FOR FINANCIAL ADVISOR USE ONLY – NOT FOR PUBLIC DISTRIBUTION

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

Markets Review

Global equity markets rebounded in the fourth quarter. Overall, the MSCI ACWI Index rose 9.76% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index increased 4.55%. In terms of style, value stocks outperformed their growth counterparts during the quarter, with the MSCI ACWI Value Index beating the MSCI ACWI Growth Index by 8.93%.

Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle International Equity ADR Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

The MSCI EAFE Index climbed by 17.34% during the fourth quarter, while the MSCI ACWI ex USA Index increased 14.28%. Within the MSCI EAFE Index, Europe & Middle East and the U.K. were the strongest performers, while Asia, though posting a positive double-digit return, performed the worst. On a sector basis, all eleven sectors within the MSCI EAFE Index posted positive returns, with Financials, Materials and Energy generating the largest gains. Conversely, Communication Services, Consumer Staples and Real Estate gained the least.

As 2022 came to a close, the global economy continued to navigate various headwinds, such as persistent inflation, central bank policy actions, geopolitical uncertainty, the continued war in Ukraine and ongoing impacts from the pandemic. As a result, the IMF projects global growth to slow from 6.0% in 2021 to 3.2% and 2.7% in 2022 and 2023, respectively. Meanwhile, the IMF expects global inflation to rise to 8.8% in 2022 and then fall to 6.5% in 2023 and 4.1% in 2024 as both restrictive monetary policy and further resolution of supply-chain issues take effect. On the currency front, the U.S. Dollar Index (DXY) reversed, falling 7.87% after five consecutive quarters of appreciation.

Despite tighter monetary policy in most regions, global inflation remained at multidecade highs. This provided reason for many central banks to maintain a hawkish stance, including the U.S. Federal Reserve, which made two additional rate hikes during the quarter, raising its benchmark rate to a range of 4.25% to 4.50%. Likewise, the European Central Bank raised its benchmark lending rate to 2.50%, and the Bank of England increased its benchmark rate to 3.50%—the highest level in 14 years. However, all three of these central banks slowed the pace of rate increases in their latest hike in order to assess progress made against inflation given the corresponding lag in economic effects. Additionally, the Bank of Japan announced a surprising hawkish shift to its yield curve control policy, allowing the 10-year bond yield to move 0.50%, instead of the previously set 0.25%, on either side of its 0.00% target. While this decision from the world’s largest creditor signals the beginning of tightening financial conditions in Japan, the central bank’s yield target remains unchanged, and officials have indicated increased bond buying in the future. Meanwhile, the People’s Bank of China cut the reserve requirement ratio for banks by 25 basis points, adding around $70 billion of liquidity into the Chinese economy. The accomodative approach in China comes on the heels of reported record high COVID cases, as the country finally began easing its zero-COVID policy by shortening quarantine periods, relaxing contact tracing and lifting travel requirements. In Europe, U.K. instability continued as Prime Minister Truss’s controversial proposal for unfunded tax cuts—a stimulative approach to fiscal policy during a time of rampant inflation—sparked significant sell-offs in both gilts and sterling, which heightened market volatility. This led to Prime Minister Truss’s resignation after just 44 days in office, making her the shortest-serving prime minister in British history. She was replaced by Prime Minister Rishi Sunak, who has pledged to reverse many of Truss’s plans that caused turmoil in the U.K.

Lastly, on the geopolitical front, Russia withdrew its forces from Kherson, a significant strategic region forming a land bridge from Russia to Crimea. In addition to the success of Ukranian troops, the G7 formally set a price cap on Russian oil at $60 per barrel. This measure is expected to limit Russia’s ability to continue to finance its war in Ukraine.

Annual Markets Review

Global equity markets faltered in 2022, as the MSCI ACWI finished lower for the first three quarters of the year, leading to a
full-year return of -18.36%. Additionally, the MSCI ACWI Value Index outperformed the MSCI ACWI Growth Index for the year by 21.06%, value’s second consecutive year of outperformance and the largest since 2000.

Meanwhile, despite fixed income’s tendency to provide stability when equities are turbulent, the Bloomberg Global Aggregate Bond Index fell 16.25%, as inflation and the corresponding interest rate environment remained primary themes. In addition, supply-chain disruptions, soaring commodity prices and COVID restrictions—particularly in China—persisted, while new factors such as geopolitical conflict came to the forefront of market attention. On the currency front, the U.S.dollar strengthened against global currencies during the year, rising approximately 7.87%, as measured by the DXY. This caused the euro to break parity with the dollar in July, the British pound to touch its lowest point in over 200 years against the dollar and the Japanese yen to hit a low not seen since 1990.

Although it was a challenging year for investors, these volatile periods are precisely why we emphasize the phrase, “not every quarter, not every year.” Short-term returns are always subject to change, and macroeconomic factors are impossible to predict. As such, we remain focused on the long-term fundamentals of businesses, and we strive to identify undervalued, high-quality companies that can weather the complex and changing market dynamics. We believe this steadfast approach will allow us to provide lasting long-term value to our clients.

Performance and Attribution Summary

For the fourth quarter of 2022, Aristotle Capital’s International Equity ADR Composite posted a total return of 14.27% gross of fees (14.16% net of fees), underperforming the MSCI EAFE Index, which returned 17.34%, and the MSCI ACWI ex USA Index, which returned 14.28%. Please refer to the table below for detailed performance.

From a sector perspective in the fourth quarter, the portfolio’s underperformance relative to the MSCI EAFE Index can be attributed to security selection, while allocation effects had a slightly positive impact. Security selection in Industrials, Information Technology and Financials detracted the most from the portfolio’s relative performance. Conversely, security selection in Consumer Staples, an overweight in Financials 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. Exposure to Canada and security selection in Asia detracted the most from relative performance, while security selection in the U.K. and an underweight in Asia contributed.

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.

Contributors and Detractors for 4Q 2022

Contributors	Detractors
ING Groep	Cameco
TotalEnergies	Brookfield
Munich Reinsurance	Accenture
Safran	Nidec
Estre Group Bank	Dassault Systèmes

Cameco, the world’s largest publicly traded uranium producer, was the largest detractor for the quarter. The company announced a strategic partnership with Brookfield Renewable to acquire Westinghouse Electric Company, one of the world’s largest nuclear services businesses, for a total enterprise value of $7.87 billion. Cameco’s 49% interest in Westinghouse will be funded with cash, equity issuance and debt. While the announcement and resulting equity issuance came as a surprise, our initial impression is positive. Industry consolidation and management’s prior prudence (i.e., net cash balance sheet and shutting production in tough times), we believe, uniquely positioned Cameco to pursue this strategic transaction. We recognize the deal increases Cameco’s financial leverage; however, we believe Westinghouse’s market-leading downstream capabilities will align well with Cameco’s production and fuel services to offer a highly competitive nuclear fuel solution. In addition to the acquisition, the company announced the production of the first packaged pounds of uranium since restarting McArthur River mine and Key Lake mill. Moreover, Cameco signed a uranium supply agreement with China Nuclear International Corporation, a subsidiary of one of the country’s largest nuclear power operators, China National Nuclear Corporation. We believe these events highlight Cameco’s continued market leadership and opportunistic mindset in a fast-changing energy landscape.

Brookfield, one of the world’s largest and most diversified private market investors, was one of the biggest detractors. In December, the company completed the previously announced spinoff of 25% of its asset management business. The asset management business is now known as Brookfield Asset Management (“Manager,” ticker: BAM), and the parent company is now known as Brookfield Corporation (“Corporation,” ticker: BN). Shareholders received one share of the Manager for every four shares owned of the Corporation, and the Corporation retained a 75% interest in the Manager. While the transaction has limited economic impact, the spinoff creates additional transparency, as well as a listed entity for shareholders to invest in the pure-play asset management business. We continue to hold our investment in both the Corporation and Manager.

Munich Reinsurance, the world’s largest reinsurance company, was a leading contributor for the quarter. Despite the negative impacts of Hurricane Ian—the deadliest hurricane to strike the state of Florida since 1935—and volatility in capital markets, Munich Re continued to experience strong fundamental developments to its overall business. Specifically, the company saw significant improvements in profitability in business units such as Life and Health Reinsurance and strong premium growth across all of its business units as it continues to win market share, leverage its global scale and demonstrate underwriting discipline. The company also announced the formation of its new Global Specialty Insurance (GSI) division, which will be comprised of various primary insurance businesses that are currently classified within the reinsurance segment. Management believes this restructuring will allow them to efficiently support the various business lines while driving further expansion in the specialty primary insurance space. Additionally, Munich Re remains committed to investing in technology that improves efficiency across its value chain, exemplified by its acquisition of apinity GmbH, an application programming interface (API) solutions provider. In the long run, we believe the company is well positioned to continue to win market share and improve profitability.

Safran, the French aerospace propulsion and equipment manufacturer, was a top contributor. As the leading supplier of narrow-body aircraft engines (approximately 70% market share), Safran has benefited as flight activities have increased and the aging fleet of aircraft has spurred demand for needed service. Part of our attraction to Safran is the nature of its product categories, which tend to exhibit both pricing power and a lengthy after-market business—the growth of which we identified as a catalyst. As such, during the quarter, the company made additional progress by signing a number of long-term service agreements, including a contract to support U.S. Army helicopters, as well as landing gear for Philippine Airlines. In addition, deliveries of the company’s latest-generation LEAP engines increased 54% from the second to third quarter of the year. Longer term, we believe Safran will benefit from the continued transition to LEAP engines as airlines upgrade their fleets to be more efficient and environmentally friendly.

¹As measured by assets as of June 30,2022.

Recent Portfolio Activity

During the quarter, we sold our positions in Carnival and Marui Group and made no new purchases.

We first invested in Carnival, the world’s largest cruise line, during the second quarter of 2019. At the time, we believed the company was improving in quality, as the industry (and shipyards) had consolidated to a point where returns on capital could increase systematically over time. In addition, cruising is underpenetrated when compared to land-based alternatives. While, in our opinion, consumers’ appetite for cruising remains high—with cumulative advanced bookings at the upper end of historical ranges—the unprecedented operating environment during the pandemic required Carnival to add significant operating debt.

We first invested in Japan-based Marui Group in the first quarter of 2016. At the time, we viewed the company as a credit card company disguised as a retailer. Over the years, Marui executed on two key catalysts. On the retail front, the company transitioned from a consignment-based model to a rental revenue-based business model, which improved profitability. Meanwhile, Marui’s credit card business continued to expand and shifted the group’s business mix from. Retailing to the highermargin FinTech segment, which is now ~95% of operating income. The shift was recognized by investors and index providers, with Marui moving from the Consumer Discretionary sector to the Financials sector.

Conclusion

2022 proved a tumultuous year for most investors, with no shortage of macroeconomic and geopolitical events gripping the world’s attention and stirring volatility in markets. Global inflation reached multi-decade highs, central banks made drastic shifts in monetary policy, governments navigated instability and changes in leadership, and rising tensions between Eastern and Western nations came to a head with a ground war in Europe. This year serves as a staunch reminder that there is “always something” to consider in financial markets and economics. However, for us at Aristotle Capital, it is important to assess whether events are truly analyzable. In our opinion, macroeconomic factors and the market’s corresponding reactions are impossible to predict consistently. We will therefore, as we always have, stay focused on what we do best—the continuous study and better understanding of individual businesses. We remain convinced this “bottom up” approach will allow us to best serve our clients, as fundamentals, not headline news, reflect long-term value.

FOR FINANCIAL ADVISOR USE ONLY – NOT FOR PUBLIC DISTRIBUTION

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

Markets Review

Global equity markets finished lower for the third consecutive quarter. Overall, the MSCI ACWI Index dropped 6.82% during the period, bringing its year-to-date return to -25.63%. Concurrently, the Bloomberg Global Aggregate Bond Index pulled back 6.94%, bringing its year-to-date return to -19.89%. 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 1.73%. Nevertheless, for the year-to-date period, the MSCI ACWI Value Index has outperformed the MSCI ACWI Growth Index by 13.14%.

Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle International Equity ADR Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

The MSCI EAFE Index dropped 9.36% during the third quarter, while the MSCI ACWI ex USA Index decreased 9.91%. Regionally, the U.K. and Europe & Middle East were the weakest performers, while Asia declined the least. On a sector basis, all eleven sectors within the MSCI EAFE Index posted negative returns, with Communication Services, Utilities and Real Estate generating the largest losses. Conversely, Energy, Consumer Staples and Information Technology declined the least.

As energy prices inflicted pain across much of the world, and the tensions between East and West became more pronounced, the outlook for global economic activity and inflation continued to worsen. The IMF now projects global growth to slow from 6.1% in 2021 to 3.2% in 2022 versus the 3.6% projection last quarter. The IMF also raised its 2022 inflation estimates to 6.6% for advanced economies and 9.5% for developing economies.

In response to elevated inflation, many central banks tightened monetary policy during the quarter. With two 0.75% increases, the U.S. Federal Reserve raised its benchmark rate to a range of 3.00% to 3.25%. The European Central Bank also raised its benchmark lending rate from 0.00% to 1.25%—its first hike in eleven years—while the Bank of England, with two 0.50% increases, raised its benchmark rate to 2.25%. Meanwhile, Japan continues to maintain its ultra-low interest rates, and China’s central bank cut key policy rates.

The divergence in monetary policies between the U.S. Federal Reserve and other central banks, plus concerns for slowing global growth, sent the U.S. Dollar Index (DXY) to a two-decade high. Currencies such as the Euro and Yen have lost approximately 14% and 20% in relative value, respectively, year-to-date. The rapid one-sided movement in the foreign exchange market caused the Bank of Japan to intervene and strengthen the Yen for the first time in 24 years.

The U.K. gathered the world’s attention this quarter, as Queen Elizabeth II—the second-longest reigning monarch in world history—passed away in September, leaving the throne to her son King Charles III. A new government was also installed after Boris Johnson resigned. He was replaced in a special election by current Prime Minister Liz Truss, a fellow member of the Conservative Party. However, Prime Minister Truss’s plan to help citizens afford energy through tax cuts and subsidies stood in contrast to the Bank of England’s efforts to curb inflation. The mixed messages resulted in a sharp sell-off in U.K. government bonds, forcing England’s central bank to reverse its stance toward quantitative tightening to prop up tumbling gilt prices.

Outside of the U.K., Russia’s ongoing invasion of Ukraine has not only caused tragic human suffering and loss of life, but is also threatening European countries’ ability to procure natural gas ahead of winter. Sanctions, pipeline issues and the surge in prices have revealed Europe’s acute need for new energy sources—independent of Russia. In addition, U.S. and Chinese relations became further strained in August following Nancy Pelosi’s visit to Taiwan, only to be compounded by President Biden’s statement that the U.S. military could be used to defend the island. These events have served to exacerbate already heightened global economic uncertainty.

Performance and Attribution Summary

For the third quarter of 2022, Aristotle Capital’s International Equity ADR Composite posted a total return of -7.12% gross of fees (-7.26% net of fees), outperforming the MSCI EAFE Index, which returned -9.36%, and the MSCI ACWI ex USA Index, which returned -9.91%. Please refer to the table below for detailed performance.

Source: FactSet

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

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

Regionally, both security selection and allocation effects were responsible for the portfolio’s outperformance. Exposure to Canada and security selection in the Developed Europe & Middle East contributed the most to relative performance, while an underweight in Asia and an overweight in the U.K. detracted.

Contributors and Detractors for 3Q 2022

Contributors	Detractors
Cameco	GSK
Pan Pacific International	Sony
Ashtead Group	AIA Group
DBS Group	Coca-Cola Europacific Partners
Munich Re Group	Alcon

Cameco, the world’s largest publicly traded uranium producer, was the top contributor for the quarter. In order to pivot away from a reliance on Russian energy without jeopardizing net-zero commitments, policymakers and businesses have (finally) turned their attention toward nuclear power generation. Germany extended the life of two nuclear power plants, and Japan announced it will look at extending the life of existing reactors, restart additional idle reactors and look at developing next-generation reactors. These shifts in energy policies have increased demand at a time of tight supply. Although such market dynamics will likely favor Cameco in the short term, we believe the company’s continued focus on supply discipline will help ensure long-term success as well. By obtaining long-term contracts and slowly ramping production, we believe Cameco is well positioned in the changing energy landscape. The company has already recorded 45 million pounds in new long-term uranium contracts this year, with additional contract discussions underway. Furthermore, Cameco increased its ownership in Cigar Lake by 4.52%, bringing its ownership stake to 54.55%. This ownership expansion, combined with investment in operational readiness for McArthur River/Key Lake, should allow the company to continue to meet utility customers’ changing and growing long-term demand. This sets the stage for Cameco to execute on our catalyst of increasing its uranium volume sold at higher prices, all while lowering production costs through scale and its access to some of the highest-grade ore on the planet.

DBS Group, Singapore’s largest bank¹, was a leading contributor. We have long been attracted to the Singapore banking industry due to its oligopoly structure and the stability of the country’s regulatory environment, as well as its fiscal and monetary policies. Part of this stability is attributable to the central bank’s long-standing currency monitoring band, which has kept the Singapore dollar tightly linked to the U.S. dollar. In our opinion, outside of a robust first half 2022 earnings report, the quarter contained nothing material from a catalyst or fundamental perspective. As such, we believe this quarter’s stock price performance was likely due to U.S. dollar strength—something we do not attempt to predict. We continue to admire DBS’s leadership in digital banking, which we believe should allow the company to drive further efficiency gains. Moreover, we continue to monitor DBS’s pending acquisition of Citigroup’s consumer banking business in Taiwan; this acquisition should bolster our ongoing catalyst of profitable expansion outside of Singapore.

GSK, the U.K.-headquartered pharmaceutical company, was the largest detractor. GSK completed the demerger of its consumer health business in July, creating the independent, publicly traded company Haleon. As discussed below, we made Haleon a full position following the spinoff. We believe the separation unlocks value and allows remaining GSK to benefit from greater focus on biopharmaceuticals and vaccines. After managing the completed spinoff, CFO Iain Mackay announced his plans to retire in May 2023, to be replaced by Julie Brown. Having served in previous CFO posts at both the luxury goods brand Burberry, as well as the pharmaceutical firm AstraZeneca, we look forward to following Ms. Brown’s initiatives at GSK. Moreover, the company has been advancing on our catalyst of market share gains for Shingrix, its vaccine to prevent shingles. Shingrix again delivered record sales growth and continues to be a key driver of GSK’s vaccine revenue expansion. Lastly, legal concerns related to potential side effects from the heartburn medicine Zantac made headlines. Although Zantac was marketed by several firms and its associated risks have been known for a number of years, upcoming lawsuits in the U.S. received media attention this quarter. We are closely following the litigation and may have more to share in future commentaries. In the interim, we find the price adjustment to be overdone. The largest side effect-related drug settlements have been in the single-digit billions, while more than £20 billion in market capitalization has been removed from GSK. Despite recent share price declines, we remain confident in GSK’s ability to further penetrate markets with its current products and evolve its pipeline of innovative medicines.

Sony, the global provider of videogames and consoles, image sensors, and music, as well as movies, was a major detractor for the period. The share price of the company has struggled this year following its strong performance in 2021. Signs of a slowdown in the gaming industry (as people seem inclined to take on outdoor activities as pandemic fears have subsided), combined with sales of its PlayStation 5 that have been held up by a global parts shortage, have led to gaming-related software sales falling more than 20% year-over-year. Rather than focusing on short-term demand dislocations, we focus on the company’s ability to continue migrating videogame users toward the firm’s subscription offerings, as well as its capacity to leverage content across its video, music and gaming platforms. We are also impressed with the expansion of Sony’s Music segment, which has been supported by the pervasiveness of streaming services. Management’s ongoing work to improve the company’s TV and film studios is bearing fruit as well, with sales growing 67% year-over-year for its Pictures segment as its regional strategy has taken hold, including recent progress made toward solidifying a merger plan with India-based Zee Entertainment.

¹As measured by assets as of June 30,2022.

Recent Portfolio Activity

We have owned shares of Reckitt—the global manufacturer and marketer of household, health and personal care products—for over a decade, having become investors in the second quarter of 2011. The company’s well-known brands include Mucinex, Dr. Scholl’s, Woolite and Lysol. During our holding period, Reckitt executed on some, but not all, of our catalysts. In particular, the 2017 acquisition of Mead Johnson increased its emerging markets presence by expanding the company’s offerings in China; however, the acquisition came at too high of a cost in our opinion. The fresh perspective Laxman Narasimhan brought when he joined as CEO in 2019, which was reflected in his reorganization of the Health and Hygiene units and a shift toward higher-margin products, was another catalyst we identified. While we still view Reckitt as a high-quality business, with many of its catalysts now closer to completion, we decided to exit our position in favor of what we consider to be a more optimal opportunity in Haleon, which is discussed below.

Haleon plc

Haleon, headquartered in the U.K., is currently the only publicly traded, pure-play global consumer health company. The company has existed for decades in various forms and, through a history of M&A, is the product of three major pharmaceutical companies’ assets: GSK, Novartis and Pfizer. With roughly £9.5 billion in revenue, Haleon operates in over 170 markets, selling products in oral health (~28% of 2021 revenue), pain relief (~23%), digestive health (~21%), vitamin and mineral supplements (~16%), and respiratory health (~12%). Its recognizable brands include Sensodyne toothpaste, the pain relief product Advil, Theraflu for cold and flu symptoms, and Centrum multivitamins.

Haleon was spun off this summer by existing holding GSK. Impressed by this consumer health products business, we decided to increase our ownership to a full weight in the portfolio.

Quality

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

– Portfolio of well-known brands, supported by a history of innovation and doctors’ advocacy;

– Market leadership in different categories across the world’s fragmented consumer health industry, including number one positions in digestive health and vitamin and mineral supplements; and

– Global reach and diversification across geographies and categories, with a track record of improving EBITDA margins and stable FREE cash flow generation.

Attractive Valuation

Given our estimates of higher normalized earnings, both due to further product penetration and efficiency gains as a standalone enterprise, we believe the company is offered at an attractive price. In addition, we recognize the risks associated with the recent Zantac lawsuits and believe this is more than reflected in the current stock price.

Compelling Catalysts

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

– Enhanced profitability and increased revenue, as many of its products, including what the company refers to as its higher-margin “power brands,” are better supported for growth by the company’s ability to make its own capital allocation decisions;

– Benefits from being managed as an independent company that should spur improved business structures and innovation efforts; and

– Management’s plan for debt reduction should also allow for more optimal capital allocation and increased cash returns to shareholders.

Conclusion

Our investment process seeks to identify businesses that, in our opinion, possess a combination of qualities that are both sustainable and difficult to reproduce. While broad macroeconomic factors such as inflation, central bank policies, foreign exchange markets and various other data points are taken into consideration as part of our research, we spend the vast majority of our time analyzing individual companies. Rather than attempting to predict the path of stock prices in the short term, we focus our efforts on understanding businesses over the long term. We believe the long-term benefits of patience and extensive research far outweigh the potential risk of a missed opportunity; seldom are reactionary decisions optimal. While the current market environment seems to be dominated by macro news and geopolitical events, we remain steadfast in our belief that the fundamentals of a company, ultimately, determine its intrinsic worth. As such, we will continue to focus our efforts on studying the unique qualities and characteristics of the companies in which we are invested.

Disclosures

The opinions expressed herein are those of Aristotle Capital Management, LLC (Aristotle Capital) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to buy or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Capital makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle International Equity ADR strategy. Not every client’s account will have these characteristics. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Capital’s International Equity ADR Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.

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.

All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.

The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and date presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Capital does not guarantee the accuracy, adequacy or completeness of such information.

This presentation is to report on the investment strategies as reported by Aristotle Capital Management, LLC and is for illustrative purposes only. The information contained herein is obtained from multiple sources and believed to be reliable. Information has not been verified by Morgan Stanley Wealth Management, and may differ from documents created by Morgan Stanley Wealth Management. The financial advisor should refer to the Profile. This must be preceded or accompanied by the Morgan Stanley Wealth Management Profile, which you can obtain from the Morgan Stanley Wealth Management Performance Analytics. For additional information on other programs, please speak to Patrick Schussman at Aristotle Capital at (310) 954-8156.

Aristotle Capital Management, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Capital, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.

FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

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

Markets Review

Global equity markets finished lower for the third consecutive quarter. Overall, the MSCI ACWI Index dropped 6.82% during the period, bringing its year-to-date return to -25.63%. Concurrently, the Bloomberg Global Aggregate Bond Index pulled back 6.94%, bringing its year-to-date return to -19.89%. 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 1.73%. Nevertheless, for the year-to-date period, the MSCI ACWI Value Index has outperformed the MSCI ACWI Growth Index by 13.14%.

Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle International Equity ADR Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

The MSCI EAFE Index dropped 9.36% during the third quarter, while the MSCI ACWI ex USA Index decreased 9.91%. Regionally, the U.K. and Europe & Middle East were the weakest performers, while Asia declined the least. On a sector basis, all eleven sectors within the MSCI EAFE Index posted negative returns, with Communication Services, Utilities and Real Estate generating the largest losses. Conversely, Energy, Consumer Staples and Information Technology declined the least.

As energy prices inflicted pain across much of the world, and the tensions between East and West became more pronounced, the outlook for global economic activity and inflation continued to worsen. The IMF now projects global growth to slow from 6.1% in 2021 to 3.2% in 2022 versus the 3.6% projection last quarter. The IMF also raised its 2022 inflation estimates to 6.6% for advanced economies and 9.5% for developing economies.

In response to elevated inflation, many central banks tightened monetary policy during the quarter. With two 0.75% increases, the U.S. Federal Reserve raised its benchmark rate to a range of 3.00% to 3.25%. The European Central Bank also raised its benchmark lending rate from 0.00% to 1.25%—its first hike in eleven years—while the Bank of England, with two 0.50% increases, raised its benchmark rate to 2.25%. Meanwhile, Japan continues to maintain its ultra-low interest rates, and China’s central bank cut key policy rates.

The divergence in monetary policies between the U.S. Federal Reserve and other central banks, plus concerns for slowing global growth, sent the U.S. Dollar Index (DXY) to a two-decade high. Currencies such as the Euro and Yen have lost approximately 14% and 20% in relative value, respectively, year-to-date. The rapid one-sided movement in the foreign exchange market caused the Bank of Japan to intervene and strengthen the Yen for the first time in 24 years.

The U.K. gathered the world’s attention this quarter, as Queen Elizabeth II—the second-longest reigning monarch in world history—passed away in September, leaving the throne to her son King Charles III. A new government was also installed after Boris Johnson resigned. He was replaced in a special election by current Prime Minister Liz Truss, a fellow member of the Conservative Party. However, Prime Minister Truss’s plan to help citizens afford energy through tax cuts and subsidies stood in contrast to the Bank of England’s efforts to curb inflation. The mixed messages resulted in a sharp sell-off in U.K. government bonds, forcing England’s central bank to reverse its stance toward quantitative tightening to prop up tumbling gilt prices.

Outside of the U.K., Russia’s ongoing invasion of Ukraine has not only caused tragic human suffering and loss of life, but is also threatening European countries’ ability to procure natural gas ahead of winter. Sanctions, pipeline issues and the surge in prices have revealed Europe’s acute need for new energy sources—independent of Russia. In addition, U.S. and Chinese relations became further strained in August following Nancy Pelosi’s visit to Taiwan, only to be compounded by President Biden’s statement that the U.S. military could be used to defend the island. These events have served to exacerbate already heightened global economic uncertainty.

Performance and Attribution Summary

For the third quarter of 2022, Aristotle Capital’s International Equity ADR Composite posted a total return of -7.12% gross of fees (-7.26% net of fees), outperforming the MSCI EAFE Index, which returned -9.36%, and the MSCI ACWI ex USA Index, which returned -9.91%. Please refer to the table below for detailed performance.

Source: FactSet

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

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

Regionally, both security selection and allocation effects were responsible for the portfolio’s outperformance. Exposure to Canada and security selection in the Developed Europe & Middle East contributed the most to relative performance, while an underweight in Asia and an overweight in the U.K. detracted.

Contributors and Detractors for 3Q 2022

Contributors	Detractors
Cameco	GSK
Pan Pacific International	Sony
Ashtead Group	AIA Group
DBS Group	Coca-Cola Europacific Partners
Munich Re Group	Alcon

Cameco, the world’s largest publicly traded uranium producer, was the top contributor for the quarter. In order to pivot away from a reliance on Russian energy without jeopardizing net-zero commitments, policymakers and businesses have (finally) turned their attention toward nuclear power generation. Germany extended the life of two nuclear power plants, and Japan announced it will look at extending the life of existing reactors, restart additional idle reactors and look at developing next-generation reactors. These shifts in energy policies have increased demand at a time of tight supply. Although such market dynamics will likely favor Cameco in the short term, we believe the company’s continued focus on supply discipline will help ensure long-term success as well. By obtaining long-term contracts and slowly ramping production, we believe Cameco is well positioned in the changing energy landscape. The company has already recorded 45 million pounds in new long-term uranium contracts this year, with additional contract discussions underway. Furthermore, Cameco increased its ownership in Cigar Lake by 4.52%, bringing its ownership stake to 54.55%. This ownership expansion, combined with investment in operational readiness for McArthur River/Key Lake, should allow the company to continue to meet utility customers’ changing and growing long-term demand. This sets the stage for Cameco to execute on our catalyst of increasing its uranium volume sold at higher prices, all while lowering production costs through scale and its access to some of the highest-grade ore on the planet.

DBS Group, Singapore’s largest bank¹, was a leading contributor. We have long been attracted to the Singapore banking industry due to its oligopoly structure and the stability of the country’s regulatory environment, as well as its fiscal and monetary policies. Part of this stability is attributable to the central bank’s long-standing currency monitoring band, which has kept the Singapore dollar tightly linked to the U.S. dollar. In our opinion, outside of a robust first half 2022 earnings report, the quarter contained nothing material from a catalyst or fundamental perspective. As such, we believe this quarter’s stock price performance was likely due to U.S. dollar strength—something we do not attempt to predict. We continue to admire DBS’s leadership in digital banking, which we believe should allow the company to drive further efficiency gains. Moreover, we continue to monitor DBS’s pending acquisition of Citigroup’s consumer banking business in Taiwan; this acquisition should bolster our ongoing catalyst of profitable expansion outside of Singapore.

GSK, the U.K.-headquartered pharmaceutical company, was the largest detractor. GSK completed the demerger of its consumer health business in July, creating the independent, publicly traded company Haleon. As discussed below, we made Haleon a full position following the spinoff. We believe the separation unlocks value and allows remaining GSK to benefit from greater focus on biopharmaceuticals and vaccines. After managing the completed spinoff, CFO Iain Mackay announced his plans to retire in May 2023, to be replaced by Julie Brown. Having served in previous CFO posts at both the luxury goods brand Burberry, as well as the pharmaceutical firm AstraZeneca, we look forward to following Ms. Brown’s initiatives at GSK. Moreover, the company has been advancing on our catalyst of market share gains for Shingrix, its vaccine to prevent shingles. Shingrix again delivered record sales growth and continues to be a key driver of GSK’s vaccine revenue expansion. Lastly, legal concerns related to potential side effects from the heartburn medicine Zantac made headlines. Although Zantac was marketed by several firms and its associated risks have been known for a number of years, upcoming lawsuits in the U.S. received media attention this quarter. We are closely following the litigation and may have more to share in future commentaries. In the interim, we find the price adjustment to be overdone. The largest side effect-related drug settlements have been in the single-digit billions, while more than £20 billion in market capitalization has been removed from GSK. Despite recent share price declines, we remain confident in GSK’s ability to further penetrate markets with its current products and evolve its pipeline of innovative medicines.

Sony, the global provider of videogames and consoles, image sensors, and music, as well as movies, was a major detractor for the period. The share price of the company has struggled this year following its strong performance in 2021. Signs of a slowdown in the gaming industry (as people seem inclined to take on outdoor activities as pandemic fears have subsided), combined with sales of its PlayStation 5 that have been held up by a global parts shortage, have led to gaming-related software sales falling more than 20% year-over-year. Rather than focusing on short-term demand dislocations, we focus on the company’s ability to continue migrating videogame users toward the firm’s subscription offerings, as well as its capacity to leverage content across its video, music and gaming platforms. We are also impressed with the expansion of Sony’s Music segment, which has been supported by the pervasiveness of streaming services. Management’s ongoing work to improve the company’s TV and film studios is bearing fruit as well, with sales growing 67% year-over-year for its Pictures segment as its regional strategy has taken hold, including recent progress made toward solidifying a merger plan with India-based Zee Entertainment.

¹As measured by assets as of June 30,2022.

Recent Portfolio Activity

We have owned shares of Reckitt—the global manufacturer and marketer of household, health and personal care products—for over a decade, having become investors in the second quarter of 2011. The company’s well-known brands include Mucinex, Dr. Scholl’s, Woolite and Lysol. During our holding period, Reckitt executed on some, but not all, of our catalysts. In particular, the 2017 acquisition of Mead Johnson increased its emerging markets presence by expanding the company’s offerings in China; however, the acquisition came at too high of a cost in our opinion. The fresh perspective Laxman Narasimhan brought when he joined as CEO in 2019, which was reflected in his reorganization of the Health and Hygiene units and a shift toward higher-margin products, was another catalyst we identified. While we still view Reckitt as a high-quality business, with many of its catalysts now closer to completion, we decided to exit our position in favor of what we consider to be a more optimal opportunity in Haleon, which is discussed below.

Haleon plc

Haleon, headquartered in the U.K., is currently the only publicly traded, pure-play global consumer health company. The company has existed for decades in various forms and, through a history of M&A, is the product of three major pharmaceutical companies’ assets: GSK, Novartis and Pfizer. With roughly £9.5 billion in revenue, Haleon operates in over 170 markets, selling products in oral health (~28% of 2021 revenue), pain relief (~23%), digestive health (~21%), vitamin and mineral supplements (~16%), and respiratory health (~12%). Its recognizable brands include Sensodyne toothpaste, the pain relief product Advil, Theraflu for cold and flu symptoms, and Centrum multivitamins.

Haleon was spun off this summer by existing holding GSK. Impressed by this consumer health products business, we decided to increase our ownership to a full weight in the portfolio.

Quality

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

– Portfolio of well-known brands, supported by a history of innovation and doctors’ advocacy;

– Market leadership in different categories across the world’s fragmented consumer health industry, including number one positions in digestive health and vitamin and mineral supplements; and

– Global reach and diversification across geographies and categories, with a track record of improving EBITDA margins and stable FREE cash flow generation.

Attractive Valuation

Given our estimates of higher normalized earnings, both due to further product penetration and efficiency gains as a standalone enterprise, we believe the company is offered at an attractive price. In addition, we recognize the risks associated with the recent Zantac lawsuits and believe this is more than reflected in the current stock price.

Compelling Catalysts

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

– Enhanced profitability and increased revenue, as many of its products, including what the company refers to as its higher-margin “power brands,” are better supported for growth by the company’s ability to make its own capital allocation decisions;

– Benefits from being managed as an independent company that should spur improved business structures and innovation efforts; and

– Management’s plan for debt reduction should also allow for more optimal capital allocation and increased cash returns to shareholders.

Conclusion

Our investment process seeks to identify businesses that, in our opinion, possess a combination of qualities that are both sustainable and difficult to reproduce. While broad macroeconomic factors such as inflation, central bank policies, foreign exchange markets and various other data points are taken into consideration as part of our research, we spend the vast majority of our time analyzing individual companies. Rather than attempting to predict the path of stock prices in the short term, we focus our efforts on understanding businesses over the long term. We believe the long-term benefits of patience and extensive research far outweigh the potential risk of a missed opportunity; seldom are reactionary decisions optimal. While the current market environment seems to be dominated by macro news and geopolitical events, we remain steadfast in our belief that the fundamentals of a company, ultimately, determine its intrinsic worth. As such, we will continue to focus our efforts on studying the unique qualities and characteristics of the companies in which we are invested.

Disclosures

The opinions expressed herein are those of Aristotle Capital Management, LLC (Aristotle Capital) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to buy or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Capital makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle International Equity ADR strategy. Not every client’s account will have these characteristics. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Capital’s International Equity ADR Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.

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.

All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.

The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Capital does not guarantee the accuracy, adequacy or completeness of such information.

Aristotle Capital Management, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Capital, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.

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

Markets Review

Global equity markets finished lower for the third consecutive quarter. Overall, the MSCI ACWI Index dropped 6.82% during the period, bringing its year-to-date return to -25.63%. Concurrently, the Bloomberg Global Aggregate Bond Index pulled back 6.94%, bringing its year-to-date return to -19.89%. 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 1.73%. Nevertheless, for the year-to-date period, the MSCI ACWI Value Index has outperformed the MSCI ACWI Growth Index by 13.14%.

Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle International Equity ADR Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

The MSCI EAFE Index dropped 9.36% during the third quarter, while the MSCI ACWI ex USA Index decreased 9.91%. Regionally, the U.K. and Europe & Middle East were the weakest performers, while Asia declined the least. On a sector basis, all eleven sectors within the MSCI EAFE Index posted negative returns, with Communication Services, Utilities and Real Estate generating the largest losses. Conversely, Energy, Consumer Staples and Information Technology declined the least.

As energy prices inflicted pain across much of the world, and the tensions between East and West became more pronounced, the outlook for global economic activity and inflation continued to worsen. The IMF now projects global growth to slow from 6.1% in 2021 to 3.2% in 2022 versus the 3.6% projection last quarter. The IMF also raised its 2022 inflation estimates to 6.6% for advanced economies and 9.5% for developing economies.

In response to elevated inflation, many central banks tightened monetary policy during the quarter. With two 0.75% increases, the U.S. Federal Reserve raised its benchmark rate to a range of 3.00% to 3.25%. The European Central Bank also raised its benchmark lending rate from 0.00% to 1.25%—its first hike in eleven years—while the Bank of England, with two 0.50% increases, raised its benchmark rate to 2.25%. Meanwhile, Japan continues to maintain its ultra-low interest rates, and China’s central bank cut key policy rates.

The divergence in monetary policies between the U.S. Federal Reserve and other central banks, plus concerns for slowing global growth, sent the U.S. Dollar Index (DXY) to a two-decade high. Currencies such as the Euro and Yen have lost approximately 14% and 20% in relative value, respectively, year-to-date. The rapid one-sided movement in the foreign exchange market caused the Bank of Japan to intervene and strengthen the Yen for the first time in 24 years.

The U.K. gathered the world’s attention this quarter, as Queen Elizabeth II—the second-longest reigning monarch in world history—passed away in September, leaving the throne to her son King Charles III. A new government was also installed after Boris Johnson resigned. He was replaced in a special election by current Prime Minister Liz Truss, a fellow member of the Conservative Party. However, Prime Minister Truss’s plan to help citizens afford energy through tax cuts and subsidies stood in contrast to the Bank of England’s efforts to curb inflation. The mixed messages resulted in a sharp sell-off in U.K. government bonds, forcing England’s central bank to reverse its stance toward quantitative tightening to prop up tumbling gilt prices.

Outside of the U.K., Russia’s ongoing invasion of Ukraine has not only caused tragic human suffering and loss of life, but is also threatening European countries’ ability to procure natural gas ahead of winter. Sanctions, pipeline issues and the surge in prices have revealed Europe’s acute need for new energy sources—independent of Russia. In addition, U.S. and Chinese relations became further strained in August following Nancy Pelosi’s visit to Taiwan, only to be compounded by President Biden’s statement that the U.S. military could be used to defend the island. These events have served to exacerbate already heightened global economic uncertainty.

Performance and Attribution Summary

For the third quarter of 2022, Aristotle Capital’s International Equity ADR Composite posted a total return of -7.12% gross of fees (-7.26% net of fees), outperforming the MSCI EAFE Index, which returned -9.36%, and the MSCI ACWI ex USA Index, which returned -9.91%. Please refer to the table below for detailed performance.

Source: FactSet

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

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

Regionally, both security selection and allocation effects were responsible for the portfolio’s outperformance. Exposure to Canada and security selection in the Developed Europe & Middle East contributed the most to relative performance, while an underweight in Asia and an overweight in the U.K. detracted.

Contributors and Detractors for 3Q 2022

Contributors	Detractors
Cameco	GSK
Pan Pacific International	Sony
Ashtead Group	AIA Group
DBS Group	Coca-Cola Europacific Partners
Munich Re Group	Alcon

Cameco, the world’s largest publicly traded uranium producer, was the top contributor for the quarter. In order to pivot away from a reliance on Russian energy without jeopardizing net-zero commitments, policymakers and businesses have (finally) turned their attention toward nuclear power generation. Germany extended the life of two nuclear power plants, and Japan announced it will look at extending the life of existing reactors, restart additional idle reactors and look at developing next-generation reactors. These shifts in energy policies have increased demand at a time of tight supply. Although such market dynamics will likely favor Cameco in the short term, we believe the company’s continued focus on supply discipline will help ensure long-term success as well. By obtaining long-term contracts and slowly ramping production, we believe Cameco is well positioned in the changing energy landscape. The company has already recorded 45 million pounds in new long-term uranium contracts this year, with additional contract discussions underway. Furthermore, Cameco increased its ownership in Cigar Lake by 4.52%, bringing its ownership stake to 54.55%. This ownership expansion, combined with investment in operational readiness for McArthur River/Key Lake, should allow the company to continue to meet utility customers’ changing and growing long-term demand. This sets the stage for Cameco to execute on our catalyst of increasing its uranium volume sold at higher prices, all while lowering production costs through scale and its access to some of the highest-grade ore on the planet.

DBS Group, Singapore’s largest bank¹, was a leading contributor. We have long been attracted to the Singapore banking industry due to its oligopoly structure and the stability of the country’s regulatory environment, as well as its fiscal and monetary policies. Part of this stability is attributable to the central bank’s long-standing currency monitoring band, which has kept the Singapore dollar tightly linked to the U.S. dollar. In our opinion, outside of a robust first half 2022 earnings report, the quarter contained nothing material from a catalyst or fundamental perspective. As such, we believe this quarter’s stock price performance was likely due to U.S. dollar strength—something we do not attempt to predict. We continue to admire DBS’s leadership in digital banking, which we believe should allow the company to drive further efficiency gains. Moreover, we continue to monitor DBS’s pending acquisition of Citigroup’s consumer banking business in Taiwan; this acquisition should bolster our ongoing catalyst of profitable expansion outside of Singapore.

GSK, the U.K.-headquartered pharmaceutical company, was the largest detractor. GSK completed the demerger of its consumer health business in July, creating the independent, publicly traded company Haleon. As discussed below, we made Haleon a full position following the spinoff. We believe the separation unlocks value and allows remaining GSK to benefit from greater focus on biopharmaceuticals and vaccines. After managing the completed spinoff, CFO Iain Mackay announced his plans to retire in May 2023, to be replaced by Julie Brown. Having served in previous CFO posts at both the luxury goods brand Burberry, as well as the pharmaceutical firm AstraZeneca, we look forward to following Ms. Brown’s initiatives at GSK. Moreover, the company has been advancing on our catalyst of market share gains for Shingrix, its vaccine to prevent shingles. Shingrix again delivered record sales growth and continues to be a key driver of GSK’s vaccine revenue expansion. Lastly, legal concerns related to potential side effects from the heartburn medicine Zantac made headlines. Although Zantac was marketed by several firms and its associated risks have been known for a number of years, upcoming lawsuits in the U.S. received media attention this quarter. We are closely following the litigation and may have more to share in future commentaries. In the interim, we find the price adjustment to be overdone. The largest side effect-related drug settlements have been in the single-digit billions, while more than £20 billion in market capitalization has been removed from GSK. Despite recent share price declines, we remain confident in GSK’s ability to further penetrate markets with its current products and evolve its pipeline of innovative medicines.

Sony, the global provider of videogames and consoles, image sensors, and music, as well as movies, was a major detractor for the period. The share price of the company has struggled this year following its strong performance in 2021. Signs of a slowdown in the gaming industry (as people seem inclined to take on outdoor activities as pandemic fears have subsided), combined with sales of its PlayStation 5 that have been held up by a global parts shortage, have led to gaming-related software sales falling more than 20% year-over-year. Rather than focusing on short-term demand dislocations, we focus on the company’s ability to continue migrating videogame users toward the firm’s subscription offerings, as well as its capacity to leverage content across its video, music and gaming platforms. We are also impressed with the expansion of Sony’s Music segment, which has been supported by the pervasiveness of streaming services. Management’s ongoing work to improve the company’s TV and film studios is bearing fruit as well, with sales growing 67% year-over-year for its Pictures segment as its regional strategy has taken hold, including recent progress made toward solidifying a merger plan with India-based Zee Entertainment.

¹As measured by assets as of June 30,2022.

Recent Portfolio Activity

We have owned shares of Reckitt—the global manufacturer and marketer of household, health and personal care products—for over a decade, having become investors in the second quarter of 2011. The company’s well-known brands include Mucinex, Dr. Scholl’s, Woolite and Lysol. During our holding period, Reckitt executed on some, but not all, of our catalysts. In particular, the 2017 acquisition of Mead Johnson increased its emerging markets presence by expanding the company’s offerings in China; however, the acquisition came at too high of a cost in our opinion. The fresh perspective Laxman Narasimhan brought when he joined as CEO in 2019, which was reflected in his reorganization of the Health and Hygiene units and a shift toward higher-margin products, was another catalyst we identified. While we still view Reckitt as a high-quality business, with many of its catalysts now closer to completion, we decided to exit our position in favor of what we consider to be a more optimal opportunity in Haleon, which is discussed below.

Haleon plc

Haleon, headquartered in the U.K., is currently the only publicly traded, pure-play global consumer health company. The company has existed for decades in various forms and, through a history of M&A, is the product of three major pharmaceutical companies’ assets: GSK, Novartis and Pfizer. With roughly £9.5 billion in revenue, Haleon operates in over 170 markets, selling products in oral health (~28% of 2021 revenue), pain relief (~23%), digestive health (~21%), vitamin and mineral supplements (~16%), and respiratory health (~12%). Its recognizable brands include Sensodyne toothpaste, the pain relief product Advil, Theraflu for cold and flu symptoms, and Centrum multivitamins.

Haleon was spun off this summer by existing holding GSK. Impressed by this consumer health products business, we decided to increase our ownership to a full weight in the portfolio.

Quality

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

– Portfolio of well-known brands, supported by a history of innovation and doctors’ advocacy;

– Market leadership in different categories across the world’s fragmented consumer health industry, including number one positions in digestive health and vitamin and mineral supplements; and

– Global reach and diversification across geographies and categories, with a track record of improving EBITDA margins and stable FREE cash flow generation.

Attractive Valuation

Given our estimates of higher normalized earnings, both due to further product penetration and efficiency gains as a standalone enterprise, we believe the company is offered at an attractive price. In addition, we recognize the risks associated with the recent Zantac lawsuits and believe this is more than reflected in the current stock price.

Compelling Catalysts

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

– Enhanced profitability and increased revenue, as many of its products, including what the company refers to as its higher-margin “power brands,” are better supported for growth by the company’s ability to make its own capital allocation decisions;

– Benefits from being managed as an independent company that should spur improved business structures and innovation efforts; and

– Management’s plan for debt reduction should also allow for more optimal capital allocation and increased cash returns to shareholders.

Conclusion

Our investment process seeks to identify businesses that, in our opinion, possess a combination of qualities that are both sustainable and difficult to reproduce. While broad macroeconomic factors such as inflation, central bank policies, foreign exchange markets and various other data points are taken into consideration as part of our research, we spend the vast majority of our time analyzing individual companies. Rather than attempting to predict the path of stock prices in the short term, we focus our efforts on understanding businesses over the long term. We believe the long-term benefits of patience and extensive research far outweigh the potential risk of a missed opportunity; seldom are reactionary decisions optimal. While the current market environment seems to be dominated by macro news and geopolitical events, we remain steadfast in our belief that the fundamentals of a company, ultimately, determine its intrinsic worth. As such, we will continue to focus our efforts on studying the unique qualities and characteristics of the companies in which we are invested.

Disclosures

The opinions expressed herein are those of Aristotle Capital Management, LLC (Aristotle Capital) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to buy or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Capital makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle International Equity ADR strategy. Not every client’s account will have these characteristics. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Capital’s International Equity ADR Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.

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.

All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.

The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Capital does not guarantee the accuracy, adequacy or completeness of such information.

Aristotle Capital Management, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Capital, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.

FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

Summary

U.S. corporate credit markets delivered mixed performance in the third quarter as U.S. Treasury yields climbed while corporate credit spreads ended the quarter roughly unchanged despite a further deterioration in risk markets. Bank loans outperformed for the third consecutive quarter, returning 1.19% as measured by the Credit Suisse Leveraged Loan Index. While both high yield bonds and investment grade corporate bonds fell during the quarter, high yield bonds outperformed as the Bloomberg U.S. Corporate High Yield Bond Index returned -0.65% and the Bloomberg U.S. Corporate Bond Index returned -5.06%.

Tighter financial conditions weighed on risk assets in the third quarter as the S&P 500 Index fell 4.88%, which brings its year-to-date return to -15.47% and marks the Index’s first three quarter losing streak since 2009. Persistently high inflation weighed on markets as the U.S. Consumer Price Index (CPI) rose 8.3% year-over-year in August, below its peak of 9.1% in June but still well above the Federal Reserve’s (Fed’s) target range. Growth continued its sluggish pace in the U.S., as real gross domestic product (GDP) fell at an annual rate of 0.6% in the second quarter. However, the labor market remained tight, and while the unemployment rate edged up to 3.7% in August, the labor force participation rate rose to 62.4%, its highest level since March 2022 and the post-pandemic high.

The Fed raised the Fed Funds rate by 75 basis points in September, its third straight hike of that magnitude, bringing its benchmark rate to a range of 3.00% to 3.25%. Fed Chairman Powell signaled the Fed would continue to hike rates into 2023 in order to bring down inflation. In response to the Fed’s hawkish stance and a step up in the pace of quantitative tightening (QT), interest rate and foreign exchange markets repriced sharply amidst increasing volatility in September, as the U.S. Dollar Index (DXY) touched its highest level in two decades. Geopolitical tensions continued to simmer, as Russia’s retaliation against Europe in response to the conflict in Ukraine led to elevated natural gas prices in Europe ahead of the winter months, and tensions between the U.S. and China flared up as Congresswoman Nancy Pelosi visited Taiwan despite protests from the Chinese Deputy Foreign Minister.

Market Environment

U.S. Treasury yields continued to climb in the third quarter, as the yield curve flattened aggressively. The yield on the U.S. 2-year note rose roughly 127 basis points, climbing to the highest level since 2007, while the yield on the U.S. 10-year note rose around 82 basis points. With yields on the long end lagging the short end, the spread between 2-year and 10-year U.S. Treasuries inverted further over the course of the quarter. As a result, U.S. fixed income markets continued to suffer historically large losses with the Bloomberg U.S. Aggregate Bond Index falling 4.75%, bringing its year-to-date loss to 14.61% and putting it on pace for its worst year since inception.

Despite the deterioration in risk sentiment, U.S. corporate credit spreads ended the quarter roughly unchanged with most of the repricing in credit markets driven by rates in the third quarter. High yield bond spreads tightened roughly 17 basis points as measured by the Bloomberg U.S. Corporate High Yield Bond Index, while investment grade corporate bond spreads widened roughly 4 basis points as measured by the Bloomberg U.S. Corporate Bond Index.

Issuance in the high yield bond market continued to slow dramatically in the third quarter with new supply totaling just over $18 billion. The year-to-date total now stands at just over $86 billion, down nearly 78% compared to the same period in 2021. Similarly, issuance in the bank loan market slowed sharply with year-to-date issuance topping $223 billion, roughly 69% below the total in the first nine months of 2021. Investment grade corporate bond issuance also slowed but to a lesser extent as year-to-date issuance topped $1 trillion in September, down roughly 16% compared to the same period last year.

On the demand side, retail flows into both high yield bond funds and leveraged loan funds eroded over the course of the third quarter. High yield bond funds experienced further outflows with the year-to-date total topping a record $53 billion. Leveraged loan funds experienced outflows of more than $13 billion in the third quarter, reducing the year-to-date inflow to just under $2 billion. Bucking the trend, investment grade bond funds saw modest inflows in August and September after seven straight months of outflows to start the year.

Within the high yield bond universe, performance in the third quarter was evenly distributed across quality tiers with lower quality bonds marginally outperforming. ‘CCC’s (-0.42%) outperformed ‘B’s (-0.66%) and ‘BB’s (-0.71%), as high yield bond spreads were roughly unchanged and longer duration bonds underperformed. From an industry perspective, Aerospace & Defense (+3.68%) outperformed while Pharmaceuticals (-9.47%) underperformed. Defaults and distressed transactions rose again after picking up materially in the second quarter following an incredibly quiet 2021. Defaults totaled more than $16 billion during the quarter as the 12-month trailing par-weighted U.S. high yield bond default rate rose to 0.83% at the end of September.

Performance and Attribution Summary

High Yield Bond – SMA

The Aristotle High Yield Bond – SMA Composite returned 0.69% gross of fees (0.55% net of fees) in the third quarter, outperforming the -0.75% return of the ICE BofA BB-B U.S. Cash Pay High Yield Constrained Index. Security selection was the primary contributor to relative performance. Industry allocation and sector rotation also contributed to relative performance.

Security selection contributed to relative performance led by holdings in Metals & Mining and Pharmaceuticals. This was only partially offset by security selection in Transportation and Diversified Manufacturing & Construction Machinery. Industry allocation also contributed to performance led by an overweight in Pipelines & Distributors and an underweight in Technology. This was partially offset by underweights in Aerospace & Defense and Utilities. Additionally, sector rotation marginally contributed to relative performance led by the allocation to cash, which was partially offset by the allocation to investment grade corporate bonds.

High Yield Bond Focused ESG

The Aristotle High Yield Bond Focused ESG Composite returned 0.44% gross of fees (0.29% net of fees) in the third quarter, outperforming the -0.75% return of the ICE BofA BB-B U.S. Cash Pay High Yield Constrained Index. Security selection was the primary contributor to relative performance. Industry allocation and sector rotation also contributed to relative performance.

Security selection contributed to relative performance led by holdings in Real Estate Investment Trusts (REITs) & Real Estate-Related and Cable & Satellite. This was only partially offset by security selection in Energy and Diversified Manufacturing & Construction Machinery. Industry allocation also contributed to performance led by an overweight in Transportation and an underweight in Pharmaceuticals. This was partially offset by an underweight in Aerospace & Defense and an overweight in Retailers & Restaurants. Additionally, sector rotation marginally contributed to relative performance led by the allocation to cash, which was partially offset by the allocation to investment grade corporate bonds.

Short Duration High Yield Bond

The Aristotle Short Duration High Yield Bond Composite returned 1.42% gross of fees (1.28% net of fees) in the third quarter, outperforming the 1.03% return of the ICE BofA 1-3 Year BB-B U.S. Cash Pay Fixed Maturity High Yield Constrained Index. Security selection was the primary contributor to relative performance, while sector rotation was the primary detractor from relative performance

Security selection contributed to relative performance led by holdings in Automotive & Captive Finance and Finance Companies. This was only partially offset by security selection in Insurance and Media & Entertainment. Industry allocation also contributed to performance led by overweights in Cable & Satellite and REITs & Real Estate-Related. This was partially offset by an overweight in Retailers & Restaurants and an underweight in Gaming. Sector rotation detracted from relative performance led by the allocation to investment grade corporate bonds, which was partially offset by the allocation to cash.

Outlook

A pickup in volatility through the first nine months of 2022 has resulted in a significant repricing across U.S. corporate credit markets. While we believe corporate credit markets are not yet out of the woods as financial conditions continue to tighten, we believe strong underlying fundamentals in certain areas of corporate credit should present opportunities through the end of the year.

The overall macroeconomic backdrop remains downbeat with slower global growth, persistent inflationary pressures, tighter monetary policy and falling earnings estimates. In our opinion, inflation has proven to be non-transitory and stickier than initially expected. We also believe the labor market is still in good shape, which combined with sticky inflation, should give the Fed the green light to continue hiking rates. While we believe U.S. yields can continue to push higher, we think the majority of the repricing in interest rates has already occurred, particularly in the short end of the curve.

In our opinion, the Fed “put” is gone as the central bank has doubled down on its primary goal of getting inflation under control. We believe the Fed is willing to send the economy into a recession as it seeks to tame inflationary pressures. Furthermore, the Fed is taking liquidity out of the market through QT, which we believe is leading to elevated volatility across financial markets. Signs of stress have emerged in pockets of the financial markets, but so far, the Fed has stayed on course. The question financial markets are now asking is if the Fed will stay the course until they hit their policy target or if increasing financial instability will force them to pause or reverse course.

While the top-down picture is fairly grim, we believe the underlying fundamentals of U.S. corporate credit markets remain strong. Our base case scenario is for corporate credit to weaken further, but we do not necessarily expect an outsized increase in credit risk. We remain comfortable with most corporate balance sheets after many companies successfully managed maturities over the past few years. While we believe the overall fundamental credit picture is strong, we also believe the technical side is helping. Issuance so far this year, especially in the high yield bond and leveraged loan markets, has been exceptionally low. With maturities and tenders, the overall market has become smaller, which we believe has helped keep credit spreads in check. That said, we seek to favor higher-quality, liquid corporate bonds over lower-quality, illiquid credit structures, which we believe could be more susceptible to a further selloff in risk assets.

Following the repricing of interest rates over the past nine months, we believe corporate credit offers relatively attractive yield now. The yield-to-worst (YTW) of the Bloomberg U.S. Corporate High Yield Bond Index increased from 4.21% at the end of 2021 to 9.68% at the end of the third quarter, while the YTW of the Bloomberg U.S. Corporate Bond Index rose from 2.33% to 5.69% over that same period. While interest rates could push higher and risk sentiment could deteriorate further, we believe there are opportunities for yield in higher-quality, liquid corporate credit.

High Yield Bond Positioning

In our high yield portfolios, we remain underweight duration relative to the benchmark and added modestly to credit risk in the front end of the curve. We increased exposure to domestic industries with strong cash flow, while reducing exposure to consumer cyclical credits and companies with large European exposure.

We believe the majority of the risk facing corporate credit markets comes from the uncertain macroeconomic backdrop rather than bottom-up credit fundamentals. We are beginning to consider bonds further out on the curve but believe rates could go higher and are willing to wait. That said, we prefer to add higher-quality credits with more interest rate risk rather than lower quality bonds. We do not believe investors are being compensated for moving down in quality given where credit spreads ended the quarter.

From an industry perspective, we reduced credits with significant exposure to the consumer such as housing and retail-related credits. Additionally, we believe Europe faces its own set of increased macroeconomic risks and reduced our exposure to credits with significant exposure to the region. At the end of the quarter, we held overweights in Media & Entertainment, Transportation and Energy alongside underweights in Technology, Telecommunications and Utilities.

Disclosures

All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. There are risks specifically associated with fixed income investments such as interest rate risk and credit risk. Bond values fluctuate in price in response to market conditions. Typically, when interest rates rise, there is a corresponding decline in bond values. This risk may be more pronounced for bonds with longer-term maturities. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. High yield securities are generally rated lower than investment grade securities and may be subject to greater market fluctuations, increased price volatility, risk of issuer default, less liquidity, or loss of income and principal compared to investment grade securities.
The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments.
The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass.
Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Credit does not guarantee the accuracy, adequacy or completeness of such information.
The opinions expressed herein are those of Aristotle Credit Partners, LLC (Aristotle Credit) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to buy or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report are or will be profitable, or that recommendations Aristotle Credit makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Credit High Yield Bond – SMA strategy, the Aristotle Credit High Yield Bond Focused ESG strategy and the Aristotle Credit Short Duration High Yield Bond strategy. Not every client’s account will have these characteristics. Aristotle Credit reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. For a full list of all recommendations made by Aristotle Credit during the last 12 months, please contact us at (949) 681-2100. This is not a recommendation to buy or sell a particular security.
Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Composite returns are preliminary pending final account reconciliation. Composite and benchmark returns reflect the reinvestment of income.
High Yield Bond – SMA Returns – Pure Gross: Pure gross returns do not reflect the deduction of any trading costs, fees or expenses. Pure gross returns prior to June 2020 reflect the deduction of transaction costs. Model Net Performance: Starting from June 2020, composite returns are presented pure gross and net of the highest wrap fee stated. Performance for periods prior to June 2020 are presented pure gross and net of actual investment advisory fees.
High Yield Bond Focused ESG and Short Duration High Yield Bond Returns – Pure Gross: Pure gross returns do not reflect the deduction of any trading costs, fees or expenses. Pure gross returns prior to September 2017 reflect the deduction of transaction costs. Model Net Performance: Starting from September 2017, composite returns are presented pure gross and net of the highest wrap fee stated. Performance for periods prior to September 2017 are presented pure gross and net of actual investment advisory fees.

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