some of the negative investor sentiment. Many specific details of what prompted regulators to step in, eventually leading to the downfall of Signature Bank, are still unknown, however, we ultimately liquidated our remaining position late in the quarter after shares reopened for trading.

Outlook

After inflationary pressures, rising borrowing costs, and geopolitical turmoil created headwinds for investors in 2022, fears of an impending banking crisis and a slowing economy pose new threats in 2023. While sentiment moderately stabilized into quarter end, continued uncertainty and increased risks of recession will likely keep market participants on edge for the foreseeable future. Against this backdrop, we continue to believe the Federal Reserve will be a key driver of market volatility going forward. Specifically, now that the Fed’s initial batch rate increases are in the rearview mirror, the ongoing debate and positioning around any future Fed activity (or lack thereof) is likely to create continued bouts of volatility in both the equity and fixed income markets due to the implications on the strength of the U.S. economy, inflation expectations, and the resulting impact on corporate profitability. Another key item to watch over the coming months will be the extent to which recent events cause banks to reduce lending. This in turn may weigh on consumer demand and business investment and therefore accelerate any slowdown in the economy. As such, we will be paying close attention to management commentary and financial disclosures throughout this upcoming earnings season, which may unearth or dispel many of these ongoing concerns. Either way, it’s not a stretch to assume that there’s likely to be more volatility in the coming months, making this a good time to remember the benefits of portfolio diversification, remaining disciplined, and staying focused on companies with higher-quality characteristics such as stable earnings, clean balance sheets, and reasonable valuations.

From an asset class perspective, valuations of SMID versus large cap remain near multi-decade lows, which we believe suggests a more favorable setup for SMID caps relative to large caps in the periods to come (12.9x P/E for the Russell 2500 Index vs. 19.2x P/E for the Russell 1000 Index). SMID caps, as represented by the Russell 2500, also remain historically attractive on an absolute basis and are trading near their lowest levels in over 30 years, slightly above the lows during the GFC and below the COVID-19 recession and 2001 recession lows. Additional benefits from re-shoring efforts, investments in automation amid wage inflation/tight labor markets, and spending to reduce emissions also favor small & mid caps which are beneficiaries of U.S. capex cycles. High and falling inflationary environments have also been favorable market environments for the asset class historically, a scenario we may find ourselves in this year. So, while the near-term outlook remains uncertain, along with the length and severity of any upcoming downturn, decades of investing have taught us that these can be the most rewarding times to be invested in SMID cap companies for the long-term. When the dust settles, we are reminded that small & mid cap companies typically start moving up before many of us know for sure that the economy has begun to reaccelerate, and that missing these early stages of a market recovery can be costly*.

Positioning

As always, our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Overweights in Industrials and Information Technology are mostly a function of recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles of many retail businesses and a potential deceleration in goods spending following a period of strength fueled in part by government backed stimulus payments. We also continue to be underweight in Real Estate as a result of structural challenges for various end markets within the sector. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

*As measured by the average return of the Russell 2500 Index the year following periods of GDP growth <0% since 1980.

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

Markets Review

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

Global equity markets rose in the first quarter of the year, as the MSCI ACWI Index increased 7.31% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index increased 3.01%. In terms of style, growth stocks outperformed their value counterparts during the quarter, with the MSCI ACWI Growth Index beating the MSCI ACWI Value Index by 12.54%.

The MSCI EAFE Index climbed by 8.47% during the first quarter, while the MSCI ACWI ex USA Index increased 6.87%. Within the MSCI EAFE Index, Europe & Middle East and the U.K. were the strongest-performing regions, while Asia gained the least. On a sector basis, ten out of the eleven sectors within the MSCI EAFE Index posted positive returns, with Information Technology, Consumer Discretionary and Industrials generating the largest gains. Conversely, Real Estate was the only sector to finish in the red, while Energy and Financials gained the least.

Despite continued geopolitical tensions, persistent inflation and new concerns in the banking industry, the global economy proved to be resilient. This was seen by strong labor markets, robust household consumption and business investment in addition to effective management of Europe’s energy crisis. Additionally, China continued its relaxation of strict COVID rules by fully reopening its borders to travelers with all types of visas. As a result, the IMF increased its growth forecasts and now projects global growth of 3.4%, 2.9% and 3.1% in 2022, 2023 and 2024, respectively.

Inflation remained elevated in many regions, with the U.K. and eurozone reporting a 10.4% and 8.5% rate, respectively. Meanwhile, in Asia, Japan’s core consumer inflation hit a 41-year high of 4.2%. However, the pace of price increases moderated for other countries. This was the case for China and South Korea, where inflation rates declined to their lowest levels in 12 and 10 months, repectively. On a forward-looking basis, the IMF estimates global inflation will fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. The organization believes restrictive monetary policy and cooling commodity prices due to weaker demand will contribute to the pattern of disinflation.

During the quarter, the failure of U.S.-based, mid-sized institutions Silicon Valley Bank (SVB) and Signature Bank reverberated into the international market, adding a layer of complexity to restrictive central bank policies. After SVB’s closure due to a run on deposits, Credit Suisse also experienced withdrawals, further exacerbated by a subsequent plunging share price that led Swiss regulators to orchestrate a takeover by UBS. As a result of the turmoil in the banking sector, central banks in the U.S. and Europe have commented that credit conditions may have tightened more than some economic indicators currently suggest.

Lastly, on the geopolitical front, the war in Ukraine rages on in the eastern side of the country while southern lines have largely stabilized. Though China continues to align itself with Russia, China’s Ministry of Foreign Affairs released a paper calling for all parties to support dialogue to “gradually deescalate the situation.” Meanwhile, Western nations continue to support Ukraine, with commitments from the U.S., Germany and Britain to supply armored vehicles.

Performance and Attribution Summary

For the first quarter of 2023, Aristotle Capital’s International Equity Composite posted a total return of 7.10% gross of fees (6.98% net of fees), underperforming the MSCI EAFE Index, which returned 8.47%, and outperforming the MSCI ACWI ex USA Index, which returned 6.87%. Please refer to the table below for detailed performance

Source: FactSet

Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income.

From a sector perspective in the first quarter, the portfolio’s underperformance relative to the MSCI EAFE Index can be attributed to security selection, while allocation effects had a positive impact. Security selection in Consumer Discretionary, Information Technology and Materials detracted the most from the portfolio’s relative performance. Conversely, overweights in Information Technology and Consumer Discretionary and a lack of exposure to Real Estate contributed to relative return.

Regionally, both security selection and allocation effects were responsible for the portfolio’s underperformance. Security selection in Europe and exposure to Canada detracted the most from relative performance, while an underweight and security selection in Asia contributed.

Contributors and Detractors for 1Q 2023

Relative Contributors	Relative Detractors
Nemetschek	Magna International
LVMH	Credicorp
Sony	DBS Group
Rentokil Initial	Koninklijke DSM
FANUC	AIA Group

Magna International, a Canada-based global auto parts, systems and assembly company, was a leading detractor during the quarter. The company continues to be impacted by the volatile production schedules of auto OEMs, primarily caused by semiconductor supply constraints. For some of Magna’s major customers, volumes are as low as 50%-60% of the contracted plan. This has created short-term inefficiencies in Magna’s ability to manage labor and its overall cost structure. However, we believe these headwinds are temporary in nature, as supply chains and car production levels will normalize over time. We instead remain focused on Magna’s 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, Magna signed an agreement in December 2022 to acquire Veoneer Active Safety for approximately $1.5 billion in cash. Veoneer’s advanced driver-assistance system (ADAS) technologies and Magna’s existing ADAS group, in our view, will benefit from enhanced scale and a larger product portfolio, ultimately allowing the company to reach a broader customer base.

AIA Group, a pan-Asian life insurance company headquartered in Hong Kong, was one of the largest detractors for the quarter. As a result of bank failures in both the U.S. and Europe, insurance companies were also scrutinized as potential vulnerabilities within the global financial system. However, given AIA’s strong capital position and ample liquidity, we believe the company is well positioned to withstand market volatility. In contrast to banks, life insurance companies like AIA have longer-duration liabilities than assets. This avoids liquidity pressure when interest rates rise and fixed-income portfolios are marked-to-market. We also see AIA’s investment exposure as limited due to its highly diversified corporate bond portfolio (with more than 1,900 issuers) and less than 5% of total invested assets in equities. As such, we remain focused on the company’s ability to benefit from its increasingly technology-enabled and productive agency salesforce. In fact, AIA’s VONB increased 6% in the second half of 2022, with growth across all of its largest markets. Moreover, we expect the company to further establish its direct presence in mainland China, a catalyst we previously identified, as it plans to reach another 10-12 affluent cities in the country by 2026.

LVMH Moët Hennessy Louis Vuitton, the luxury goods company, was a primary contributor for the quarter. China, one of the world’s largest luxury goods markets, has reopened following three years of various COVID lockdown policies and provided a boost for LVMH. While we are pleased to see the company (and industry) benefit from an improved macroeconomic environment, this is not, and was not, our focus when analyzing the fundamentals of LVMH’s business. Instead of attempting to time short-term factors out of the company’s control, we remain fixated on what LVMH can control. This includes the company’s progress on initiatives such as integrating the acquisitions of Tiffany & Co. and, most recently, the Pedemonte Group to bolster its Jewelry division; market share gains within the Fashion & Leather Goods segment; continued market leadership with the likes of Dior’s Sauvage being named the world leader in perfumes for 2022; and the expansion of the company’s store network and the development of production facilities. These improvements, we believe, more directly impact the company’s long-term fundamental outlook, regardless of the short-term macroeconomic landscape. Lastly, LVMH appointed Pharrell Williams as its new Men’s Creative Director, filling the role following the tragic passing of Virgil Abloh in 2021.

Rentokil Initial, the U.K.-based pest control and hygiene services company, was a leading contributor for the quarter. In late 2022, the company completed its previously announced $6.7 billion acquisition of Terminix to further solidify its position in the North American pest control market. We believed the acquisition, its largest ever, would provide operational synergies from scale efficiencies and in-market densification, as well as accelerate the consolidation of the U.S. pest control market. Initially, Rentokil estimated $150 million in cost synergies by 2025, and the company recently upgraded its target to at least $200 million. We are encouraged by the company’s integration progress and operations, which in turn have led to Rentokil’s highest operating margin in 20 years. We believe the fundamental improvements, combined with the resilient nature of the pest control business, will allow Rentokil to continue to unlock value in the years ahead.

Recent Portfolio Activity

During the quarter, we sold our position in Brookfield Asset Management.

We have been owners of Brookfield for well over a decade, having first invested in the fourth quarter of 2009. In December 2022, the company completed the spinoff of 25% of its asset management business, now known as Brookfield Asset Management (“Manager,” ticker: BAM). As part of the spinoff, the parent company, Brookfield Corporation (“Corporation,” ticker: BN), retained a 75% interest in the Manager. As such, we decided to sell our stake in the Manager and use the proceeds to top-up our investment in the Corporation. While we continue to find the Manager’s business attractive, we view Brookfield Corporation as a more optimal investment.

Conclusion

A core tenet of our investment philosophy is the commitment to understand businesses with a long-term perspective. For us, this is especially important during times of heightened uncertainty when macroeconomic events dominate headlines. We remain aware of short-term topics such as inflation, monetary policy and the recent shock to the banking system. However, we believe a competitive advantage of our investment process lies in the fact that, instead of reacting and repositioning our portfolio based on unknowns and unfolding events, our focus remains on business fundamentals. Fundamentals, we are convinced, are what dictate shareholder value in the long term. As such, we continue to attentively study what we believe are high-quality companies with sustainable competitive advantages poised to outperform their peers over full market cycles.

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

Markets Review

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

Global equity markets rose in the first quarter of the year, as the MSCI ACWI Index increased 7.31% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index increased 3.01%. In terms of style, growth stocks outperformed their value counterparts during the quarter, with the MSCI ACWI Growth Index beating the MSCI ACWI Value Index by 12.54%.

Regionally, Latin America and Europe were the strongest performers during the quarter. On the other hand, Asia/Pacific ex-Japan and Emerging Markets were the weakest performers. On a sector basis, seven out of the eleven sectors within the MSCI ACWI Index posted gains, with Information Technology, Communication Services and Consumer Discretionary being the best performers. The worst performers were Energy, Health Care and Utilities.

Despite continued geopolitical tensions, persistent inflation and new concerns in the banking industry, the global economy proved to be resilient. This was seen by strong labor markets, robust household consumption and business investment in addition to effective management of Europe’s energy crisis. Additionally, China continued its relaxation of strict COVID rules by fully reopening its borders to travelers with all types of visas. As a result, the IMF increased its growth forecasts and now projects global growth of 3.4%, 2.9% and 3.1% in 2022, 2023 and 2024, respectively.

Inflation remained elevated in many regions, with the U.K, eurozone and U.S. reporting a 10.4%, 8.5% and 6.0% rate, respectively. Meanwhile, in Asia, Japan’s core consumer inflation hit a 41-year high of 4.2%. However, the pace of price increases moderated for other countries. This was the case for China and South Korea, where inflation rates declined to their lowest levels in 12 and 10 months, repectively. On a forward-looking basis, the IMF estimates global inflation will fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. The organization believes restrictive monetary policy and cooling commodity prices due to weaker demand will contribute to the pattern of disinflation.

During the quarter, the failure of U.S.-based, mid-sized institutions Silicon Valley Bank (SVB) and Signature Bank reverberated into the international market, adding a layer of complexity to restrictive central bank policies. After SVB’s closure due to a run on deposits, Credit Suisse also experienced withdrawals, further exacerbated by a subsequent plunging share price that led Swiss regulators to orchestrate a takeover by UBS. As a result of the turmoil in the banking sector, central banks in the U.S. and Europe have commented that credit conditions may have tightened more than some economic indicators currently suggest.

Lastly, on the geopolitical front, the war in Ukraine rages on in the eastern side of the country while southern lines have largely stabilized. Though China continues to align itself with Russia, China’s Ministry of Foreign Affairs released a paper calling for all parties to support dialogue to “gradually deescalate the situation.” Meanwhile, Western nations continue to support Ukraine, with commitments from the U.S., Germany and Britain to supply armored vehicles.

Performance and Attribution Summary

For the first quarter of 2023, Aristotle Capital’s Global Equity Composite posted a total return of 6.11% gross of fees (6.03% net of fees), underperforming the MSCI World Index, which returned 7.73%, and the MSCI ACWI Index, which returned 7.31%. Please refer to the table below for detailed performance.

Source: FactSet

Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income.

From a sector perspective, the portfolio’s underperformance relative to the MSCI World Index can be attributed to security selection, while allocation effects had a slightly positive impact. Security selection in Materials, Information Technology and Consumer Discretionary detracted the most from the portfolio’s relative performance. Conversely, security selection in Financials and Energy and an overweight in Consumer Discretionary contributed to relative return.

Regionally, both allocation effects and security selection were responsible for the portfolio’s underperformance relative to the MSCI World Index. Security selection in North America and Asia/Pacific ex-Japan detracted the most from relative performance, while an overweight in Europe and security selection in Japan contributed.

Contributors and Detractors for 1Q 2023

Relative Contributors	Relative Detractors
Nemetschek	RPM International
Microchip Technology	Amgen
LVMH	Danaher
Lennar	Honeywell
Sony	General Dynamics

RPM International, the coatings, sealants and building materials manufacturer, was one of the biggest detractors for the quarter. The combination of higher interest rates (which have negatively impacted construction activity and existing home sales), temporarily moderating customer purchases and cost inflation has weighed on the company and the overall coatings industry. Despite the challenging short-term macroeconomic landscape, RPM continues to demonstrate fundamental improvement. In response to inflation, the company has successfully increased pricing while simultaneously launching and executing on its latest Margin Achievement Plan (MAP 2025), which aims to make operational improvements by optimizing RPM’s manufacturing footprint, expanding categories of centralized procurement and executing on value-added selling. We believe the company’s ongoing focus on operational efficiency should allow it to continue to enhance its long-term FREE cash flow generation, which it can use to innovate new products and opportunistically deploy capital in the form of accretive acquisitions or returning value back to shareholders, as demonstrated by RPM’s ability to increase its dividend for 49 consecutive years.

Honeywell, the U.S.-based multinational industrial conglomerate, was one of the largest detractors during the quarter. Shares declined as management highlighted temporary issues affecting margins and the ability to meet demand in some of the company’s segments. These issues included component shortages in its Aerospace division, as well as severe cold weather that impacted production of its performance chemicals business. Despite the short-term setbacks, Honeywell continues to benefit from strong demand for its products across its various business segments. This is evidenced by the company’s record backlog, which grew to $29.6 billion in the fourth quarter—up 7% year-over-year. Additionally, during the quarter, CEO Darius Adamczyk announced he will step down in June of 2023 and hand the reins to current COO Vimal Kapur. Mr. Adamczyk built upon the work of his predecessor, famed former CEO David Cote, in the transformation of the business from what was once an over-leveraged, old-line industrial company to one poised for the digital age. We are impressed by Mr. Kapur’s 34-year tenure at Honeywell in increasingly important positions, including his leadership of Performance Materials and Technologies and Honeywell Building Technologies divisions. As such, we look forward to Mr. Kapur’s efforts to further advance Honeywell’s ability to leverage software across its massive industrial installed base and increase energy efficiency, productivity and connectivity (aka Industrial Internet of Things) for the company’s wide array of customers.

LVMH Moët Hennessy Louis Vuitton, the luxury goods company, was a primary contributor for the quarter. China, one of the world’s largest luxury goods markets, has reopened following three years of various COVID lockdown policies and provided a boost for LVMH. While we are pleased to see the company (and industry) benefit from an improved macroeconomic environment, this is not, and was not, our focus when analyzing the fundamentals of LVMH’s business. Instead of attempting to time short-term factors out of the company’s control, we remain fixated on what LVMH can control. This includes the company’s progress on initiatives such as integrating the acquisitions of Tiffany & Co. and, most recently, the Pedemonte Group to bolster its Jewelry division; market share gains within the Fashion & Leather Goods segment; continued market leadership with the likes of Dior’s Sauvage being named the world leader in perfumes for 2022; and the expansion of the company’s store network and the development of production facilities. These improvements, we believe, more directly impact the company’s long-term fundamental outlook, regardless of the short-term macroeconomic landscape. Lastly, LVMH appointed Pharrell Williams as its new Men’s Creative Director, filling the role following the tragic passing of Virgil Abloh in 2021.

Lennar, one of the nation’s largest homebuilders, was a primary contributor for the quarter. Following a housing surge supported by low mortgage rates and government stimulus, U.S. home sales activity began to decline in 2022 as rapidly rising mortgage rates reduced affordability. Over our decade-plus investment in Lennar, we have admired the management team’s ability to quickly respond to changing housing dynamics. Recent times were no exception, as Lennar adopted a dynamic pricing model that, in combination with its digital-marketing platform, helped to protect its backlog and prevent cancellations. As a result, fiscal first-quarter orders declined 10% year-over-year compared to a 38% decline for the homebuilder industry. The company has also made progress on its transition to a lighter asset strategy, a catalyst we previously identified, now controlling 68% of its land through options (up from 39% in 2020). Less capital tied up in land and the ability to acquire parcels on a just-in-time basis, in our opinion, should support enhanced FREE cash flow generation. As such, we believe Lennar’s strong balance sheet, prudent inventory management, and further ability to implement cost and production efficiencies position it well to both overcome near-term housing market softness and benefit from the decade-long undersupply of homes in the U.S.

Recent Portfolio Activity

During the quarter, we sold our position in Brookfield Asset Management.

The strategy has been invested in Brookfield since the first quarter of 2022. In December 2022, the company completed the spinoff of 25% of its asset management business, now known as Brookfield Asset Management (“Manager,” ticker: BAM). As part of the spinoff, the parent company, Brookfield Corporation (“Corporation,” ticker: BN), retained a 75% interest in the Manager. As such, we decided to sell our stake in the Manager and use the proceeds to top-up our investment in the Corporation. While we continue to find the Manager’s business attractive, we view Brookfield Corporation as a more optimal investment.

Conclusion

A core tenet of our investment philosophy is the commitment to understand businesses with a long-term perspective. For us, this is especially important during times of heightened uncertainty when macroeconomic events dominate headlines. We remain aware of short-term topics such as inflation, monetary policy and the recent shock to the banking system. However, we believe a competitive advantage of our investment process lies in the fact that, instead of reacting and repositioning our portfolio based on unknowns and unfolding events, our focus remains on business fundamentals. Fundamentals, we are convinced, are what dictate shareholder value in the long term. As such, we continue to attentively study what we believe are high-quality companies with sustainable competitive advantages poised to outperform their peers over full market cycles.

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

Markets Review

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

Global equity markets rose in the first quarter of the year, as the MSCI ACWI Index increased 7.31% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index increased 3.01%. In terms of style, growth stocks outperformed their value counterparts during the quarter, with the MSCI ACWI Growth Index beating the MSCI ACWI Value Index by 12.54%.

The MSCI EAFE Index climbed by 8.47% during the first quarter, while the MSCI ACWI ex USA Index increased 6.87%. Within the MSCI EAFE Index, Europe & Middle East and the U.K. were the strongest-performing regions, while Asia gained the least. On a sector basis, ten out of the eleven sectors within the MSCI EAFE Index posted positive returns, with Information Technology, Consumer Discretionary and Industrials generating the largest gains. Conversely, Real Estate was the only sector to finish in the red, while Energy and Financials gained the least.

Despite continued geopolitical tensions, persistent inflation and new concerns in the banking industry, the global economy proved to be resilient. This was seen by strong labor markets, robust household consumption and business investment in addition to effective management of Europe’s energy crisis. Additionally, China continued its relaxation of strict COVID rules by fully reopening its borders to travelers with all types of visas. As a result, the IMF increased its growth forecasts and now projects global growth of 3.4%, 2.9% and 3.1% in 2022, 2023 and 2024, respectively.

Inflation remained elevated in many regions, with the U.K. and eurozone reporting a 10.4% and 8.5% rate, respectively. Meanwhile, in Asia, Japan’s core consumer inflation hit a 41-year high of 4.2%. However, the pace of price increases moderated for other countries. This was the case for China and South Korea, where inflation rates declined to their lowest levels in 12 and 10 months, repectively. On a forward-looking basis, the IMF estimates global inflation will fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. The organization believes restrictive monetary policy and cooling commodity prices due to weaker demand will contribute to the pattern of disinflation.

During the quarter, the failure of U.S.-based, mid-sized institutions Silicon Valley Bank (SVB) and Signature Bank reverberated into the international market, adding a layer of complexity to restrictive central bank policies. After SVB’s closure due to a run on deposits, Credit Suisse also experienced withdrawals, further exacerbated by a subsequent plunging share price that led Swiss regulators to orchestrate a takeover by UBS. As a result of the turmoil in the banking sector, central banks in the U.S. and Europe have commented that credit conditions may have tightened more than some economic indicators currently suggest.

Lastly, on the geopolitical front, the war in Ukraine rages on in the eastern side of the country while southern lines have largely stabilized. Though China continues to align itself with Russia, China’s Ministry of Foreign Affairs released a paper calling for all parties to support dialogue to “gradually deescalate the situation.” Meanwhile, Western nations continue to support Ukraine, with commitments from the U.S., Germany and Britain to supply armored vehicles.

Performance and Attribution Summary

For the first quarter of 2023, Aristotle Capital’s International Equity ADR Composite posted a total return of 6.59% gross of fees (6.43% net of fees), underperforming the MSCI EAFE Index, which returned 8.47%, and underperforming the MSCI ACWI ex USA Index, which returned 6.87%. Please refer to the table below for detailed performance.

Source: FactSet

Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income.

From a sector perspective in the first quarter, the portfolio’s underperformance relative to the MSCI EAFE Index can be attributed to security selection, while allocation effects had a positive impact. Security selection in Consumer Discretionary, Information Technology and Financials detracted the most from the portfolio’s relative performance. Conversely, an overweight in Consumer Discretionary, a lack of exposure to Real Estate and security selection in Energy contributed to relative return.

Regionally, both security selection and allocation effects were responsible for the portfolio’s underperformance. Security selection in Europe and exposure to Emerging Markets detracted the most from relative performance, while an underweight and security selection in Asia contributed.

Contributors and Detractors for 1Q 2023

Relative Contributors	Relative Detractors
LVMH	AIA Group
Sony	TotalEnergies
Safran	Otsuka Holdings
Rentokil Initial	ING Groep
Dassault Systèmes	Magna International

AIA Group, a pan-Asian life insurance company headquartered in Hong Kong, was the largest detractor for the quarter. As a result of bank failures in both the U.S. and Europe, insurance companies were also scrutinized as potential vulnerabilities within the global financial system. However, given AIA’s strong capital position and ample liquidity, we believe the company is well positioned to withstand market volatility. In contrast to banks, life insurance companies like AIA have longer-duration liabilities than assets. This avoids liquidity pressure when interest rates rise and fixed-income portfolios are marked-to-market. We also see AIA’s investment exposure as limited due to its highly diversified corporate bond portfolio (with more than 1,900 issuers) and less than 5% of total invested assets in equities. As such, we remain focused on the company’s ability to benefit from its increasingly technology-enabled and productive agency salesforce. In fact, AIA’s VONB¹ increased 6% in the second half of 2022, with growth across all of its largest markets. Moreover, we expect the company to further establish its direct presence in mainland China, a catalyst we previously identified, as it plans to reach another 10-12 affluent cities in the country by 2026.

¹Value of New Business (VONB) is an insurance term for the present value of new business written during a period.

Magna International, a Canada-based global auto parts, systems and assembly company, was a leading detractor during the quarter. The company continues to be impacted by the volatile production schedules of auto OEMs, primarily caused by semiconductor supply constraints. For some of Magna’s major customers, volumes are as low as 50%-60% of the contracted plan. This has created short-term inefficiencies in Magna’s ability to manage labor and its overall cost structure. However, we believe these headwinds are temporary in nature, as supply chains and car production levels will normalize over time. We instead remain focused on Magna’s 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, Magna signed an agreement in December 2022 to acquire Veoneer Active Safety for approximately $1.5 billion in cash. Veoneer’s advanced driver-assistance system (ADAS) technologies and Magna’s existing ADAS group, in our view, will benefit from enhanced scale and a larger product portfolio, ultimately allowing the company to reach a broader customer base.

LVMH Moët Hennessy Louis Vuitton, the luxury goods company, was the primary contributor for the quarter. China, one of the world’s largest luxury goods markets, has reopened following three years of various COVID lockdown policies and provided a boost for LVMH. While we are pleased to see the company (and industry) benefit from an improved macroeconomic environment, this is not, and was not, our focus when analyzing the fundamentals of LVMH’s business. Instead of attempting to time short-term factors out of the company’s control, we remain fixated on what LVMH can control. This includes the company’s progress on initiatives such as integrating the acquisitions of Tiffany & Co. and, most recently, the Pedemonte Group to bolster its Jewelry division; market share gains within the Fashion & Leather Goods segment; continued market leadership with the likes of Dior’s Sauvage being named the world leader in perfumes for 2022; and the expansion of the company’s store network and the development of production facilities. These improvements, we believe, more directly impact the company’s long-term fundamental outlook, regardless of the short-term macroeconomic landscape. Lastly, LVMH appointed Pharrell Williams as its new Men’s Creative Director, filling the role following the tragic passing of Virgil Abloh in 2021.

Rentokil Initial, the U.K.-based pest control and hygiene services company, was a leading contributor for the quarter. In late 2022, the company completed its previously announced $6.7 billion acquisition of Terminix to further solidify its position in the North American pest control market. We believed the acquisition, its largest ever, would provide operational synergies from scale efficiencies and in-market densification, as well as accelerate the consolidation of the U.S. pest control market. Initially, Rentokil estimated $150 million in cost synergies by 2025, and the company recently upgraded its target to at least $200 million. We are encouraged by the company’s integration progress and operations, which in turn have led to Rentokil’s highest operating margin in 20 years. We believe the fundamental improvements, combined with the resilient nature of the pest control business, will allow Rentokil to continue to unlock value in the years ahead.

Recent Portfolio Activity

During the quarter, we sold our position in Brookfield Asset Management.

We have been owners of Brookfield since the strategy’s inception. In December 2022, the company completed the spinoff of 25% of its asset management business, now known as Brookfield Asset Management (“Manager,” ticker: BAM). As part of the spinoff, the parent company, Brookfield Corporation (“Corporation,” ticker: BN), retained a 75% interest in the Manager. As such, we decided to sell our stake in the Manager and use the proceeds to top-up our investment in the Corporation. While we continue to find the Manager’s business attractive, we view Brookfield Corporation as a more optimal investment.

Conclusion

A core tenet of our investment philosophy is the commitment to understand businesses with a long-term perspective. For us, this is especially important during times of heightened uncertainty when macroeconomic events dominate headlines. We remain aware of short-term topics such as inflation, monetary policy and the recent shock to the banking system. However, we believe a competitive advantage of our investment process lies in the fact that, instead of reacting and repositioning our portfolio based on unknowns and unfolding events, our focus remains on business fundamentals. Fundamentals, we are convinced, are what dictate shareholder value in the long term. As such, we continue to attentively study what we believe are high-quality companies with sustainable competitive advantages poised to outperform their peers over full market cycles.

As we reflect on the year that just ended, we realize that we have much to celebrate and are excited to share our initiatives and the progress we have made to support our clients, people and communities. 2022 was a year of expansion, as we have continued to invest in our people, with 30 members joining us across our departments, affiliates and locations. As we bring on board new members, we are committed to inspiring them by sharing our purpose and reinforcing our corporate values, which include maintaining a culture of transparency and integrity with our clients’ interests at the top of our minds.

In this letter, we highlight updates on our growing Aristotle family; department enhancements; Diversity, Equity and Inclusion Council initiatives; our new podcast; and more.

Growing Aristotle Family and Expanding Capabilities

We are delighted to share the news that Aristotle Capital Management, LLC (Aristotle Capital) is acquiring Pacific Asset Management, LLC (PAM), Pacific Life’s credit asset management firm, whose clients include Pacific Funds and which is based in Newport Beach, California. We believe this is an extraordinary opportunity to join forces with a group of people who share our firm’s values and purpose.

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