ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

Small cap equities searched for direction in the third quarter as volatility to upside and downside continued to test investors’ fortitude. What looked like a relatively rosy market backdrop through the first half of the quarter with the Russell 2000 Index up over 18%, turned sour in the middle of August, only to worsen further in September, pushing the index into negative territory by quarter-end. Equity market intra-quarter declines coincided with the Federal Reserve (Fed) reiterating that they would prioritize reining in inflation versus supporting growth. To that end, the quarter saw two more aggressive interest-rate hikes of 0.75 percentage points, one in July and then another in September, which leaves the effective federal-funds rate at 3.00%-3.25% exiting the third quarter, its highest level since 2008. Prior to raising the fed-funds rate by three-quarters of a point in June, the Fed had not raised its flagship policy rate by 0.75 percentage points in any single meeting since 1994. These actions led to a sharp rise in bond yields and a risk-off environment that extended to equity markets across the globe. Compared to their large cap counterparts, however, small caps held up relatively well during the quarter with the Russell 2000 Index’s total return of -2.19%, besting the -4.61% return of the Russell 1000 Index. This snaps a five-quarter underperformance streak, its longest since the six quarters ending in the first quarter of 1999.

At the sector level, nine of the eleven economic sectors in the Russell 2000 Index posted negative returns during the quarter led by Real Estate (-12.59%), Communication Services (-11.03%) and Consumer Staples (-7.89%). Conversely, Health Care (+6.54%), driven by gains in Biotechnology, Energy (+5.70%) and Consumer Discretionary (-1.55%) were the top performing sectors during the quarter. From a fundamental characteristics standpoint, companies with higher betas, lower dividend yields and high short interest ratios outperformed. Unprofitable* companies within the Russell 2000 Index also outperformed profitable companies during the quarter by 8.18%.

Given the factor leadership outlined above, it may come as no surprise that the Russell 2000 Growth Index (+0.24%) outpaced the Russell 2000 Value Index (-4.61%) during the period. Although the quarter granted a slight reprieve from growth’s relative underperformance versus value over the past several quarters, value’s dominance over growth in recent periods continues to be reflected in their trailing twelve-month period returns, with the Russell 2000 Value Index returning -21.12% versus -29.28% for the Russell 2000 Growth Index.

*Based on earnings expectations over the next twelve months. Source: FactSet

Sources: SS&C Advent; Russell Investments

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

Performance Review

For the third quarter of 2022, the Aristotle Small Cap Equity Composite generated a total return of -2.94% gross of fees ( 3.09% net of fees), trailing the -2.19% total return of the Russell 2000 Index. Overall, security selection detracted while sector allocation positively contributed. Security selection within the Health Care, Utilities and Consumer Discretionary sectors were the largest detractors on a relative basis, while selection within Industrials, Materials and Communication Services contributed. From an allocation perspective, the portfolio benefited from underweights in Real Estate and Communication Services; however, this was partially offset by an underweight in Energy and an overweight in Industrials.

Relative Contributors	Relative Detractors
Cross Country Healthcare	Mercury Systems
Acadia Healthcare	PetIQ
Ardmore Shipping	Knowles
WillScot Mobile Mini Holdings	Unitil
ModivCare	Euronet Worldwide

CONTRIBUTORS

Security selection added the most value within the Industrials, Materials and Communication Services sectors. From an allocation perspective, the portfolio benefited from underweights in Real Estate and Communications Services. At the company level, Cross Country Healthcare and Acadia Healthcare were two of the largest contributors during the quarter.

Cross Country Healthcare (CCRN), a workforce solutions and healthcare staffing company, appreciated amid a favorable demand and pricing environment along with strengthening investor sentiment following the company’s upbeat investor day. We maintain a position, as we believe management’s recent investments in technology along with favorable industry supply-demand dynamics have the potential to drive further value for shareholders in periods to come.

Acadia Healthcare (ACHC), a provider of behavioral health and addiction services to patients in a variety of inpatient and outpatient settings, benefited from continued strong growth tailwinds from the increasing demand for behavioral services. We maintain a position, as we believe the company is well-positioned to capitalize on the favorable supply/demand outlook for behavioral health, positive reimbursement trends and continued execution of its growth strategy.

DETRACTORS

Security selection detracted within the Health Care, Utilities and Consumer Discretionary sectors. From an allocation perspective, the portfolio’s underweight in Energy and overweight in Industrials detracted from relative performance. Additionally, the portfolio’s orientation towards higher quality companies and avoidance of speculatively valued/money-losing businesses also detracted. At the company level, Mercury Systems and PetIQ were two of the largest detractors during the quarter.

Mercury Systems (MRCY), a provider of secure sensor and safety-critical processing subsystems for the aerospace and defense markets, declined in the face of supply chain constraints and defense budget delays despite seeing high levels of new bookings activity, design wins and a robust backlog. We maintain a position, as we believe the company is well-positioned to capitalize on continued outsourcing of subsystem development, strong mergers and acquisitions opportunities and continued technological innovation.

PetIQ (PETQ), a holding company that engages in the manufacturing, procurement, packaging and distribution of pet health and wellness, declined amid a soft start to flea and tick season along with near-term inflationary pressures. We maintain our position, as we believe the company is well-positioned to benefit from secular demand tailwinds for pet health products. Additionally, we believe management’s focus on increased penetration for its wellness clinics has the potential to create additional value for shareholders.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
None	Huntington Bancshares

BUYS/ACQUISITIONS

None

SELLS/LIQUIDATIONS

Huntington Bancshares (HBAN), an Ohio-based bank holding company, was removed from the portfolio based on our belief that shares were fully valued and there were better opportunities to deploy capital elsewhere within the portfolio.

Outlook and Positioning

The risks to U.S. economic activity and thus the equity market overall, continue to be the same culprits that have been responsible for the market’s volatility over the past several quarters: the speed and pace of interest rate hikes, supply chain issues, currency and commodity price swings, and geopolitical turmoil across the globe. The subsequent impact of these factors, among others, has resulted in a 25.10% decline in the Russell 2000 Index through the first nine months of the year.

The question at this point is less about what has happened over the past twelve months but more importantly about where we are headed for the remainder of the year and into 2023. As we have indicated many times over the years, our ability to call the direction and magnitude of the market’s moves over the short term is no better (or worse) than anyone else’s. Therefore, we do not attempt to do so. Rather, we continue to monitor events as they unfold and factor those developments into our company-specific and portfolio-specific analyses. Overall, we remain encouraged by the fact that our conversations with hundreds of small cap companies so far in 2022 point to a relatively “stable” environment for their businesses. Companies are reporting a wide array of operating conditions for their business, from reasonably robust to continued sluggishness, but the general consensus in recent meetings is that conditions have not experienced a sudden and rapid deterioration. That is not to say that such a turn of events could not happen before the end of the year; rather, it is just meant to highlight the divergence between the market’s action and what we hear from small cap companies. With quarterly earnings season set to take center stage, we will see if their collective tones have changed or if it will be more of the same.

Another positive note stems from current valuations of small cap companies. Small cap equities continue to remain attractive on a forward valuation basis, both on an absolute level and relative to large caps. As of quarter-end, the relative forward P/E of the Russell 2000 Index versus the Russell 1000 Index continues to trade at a discount to its long-term average and now sits at its cheapest levels since the Dot-com bubble. For long-term investors, these valuations may imply a more favorable setup for small caps relative to large caps in the periods to come. The strengthening of the U.S. dollar may also have an outsized impact on third quarter earnings. In particular, large multinational companies may see a headwind as sizable chunks of their sales come from outside the U.S. That is because as the value of the dollar rises, it makes U.S.-produced goods more expensive outside the country. Continued strength in the U.S. dollar coupled with ongoing geopolitical turmoil and reshoring efforts may offer a relative boost to small caps versus large caps moving forward.

Nevertheless, with uncertainty, volatility and investor pessimism enduring, we believe these environments reinforce the need for selectivity and further argue for a focus on companies with quality characteristics, particularly strong balance sheets and healthy profitability to offer a buffer if economic conditions continue to slow. As always, our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Recent purchases and sales have been spread across industries and are idiosyncratic in nature, as opposed to being tied to an outlook for a particular sector. Overweights in Industrials and Information Technology are mostly a function of recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles as a result of structural headwinds for various brick and mortar businesses. We also continue to be underweight in Real Estate as a result of valuations and structural challenges for various end markets within the sector. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter; however, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

Disclosures

The opinions expressed herein are those of Aristotle Capital Boston, LLC (Aristotle Boston) and are subject to change without notice.

Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security. 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 Boston’s Small Cap Equity 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. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Aristotle Boston makes in the future will be profitable or equal the performance of the securities discussed herein. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. 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.

Effective January 1, 2022, the Aristotle Small Cap Equity Composite has been redefined to exclude accounts with meaningful industry-specific restrictions or substantial values-based screens hampering implementation of the small cap strategy.

Effective January 1, 2022, the Russell 2000 Value Index was removed as the secondary benchmark for the Aristotle Capital Boston Small Cap Equity strategy.

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.

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

Performance Disclosures

Sources: SS&C Advent, Russell Investments

Composite returns for periods ended September 30, 2022 are preliminary pending final account reconciliation.

^*The Aristotle Small Cap Equity Composite has an inception date of November 1, 2006 at a predecessor firm. During this time, Jack McPherson and Dave Adams had primary responsibility for managing the strategy. Performance starting January 1, 2015 was achieved at Aristotle Boston.

^**For the period November 2006 through December 2006.

Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized.

Effective January 1, 2022, the Aristotle Small Cap Equity Composite has been redefined to exclude accounts with meaningful industry-specific restrictions or substantial values-based screens hampering implementation of the small cap strategy.

Effective January 1, 2022, the Russell 2000 Value Index was removed as the secondary benchmark for the Aristotle Capital Boston Small Cap Equity strategy.

Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. 

Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACB-2210-19

FOR FINANCIAL ADVISOR USE ONLY – NOT FOR PUBLIC DISTRIBUTION

ARISTOTLE CAPITAL BOSTON, LLC

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

Markets Review

Small/mid cap equities ended the year on a positive note, with the Russell 2500 Index rising 7.43% during the final quarter of the year. Despite some relief in the fourth quarter, 2022 will mainly be remembered as a year when markets priced in the unpleasant consequences of higher inflation and interest rates, which many expect to hit the global economy in 2023. To that end, inflation remained elevated in the U.S., with the Consumer Price Index (CPI) rising 7.1% for the 12‐month period ending in November, continuing to slow from the 40‐year highs of 9.1% set in June. While some economic indicators are suggesting that an economic slowdown lies ahead, third quarter U.S. Gross Domestic Product (GDP) was revised higher during the period, increasing 3.2%, and rebounding from two consecutive quarters of contraction. In response to the economic and inflationary backdrop, the Federal Reserve (Fed) raised its policy rate by 50 basis points at its December meeting, providing somewhat of a reprieve relative to the prior four 75 basis points increases. Still, this represented the fastest increase in rates since 1970 and a total increase of 4.25% in 2022. Against this backdrop, small/mid caps declined ‐18.37% for the full calendar year, ending a three‐year run of positive returns for the broad Russell 2500 Index.

Stylistically, the Russell 2500 Value Index was a relative outperformer throughout 2022, with a full year return of ‐13.08% versus the ‐26.21% return of the Russell 2500 Growth Index. This marks the second consecutive calendar year where value has led the small/mid cap market and the first time value has outperformed growth in two consecutive years since 2001‐2002. Likewise, cash flow generation and profitability remained in favor throughout the year after taking a multi‐year back seat  to  anticipated  revenue  growth  in  the  hierarchy  of  small/mid  cap  investor  preferences.  This  is  highlighted  by  the  performance differential between money‐losing and profitable companies in recent periods. For the full year, unprofitable* companies within the Russell 2500 Index returned ‐40.34%, while those with positive earnings declined “only” ‐14.10% on average.

At the sector level, all eleven economic sectors within the Russell 2500 Index generated positive returns during the quarter led by Materials, Energy and Consumer Discretionary. Health Care, Communication Services and Information Technology were the worst performing sectors during the quarter. For the full year Energy was by far the best performing sector within the index and the only sector to generate a positive return. Utilities and Materials were the next best performing sectors, finishing the year with modest declines. Communication Services, Information Technology and Health Care were the worst performing sectors for the year, all producing declines in excess of ‐25%.

Performance Review

For the fourth quarter of 2022, the Aristotle Small/Mid Cap Equity Composite generated a total return of 10.47% net of fees (10.59% gross of fees), outperforming the 7.43% total return of the Russell 2500 Index. Outperformance during the period was driven entirely by security selection while allocation effects modestly detracted. Overall, security selection was strongest within the Information Technology, Health Care and Industrials sectors and weakest within the Financials, Consumer Discretionary and Communication Services sectors. From an allocation perspective, the portfolio benefited from an overweight in Industrials and an underweight in Real Estate. This was partially offset by an underweight in Consumer Discretionary and an overweight in Health Care. For the full calendar year, the Aristotle Small/Mid Cap Equity Composite generated a total return of ‐12.58% net of fees (‐12.11% gross of fees), outperforming the ‐18.37% return of the Russell 2500 Index.

Relative Contributors	Relative Detractors
Altra Industrial Motion	Catalent
Oceaneering	Signature Bank
AerCap Holdings	Carlisle Cos
Merit Medical Systems	Designer Brands
Barnes Group	ASGN

CONTRIBUTORS

Altra Industrial  Motion  (AIMC),  a  global  manufacturer  and  supplier  of  motion  control,  power  transmission  and automation products, appreciated following an announcement that the company would be acquired by Regal Rexnord Corporation. The merger is expected to close in the first half of 2023 and upon the completion of the transaction, Altra shares will no longer be listed in the public market.

Oceaneering (OII), a global provider of engineered products, services and robotic solutions for a variety of end markets, benefited from improved operating performance and profitability across all its business units. We maintain a position, as we believe the company’s strong portfolio of technologically advanced products and services remains well‐positioned to benefit from a recovery in its offshore activity. Additionally, we believe the company’s Mobile and Subsea Robotics may garner increased interest moving forward, as automation lowers on‐site personnel requirements and enables remote supervisory control.

DETRACTORS

Catalent  (CTLT), a pharmaceutical  contract  development  and  manufacturing  organization,  declined  amid  broader macroeconomic challenges impacting the biotech funding landscape and the more discretionary areas of the company’s consumer health business. We maintain a position, as we believe the long‐term value creation opportunity for the company remains intact, driven by its competitive position in biologics, particularly within the company’s cell and gene therapy sub‐segments.

Signature Bank (SBNY), a full‐service commercial bank with offices across the U.S., declined despite reporting strong financial results during the quarter. It appears the share price weakness is in part due to subdued sentiment associated with the company’s exposure to the digital currency ecosystem. We maintain our investment, as we believe the company’s core business continues to perform well and that the company’s recent expansion into the West Coast market will augment further growth at above‐market rates both organically and inorganically, which should allow for additional shareholder value creation going forward.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Adeia	Cal‐Maine Foods
Safehold	Xperi Holding

BUYS/ACQUISITIONS

Adeia (ADEA), is an intellectual property (IP) licensing business, focused on the media and semiconductor end markets. We inherited shares of Adeia via a spinoff from existing holding Xperi during the quarter. We maintain our investment in the company, as we assess the risk‐reward profile of the standalone business.

Safehold  (SAFE),  is  a  real  estate  investment  trust  (REIT),  focused  on  acquiring,  owning,  managing  and  capitalizing ground leases. We inherited shares of Safehold via a special dividend from existing holding iStar, which holds a meaningful stake in Safehold. We maintain our shares ahead of the anticipated business combination between the two entities, which will create the only self‐managed, pure‐play ground lease company in the public markets.

SELLS/LIQUIDATIONS

Cal‐Maine Foods (CALM), the largest producer and distributor of fresh shell eggs in the U.S., was removed from the portfolio based on our belief that shares were fully valued amid a favorable pricing environment, in part, driven by the supply related impact of the ongoing Avian Flu outbreak. While we continue to believe that Cal‐Maine is a high‐quality company, we are cognizant of the risk that egg prices may eventually return to a normalized level and prefer to step aside while we monitor the company’s progress from the sidelines.

Xperi Holding (XPER), a developer of technology for entertainment and consumer electronics products, was removed from the portfolio following its recent business reorganization, which resulted in the separation of the company’s product business, Xperi, and the company’s IP licensing business, Adeia.

Outlook and Positioning

2022 was a year to forget for investors, as markets grappled with a myriad of challenges that resulted in the worst calendar year decline for the Russell 2500 Index since 2008. Whether or not the market can rebound and produce a positive total return in 2023 will likely depend on many of the same factors that have influenced corporate profits and investor sentiment in 2022, including the timing and magnitude of future rate moves in response to inflation expectations, the seemingly never‐ending geopolitical uncertainty around the world, changes to business and consumer spending patterns and commodity price movements, among others. The risks associated with these and other currently unknown issues may continue to impact global economic activity and thus equity market returns. However, the reality is that we do not know if, when or where these risks might be realized, so it is difficult to manage portfolios for specific threats that may or may not occur. Therefore, we remain focused on understanding the risk associated with each investment position within the context of our fundamentally‐oriented approach and managing that risk through a disciplined approach to portfolio construction and management. As we have previously stated, we believe the current market environment reinforces the need for selectivity and further argues for a focus on companies with quality characteristics, particularly strong balance sheets and healthy profitability to offer a buffer in the face of adverse economic conditions.

On the plus side, given the recent declines and well‐documented economic and corporate challenges on investors’ minds, we believe at least some of this risk may be priced into markets already, particularly within the small/mid cap segment. At 12x, the Russell 2500 Index’s forward P/E is trading near its lowest levels in over 30 years, only slightly above the lows during the Great Financial Crisis and below the COVID‐19 recession and 2001 recession lows. The relative P/E of the Russell 2500 Index versus the Russell 1000 Index also remains near historic lows and sits at its cheapest levels since the Dot‐com bubble. For long‐term investors, these valuations may imply a more favorable setup for small/mid caps relative to large caps in the periods to  come.  Additionally,  the  2020s  may  mark  the  beginning  of  deglobalization,  where  re‐shoring  of  U.S.  manufacturing  accelerates following the pandemic and accompanying supply chain disruptions, trade tensions and geopolitical conflict. U.S. reshoring efforts, along with the accompanying need for regional banking, warehousing, etc., could result in a tailwind for small/mid caps, whose sales are more highly correlated with U.S. CapEx cycles than large caps. Lastly, using history as a guide, we observe that calendar year declines of this magnitude, typically portend positive returns in the following year, with the Russell  2500  never  having  experienced  two  negative  years  in  a  row  since  its  inception.  High  and  falling  inflationary  environments have also been favorable market environments for small/mid caps historically, a scenario we may find ourselves in this year.

As always, our current positioning is a function of our bottom‐up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Recent purchases and sales have been spread across industries and are idiosyncratic in nature, as opposed to being tied to an outlook for a particular sector. Overweights  in  Industrials  and  Information  Technology are  mostly  a  function  of  recent portfolio  activity and  the  relative  performance of our holdings in these sectors over the past few periods. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long‐term opportunities that fit our discipline given the rising risk profiles as a result of structural headwinds for various brick and mortar businesses. We also continue to be underweight in Real Estate as a result of valuations and structural challenges for various end markets within  the  sector.  Given  our  focus  on  long‐term  business  fundamentals,  patient  investment  approach  and  low  portfolio  turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

FOR FINANCIAL ADVISOR USE ONLY – NOT FOR PUBLIC DISTRIBUTION

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

Small/mid cap equities searched for direction in the third quarter as volatility to upside and downside continued to test investors’ fortitude. What looked like a relatively rosy market backdrop through the first half of the quarter with the Russell 2500 Index up over 16%, turned sour in the middle of August, only to worsen further in September, pushing the index into negative territory by quarter-end. Equity market intra-quarter declines coincided with the Federal Reserve (Fed) reiterating that they would prioritize reining in inflation versus supporting growth. To that end, the quarter saw two more aggressive interest-rate hikes of 0.75 percentage points, one in July and then another in September, which leaves the effective federal-funds rate at 3.00%-3.25% exiting the third quarter, its highest level since 2008. Prior to raising the fed-funds rate by three-quarters of a point in June, the Fed had not raised its flagship policy rate by 0.75 percentage points in any single meeting since 1994. These actions led to a sharp rise in bond yields and a risk-off environment that extended to equity markets across the globe. Compared to their large cap counterparts, however, small/mid caps held up relatively well during the quarter with the Russell 2500 Index’s total return of -2.82%, besting the -4.61% return of the Russell 1000 Index. This snaps a five-quarter underperformance streak, its longest since the six quarters ending in the first quarter of 1999.

At the sector level, nine of the eleven economic sectors in the Russell 2500 Index posted negative returns during the quarter led by Real Estate (-10.23%), Communication Services (-9.56%) and Utilities (-8.15%). Conversely, Energy (+6.43%), Health Care (+0.49%), driven by gains in Biotechnology, and Industrials (-0.58%) were the top performing sectors during the quarter. From a fundamental characteristics standpoint, companies with higher betas, lower dividend yields and high short interest ratios outperformed. Unprofitable* companies within the Russell 2500 Index also outperformed profitable companies during the quarter by 7.60%.

Given the factor leadership outlined above, it may come as no surprise that the Russell 2500 Growth Index (-0.12%) outperformed the Russell 2500 Value Index (-4.50%) during the period. Although the quarter granted a slight reprieve from growth’s relative underperformance versus value over the past several quarters, value’s dominance over growth in recent periods continues to be reflected in their trailing twelve-month period returns, with the Russell 2500 Value Index returning -20.41% versus -29.54% for the Russell 2500 Growth Index.

*Based on earnings expectations over the next twelve months. Source: FactSet

Sources: SS&C Advent; Russell Investments

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

Performance Review

For the third quarter of 2022, the Aristotle Small/Mid Cap Equity Composite generated a total return of -4.55% gross of fees (-4.67% net of fees), trailing the -2.82% total return of the Russell 2500 Index. Overall, security selection detracted while sector allocation positively contributed. Security selection within the Health Care, Information Technology and Energy sectors were the largest detractors on a relative basis, while selection within Financials, Communication Services and Materials contributed. From an allocation perspective, the portfolio benefited from an underweight in Real Estate and an overweight in Industrials; however, this was partially offset by an underweight in Energy and an overweight in Consumer Staples.

Relative Contributors	Relative Detractors
Acadia Healthcare	Catalent
Carlisle Cos	NCR
WillScot Mobile Mini Holdings	PetIQ
Gartner	Knowles
MACOM Technology Solutions	Harsco

CONTRIBUTORS

Security selection added the most value within the Financials, Communication Services and Materials sectors. From an allocation perspective, the portfolio benefited from an underweight in Real Estate and an overweight in Industrials. At the company level, Acadia Healthcare and Carlisle Companies were two of the largest contributors during the quarter.

Acadia Healthcare (ACHC), a provider of behavioral health and addiction services to patients in a variety of inpatient and outpatient settings, benefited from continued strong growth tailwinds from increasing demand for behavioral services. We maintain a position, as we believe the company is well-positioned to capitalize on the favorable supply/demand outlook for behavioral health, positive reimbursement trends and continued execution of its growth strategy.

Carlisle Cos (CSL), a diversified industrial manufacture of nonresidential roofing materials and industrial connectivity products, benefitted from strong demand, robust backlogs and solid execution in its Construction Materials and Weatherproofing Technologies segments. We maintain a position, as we believe company-specific operating efficiency initiatives, relatively stable re-roofing demand growth and selective acquisitions will drive above average revenue and earnings growth for the business moving forward.

DETRACTORS

Security selection detracted within the Health Care, Information Technology and Energy sectors. From an allocation perspective, the portfolio’s underweight in Energy and an overweight in Consumer Staples detracted from relative performance. Additionally, the portfolio’s orientation towards what we believe to be higher quality companies and avoidance of highly valued/unprofitable businesses also detracted. At the company level, Catalent and NCR Corporation were two of the largest detractors during the quarter.

Catalent (CTLT), a pharmaceutical contract development and manufacturing organization, declined following a rate-of-change slowdown in its COVID-related revenues along with ongoing near-term cost pressures. We maintain a position, as we believe the long-term value creation opportunity for the company remains intact, driven by its competitive position in biologics, sticky customer relationships and growing demand from biopharma companies for complex dose solutions.

NCR Corporation (NCR), an enterprise technology company that provides software and hardware to the financial, retail and restaurant/hospitality industries, declined following an announcement that the company’s board had approved to separate the company into two publicly traded entities in an attempt to unlock shareholder value as opposed to an outright sale which the market preferred. We maintain a position, as we believe the two separate enterprises should drive greater focus and expertise on their respective market opportunities. Furthermore, we believe demand for point-of-service terminals, self-checkout, digital payments and automated billing and accounting services serve as tailwinds for the company moving forward.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Enhabit	Huntington Bancshares

BUYS/ACQUISITIONS

Enhabit (EHAB), a provider of home health and hospice services, was added to the portfolio by virtue of its spin-off from existing holding Encompass Health. We maintain a position, as we believe the company should benefit from aging demographic trends that can increase demand for the company’s services.

SELLS/LIQUIDATIONS

Huntington Bancshares (HBAN), an Ohio-based bank holding company, was removed from the portfolio based on our belief that shares were fully valued and there were better opportunities to deploy capital elsewhere within the portfolio.

Outlook and Positioning

The risks to U.S. economic activity and thus the equity market overall, continue to be the same culprits that have been responsible for the market’s volatility over the past several quarters: the speed and pace of interest rate hikes, supply chain issues, currency and commodity price swings, and geopolitical turmoil across the globe. The subsequent impact of these factors, among others, has resulted in a 24.01% decline in the Russell 2500 Index through the first nine months of the year.

The question at this point is less about what has happened over the past twelve months but more importantly about where we are headed for the remainder of the year and into 2023. As we have indicated many times over the years, our ability to call the direction and magnitude of the market’s moves over the short term is no better (or worse) than anyone else’s. Therefore, we do not attempt to do so. Rather, we continue to monitor events as they unfold and factor those developments into our company-specific and portfolio-specific analyses. Overall, we remain encouraged by the fact that our conversations with hundreds of small-cap companies so far in 2022 point to a relatively “stable” environment for their businesses. Companies are reporting a wide array of operating conditions for their business, from reasonably robust to continued sluggishness, but the general consensus in recent meetings is that conditions have not experienced a sudden and rapid deterioration. That is not to say that such a turn of events could not happen before the end of the year; rather, it is just meant to highlight the divergence between the market’s action and what we hear from small cap companies. With quarterly earnings season set to take center stage, we will see if their collective tones have changed or if it will be more of the same.

Another positive note stems from current valuations of small/mid cap companies. Small/mid cap equities continue to remain attractive on a forward valuation basis, both on an absolute level and relative to large caps. As of quarter-end, the relative forward P/E of the Russell 2500 Index versus the Russell 1000 Index continues to trade at a discount to its long-term average and now sits at its cheapest levels since the Dot-com bubble. For long-term investors, these valuations may imply a more favorable setup for small/mid caps relative to large caps in the periods to come. The strengthening of the U.S. dollar may also have an outsized impact on third quarter earnings. In particular, large multinational companies may see a headwind as sizable chunks of their sales come from outside the U.S. That is because as the value of the dollar rises, it makes U.S.-produced goods more expensive outside the country. Continued strength in the U.S. dollar coupled with ongoing geopolitical turmoil and reshoring efforts may offer a relative boost to small and mid cap companies versus large caps moving forward.

Nevertheless, with uncertainty, volatility and investor pessimism enduring, we believe these environments reinforce the need for selectivity and further argue for a focus on companies with quality characteristics, particularly strong balance sheets and healthy profitability to offer a buffer if economic conditions continue to slow. As always, our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Recent purchases and sales have been spread across industries and are idiosyncratic in nature, as opposed to being tied to an outlook for a particular sector. Overweights in Industrials and Information Technology are mostly a function of recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles as a result of structural headwinds for various brick and mortar businesses. We also continue to be underweight in Real Estate as a result of valuations and structural challenges for various end markets within the sector. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter; however, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

Disclosures

The opinions expressed herein are those of Aristotle Capital Boston, LLC (Aristotle Boston) and are subject to change without notice.

Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security. 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 Boston’s Small/Mid Cap Equity 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. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Aristotle Boston makes in the future will be profitable or equal the performance of the securities discussed herein. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. 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.

Effective January 1, 2022, the Russell 2500 Value Index was removed as the secondary benchmark for the Aristotle Boston Small/Mid Cap Equity strategy.

Non-fee-paying accounts represented less than 5% of the SMID Cap Composite assets from December 31, 2010 to December 31, 2013. As of December 31, 2014, there were no non-fee-paying accounts in the Composite. In instances where non-fee paying accounts were included in the SMID Cap Composite, the highest model fee was applied to recalculate the net returns for composite purposes and the impact on the since inception return of the composite was deemed immaterial.

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.

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

Performance Disclosures

Sources: SS&C Advent, Russell Investments

Composite returns for periods ended September 30, 2022 are preliminary pending final account reconciliation.

*The Aristotle Small/Mid Cap Equity Composite has an inception date of January 1, 2008 at a predecessor firm. During this time, Jack McPherson and Dave Adams had primary responsibility for managing the strategy. Performance starting January 1, 2015 was achieved at Aristotle Boston.

Effective January 1, 2022, the Russell 2500 Value Index was removed as the secondary benchmark for the Aristotle Boston Small/Mid Cap Equity Strategy. Nonfee-paying accounts represented less than 5% of the SMID Cap Composite assets from December 31, 2010 to December 31, 2013. As of December 31, 2014, there were no non-fee-paying accounts in the Composite. In instances where non-fee paying accounts were included in the SMID Cap Composite, the highest model fee was applied to recalculate the net returns for composite purposes and the impact on the since inception return of the composite was deemed immaterial. Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized.

Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. 

Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACB-2210-22-MSFA

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

Small/mid cap equities searched for direction in the third quarter as volatility to upside and downside continued to test investors’ fortitude. What looked like a relatively rosy market backdrop through the first half of the quarter with the Russell 2500 Index up over 16%, turned sour in the middle of August, only to worsen further in September, pushing the index into negative territory by quarter-end. Equity market intra-quarter declines coincided with the Federal Reserve (Fed) reiterating that they would prioritize reining in inflation versus supporting growth. To that end, the quarter saw two more aggressive interest-rate hikes of 0.75 percentage points, one in July and then another in September, which leaves the effective federal-funds rate at 3.00%-3.25% exiting the third quarter, its highest level since 2008. Prior to raising the fed-funds rate by three-quarters of a point in June, the Fed had not raised its flagship policy rate by 0.75 percentage points in any single meeting since 1994. These actions led to a sharp rise in bond yields and a risk-off environment that extended to equity markets across the globe. Compared to their large cap counterparts, however, small/mid caps held up relatively well during the quarter with the Russell 2500 Index’s total return of -2.82%, besting the -4.61% return of the Russell 1000 Index. This snaps a five-quarter underperformance streak, its longest since the six quarters ending in the first quarter of 1999.

At the sector level, nine of the eleven economic sectors in the Russell 2500 Index posted negative returns during the quarter led by Real Estate (-10.23%), Communication Services (-9.56%) and Utilities (-8.15%). Conversely, Energy (+6.43%), Health Care (+0.49%), driven by gains in Biotechnology, and Industrials (-0.58%) were the top performing sectors during the quarter. From a fundamental characteristics standpoint, companies with higher betas, lower dividend yields and high short interest ratios outperformed. Unprofitable* companies within the Russell 2500 Index also outperformed profitable companies during the quarter by 7.60%.

Given the factor leadership outlined above, it may come as no surprise that the Russell 2500 Growth Index (-0.12%) outperformed the Russell 2500 Value Index (-4.50%) during the period. Although the quarter granted a slight reprieve from growth’s relative underperformance versus value over the past several quarters, value’s dominance over growth in recent periods continues to be reflected in their trailing twelve-month period returns, with the Russell 2500 Value Index returning -20.41% versus -29.54% for the Russell 2500 Growth Index.

*Based on earnings expectations over the next twelve months. Source: FactSet

Sources: SS&C Advent; Russell Investments

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

Performance Review

For the third quarter of 2022, the Aristotle Small/Mid Cap Equity Composite generated a total return of -4.55% gross of fees (-4.67% net of fees), trailing the -2.82% total return of the Russell 2500 Index. Overall, security selection detracted while sector allocation positively contributed. Security selection within the Health Care, Information Technology and Energy sectors were the largest detractors on a relative basis, while selection within Financials, Communication Services and Materials contributed. From an allocation perspective, the portfolio benefited from an underweight in Real Estate and an overweight in Industrials; however, this was partially offset by an underweight in Energy and an overweight in Consumer Staples.

Relative Contributors	Relative Detractors
Acadia Healthcare	Catalent
Carlisle Cos	NCR
WillScot Mobile Mini Holdings	PetIQ
Gartner	Knowles
MACOM Technology Solutions	Harsco

CONTRIBUTORS

Security selection added the most value within the Financials, Communication Services and Materials sectors. From an allocation perspective, the portfolio benefited from an underweight in Real Estate and an overweight in Industrials. At the company level, Acadia Healthcare and Carlisle Companies were two of the largest contributors during the quarter.

Acadia Healthcare (ACHC), a provider of behavioral health and addiction services to patients in a variety of inpatient and outpatient settings, benefited from continued strong growth tailwinds from increasing demand for behavioral services. We maintain a position, as we believe the company is well-positioned to capitalize on the favorable supply/demand outlook for behavioral health, positive reimbursement trends and continued execution of its growth strategy.

Carlisle Cos (CSL), a diversified industrial manufacture of nonresidential roofing materials and industrial connectivity products, benefitted from strong demand, robust backlogs and solid execution in its Construction Materials and Weatherproofing Technologies segments. We maintain a position, as we believe company-specific operating efficiency initiatives, relatively stable re-roofing demand growth and selective acquisitions will drive above average revenue and earnings growth for the business moving forward.

DETRACTORS

Security selection detracted within the Health Care, Information Technology and Energy sectors. From an allocation perspective, the portfolio’s underweight in Energy and an overweight in Consumer Staples detracted from relative performance. Additionally, the portfolio’s orientation towards what we believe to be higher quality companies and avoidance of highly valued/unprofitable businesses also detracted. At the company level, Catalent and NCR Corporation were two of the largest detractors during the quarter.

Catalent (CTLT), a pharmaceutical contract development and manufacturing organization, declined following a rate-of-change slowdown in its COVID-related revenues along with ongoing near-term cost pressures. We maintain a position, as we believe the long-term value creation opportunity for the company remains intact, driven by its competitive position in biologics, sticky customer relationships and growing demand from biopharma companies for complex dose solutions.

NCR Corporation (NCR), an enterprise technology company that provides software and hardware to the financial, retail and restaurant/hospitality industries, declined following an announcement that the company’s board had approved to separate the company into two publicly traded entities in an attempt to unlock shareholder value as opposed to an outright sale which the market preferred. We maintain a position, as we believe the two separate enterprises should drive greater focus and expertise on their respective market opportunities. Furthermore, we believe demand for point-of-service terminals, self-checkout, digital payments and automated billing and accounting services serve as tailwinds for the company moving forward.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Enhabit	Huntington Bancshares

BUYS/ACQUISITIONS

Enhabit (EHAB), a provider of home health and hospice services, was added to the portfolio by virtue of its spin-off from existing holding Encompass Health. We maintain a position, as we believe the company should benefit from aging demographic trends that can increase demand for the company’s services.

SELLS/LIQUIDATIONS

Huntington Bancshares (HBAN), an Ohio-based bank holding company, was removed from the portfolio based on our belief that shares were fully valued and there were better opportunities to deploy capital elsewhere within the portfolio.

Outlook and Positioning

The risks to U.S. economic activity and thus the equity market overall, continue to be the same culprits that have been responsible for the market’s volatility over the past several quarters: the speed and pace of interest rate hikes, supply chain issues, currency and commodity price swings, and geopolitical turmoil across the globe. The subsequent impact of these factors, among others, has resulted in a 24.01% decline in the Russell 2500 Index through the first nine months of the year.

The question at this point is less about what has happened over the past twelve months but more importantly about where we are headed for the remainder of the year and into 2023. As we have indicated many times over the years, our ability to call the direction and magnitude of the market’s moves over the short term is no better (or worse) than anyone else’s. Therefore, we do not attempt to do so. Rather, we continue to monitor events as they unfold and factor those developments into our company-specific and portfolio-specific analyses. Overall, we remain encouraged by the fact that our conversations with hundreds of small-cap companies so far in 2022 point to a relatively “stable” environment for their businesses. Companies are reporting a wide array of operating conditions for their business, from reasonably robust to continued sluggishness, but the general consensus in recent meetings is that conditions have not experienced a sudden and rapid deterioration. That is not to say that such a turn of events could not happen before the end of the year; rather, it is just meant to highlight the divergence between the market’s action and what we hear from small cap companies. With quarterly earnings season set to take center stage, we will see if their collective tones have changed or if it will be more of the same.

Another positive note stems from current valuations of small/mid cap companies. Small/mid cap equities continue to remain attractive on a forward valuation basis, both on an absolute level and relative to large caps. As of quarter-end, the relative forward P/E of the Russell 2500 Index versus the Russell 1000 Index continues to trade at a discount to its long-term average and now sits at its cheapest levels since the Dot-com bubble. For long-term investors, these valuations may imply a more favorable setup for small/mid caps relative to large caps in the periods to come. The strengthening of the U.S. dollar may also have an outsized impact on third quarter earnings. In particular, large multinational companies may see a headwind as sizable chunks of their sales come from outside the U.S. That is because as the value of the dollar rises, it makes U.S.-produced goods more expensive outside the country. Continued strength in the U.S. dollar coupled with ongoing geopolitical turmoil and reshoring efforts may offer a relative boost to small and mid cap companies versus large caps moving forward.

Nevertheless, with uncertainty, volatility and investor pessimism enduring, we believe these environments reinforce the need for selectivity and further argue for a focus on companies with quality characteristics, particularly strong balance sheets and healthy profitability to offer a buffer if economic conditions continue to slow. As always, our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Recent purchases and sales have been spread across industries and are idiosyncratic in nature, as opposed to being tied to an outlook for a particular sector. Overweights in Industrials and Information Technology are mostly a function of recent portfolio activity and the relative performance of our holdings in these sectors over the past few periods. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles as a result of structural headwinds for various brick and mortar businesses. We also continue to be underweight in Real Estate as a result of valuations and structural challenges for various end markets within the sector. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter; however, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

Disclosures

The opinions expressed herein are those of Aristotle Capital Boston, LLC (Aristotle Boston) and are subject to change without notice.

Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security. 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 Boston’s Small/Mid Cap Equity 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. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Aristotle Boston makes in the future will be profitable or equal the performance of the securities discussed herein. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. 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.

Effective January 1, 2022, the Russell 2500 Value Index was removed as the secondary benchmark for the Aristotle Boston Small/Mid Cap Equity strategy.

Non-fee-paying accounts represented less than 5% of the SMID Cap Composite assets from December 31, 2010 to December 31, 2013. As of December 31, 2014, there were no non-fee-paying accounts in the Composite. In instances where non-fee paying accounts were included in the SMID Cap Composite, the highest model fee was applied to recalculate the net returns for composite purposes and the impact on the since inception return of the composite was deemed immaterial.

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.

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

Performance Disclosures

Sources: SS&C Advent, Russell Investments

Composite returns for periods ended September 30, 2022 are preliminary pending final account reconciliation.

^*The Aristotle Small/Mid Cap Equity Composite has an inception date of January 1, 2008 at a predecessor firm. During this time, Jack McPherson and Dave Adams had primary responsibility for managing the strategy. Performance starting January 1, 2015 was achieved at Aristotle Boston.

Effective January 1, 2022, the Russell 2500 Value Index was removed as the secondary benchmark for the Aristotle Boston Small/Mid Cap Equity Strategy.  Non-fee-paying accounts represented less than 5% of the SMID Cap Composite assets from December 31, 2010 to December 31, 2013. As of December 31, 2014, there were no non-fee-paying accounts in the Composite. In instances where non-fee paying accounts were included in the SMID Cap Composite, the highest model fee was applied to recalculate the net returns for composite purposes and the impact on the since inception return of the composite was deemed immaterial. Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized.

Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. 

Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACB-2210-22

Markets Review

The U.S. equity market finished lower for the third consecutive quarter, as the S&P 500 Index fell 4.88% during the period, bringing its year-to-date return to -23.87%. Concurrently, the Bloomberg U.S. Aggregate Bond Index dropped 4.75% for the quarter, bringing its year-to-date return to -14.61%. In terms of style, the Russell 1000 Growth Index outperformed its value counterpart by 2.02% during the quarter. Nevertheless, for the year-to-date period, the Russell 1000 Value Index has still outperformed the Russell 1000 Growth Index by 12.91%.

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

On a sector basis, nine out of eleven sectors within the S&P 500 Index finished lower for the quarter, with Communication Services, Real Estate and Materials posting the largest declines. Consumer Discretionary and Energy were the only sectors to post positive returns, while Financials declined the least.

With sustained levels of heightened inflation and continued tightening by the Federal Reserve, recessionary fears persisted throughout the period, as the U.S. economy contracted in both the first and second quarters of 2022. After setting a new 40-year high in June, the CPI remained elevated, recording an 8.3% rise for the year ended in August. Higher prices have weighed on consumers, as sentiment hit multi-year lows. However, the labor market remains tight with unemployment at 3.5% in September. During the first nine months of 2022, payroll employment rose 3.7 million to a record 152.9 million. In tandem, consumer spending during the first and second quarters increased 1.8% and 1.5%, respectively, on a quarter-over-quarter basis.

In response, the Federal Reserve raised the federal funds rate 0.75% in both July and September, moving the benchmark rate to a range of 3.00% to 3.25%, all while continuing to unwind its balance sheet. Restrictive monetary policy has perhaps most visibly impacted interest-rate sensitive sectors, in particular housing, as mortgage rates breached 7%—a 20-year high—and residential investment declined 14% year-over-year in the second quarter. Additionally, the U.S. Dollar Index (DXY) reached a two-decade high, deepening concerns for the durability of U.S. export demand and causing some central banks such as the Bank of Japan to intervene and support their currency.

On the corporate earnings front, although 76% of the companies in the S&P 500 Index exceeded earnings expectations, 72 companies provided negative guidance, the most since the fourth quarter of 2019. The mixed signals highlight the continued backdrop of uncertainty heading into the last quarter of the year.

In geopolitical news, tensions between the U.S. and China flared up as Nancy Pelosi visited Taiwan despite protests from the Chinese deputy foreign minister. The worsening relations with China, combined with the ongoing war in Ukraine, continued to stoke concerns surrounding further geopolitical disruption, inflation and the outlook for global economic activity.

Performance and Attribution Summary

For the third quarter of 2022, Aristotle Atlantic’s Core Equity Composite posted a total return of -4.92% gross of fees (-5.02% net of fees), underperforming the S&P 500 Index, which recorded a total return of -4.88%. Since its inception on August 1, 2013, the Core Equity Composite has posted an annualized return of 11.61% gross of fees (11.09% net of fees), while the S&P 500 Index has reported a total return of 10.69%.

	3Q22	YTD	1 Year	3 Years	5 Years	Since Inception*
Core Equity Composite (gross)	-4.92	-26.76	-19.32	8.09	9.70	11.61
Core Equity Composite (net)	-5.02	-27.00	-19.65	7.64	9.25	11.09
S&P 500 Index	-4.88	-23.87	-15.47	8.15	9.23	10.69

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

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

Contributors and Detractors for 3Q 2022

Relative Contributors	Relative Detractors
Darling Ingredients	Catalent
Cigna	ServiceNow
Ameriprise Financial	Bio-Techne
O’Reilly Automotive	Ball
Trane Technologies	Spirit AeroSystems Holdings

Contributors

Darling Ingredients

Darling Ingredients was a relative contributor, bouncing back from weakness at the end of the prior quarter. The company reported, what we view, as solid second quarter earnings and gave positive guidance on future renewal diesel trends. The Energy sector was up in the third quarter, which also provided a tailwind to Darling’s energy operations. 

Cigna

Cigna outperformed the S&P 500 Index in the third quarter, as the company reported what we view as solid second quarter results driven by a better-than-expected medical loss ratio. The company continues to be aggressive with share repurchases and we believe the defensive nature of Cigna’s business continues to be attractive during the ongoing macroeconomic uncertainty. 

Detractors

Catalent

Catalent shares were weak in the third quarter. The company reported results in line with consensus for the second quarter, but provided initial fiscal 2023 guidance calling for 8% organic constant currency revenue growth which fell slightly below estimates. Catalent is seeing a sharp decline in COVID-19 vaccine production as the pandemic wanes. However, they are confident in their ability to repurpose those manufacturing assets to address market demand outside of COVID-19 vaccines. The stock ended the third quarter trading at what we think is an attractive valuation of 18.1x next twelve-month earnings estimates versus the 5-year average multiple of 27.7x. 

ServiceNow

Underperformance in the third quarter can be attributed to ServiceNow’s slight miss on the second quarter earnings and guidance that was lower than expected for its third quarter outlook. The company is facing headwinds from the weaker macroeconomic conditions and a tempered outlook resulting from elongated sales cycles and an overall slowing software spending environment. These worsening conditions were highlighted by many software companies during the second quarter earnings season. We expect this to be temporary for ServiceNow where the long-term thesis of the company’s platform strategy and relevance to digital transformation strategies remains intact. The stock was also likely impacted by the rapid increase in interest rates during the third quarter and the resulting contraction of multiples on high-growth software stocks.  

Recent Portfolio Activity

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

Buys	Sells
Halliburton	Ball
	Comcast

Buys

Halliburton

Halliburton provides energy, engineering and construction services and is a manufacturer of products for the energy industry. The company offers services and products and integrated solutions to customers in the exploration, development, and production of oil and natural gas. Halliburton operates two business segments: Completion & Production and Drilling & Evaluation.

Our conviction in longer-term operating leverage is supported by the focus on improving cost structures. Upstream oil and gas spending over the longer term can benefit Exploration & Production (E&P) firms from sustained high oil and gas prices and a renewed urgency in global energy security. We believe the rightsizing of the company’s cost structure and forward focus on margins at the same time as E&Ps respond to new investment signals will drive both topline and bottom-line growth.

Sells

Ball

We sold Ball following a very disappointing second quarter earnings and outlook that has caused us to reevaluate the long-term growth potential of the North American beverage can market. The competitive environment appears to have increased more quickly than management has anticipated. We believe it is prudent to sell the entire position, as Ball is forced to reevaluate its growth strategy and shift its capital deployments. Market conditions in North America could spread to other global markets over the next couple of years. 

Comcast

We sold our position in Comcast over concerns that the post-COVID slowdown in the company’s broadband net adds experienced in recent quarters will persist for the foreseeable future. The company faces increased competition in broadband from fiber and fixed-5G offerings that can deliver comparable or better service at lower prices. We believe that Comcast could respond to this competitive threat by cutting prices of its broadband and wireless bundle plans, which would pressure margins and EBTIDA growth. In addition, the company likely faces increased CapEx intensity as it seeks to keep its broadband service competitive.

Outlook

With the S&P 500 Index now trading at 15x forward earnings, we believe the multiple compression is reflected in current equity market valuation levels. The market focus has now shifted to the reduction in earnings estimates to reflect the expectations of a recession. This can impact the cyclical sectors compared to the growth sectors, feeling the brunt of the multiple contraction. International markets will likely continue to struggle with the sizable rise in commodity prices along with a stronger U.S. dollar adding to their woes. If there are any credit issues, it may very well show in either emerging markets or Europe. The two most important economic indicators we will be focused on are weekly unemployment insurance claims and the monthly Consumer Price Index (CPI). The Federal Reserve will likely continue to tighten until the tight labor markets ease. We believe the equity markets should rally on any material uptick in unemployment claims or a CPI that comes in below the consensus survey. Russia’s response to Ukraine’s recent success in regaining territory could also weigh heavily on markets in the fourth quarter. Our focus will continue to be at the company level, with an emphasis on companies with secular tailwinds or strong product driven cycles.

Disclosures

The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) 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 purchase 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 Atlantic 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 Atlantic Core Equity strategy. Not every client’s account will have these characteristics. Aristotle Atlantic 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 Atlantic’s Core Equity 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 Atlantic does not guarantee the accuracy, adequacy or completeness of such information.

Aristotle Atlantic Partners, 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 Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.

Markets Review

The U.S. equity market finished lower for the third consecutive quarter, as the S&P 500 Index fell 4.88% during the period, bringing its year-to-date return to -23.87%. Concurrently, the Bloomberg U.S. Aggregate Bond Index dropped 4.75% for the quarter, bringing its year-to-date return to -14.61%. In terms of style, the Russell 1000 Growth Index outperformed its value counterpart by 2.02% during the quarter. Nevertheless, for the year-to-date period, the Russell 1000 Value Index has still outperformed the Russell 1000 Growth Index by 12.91%.

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

On a sector basis, nine out of eleven sectors within the Russell 1000 Growth Index finished lower for the quarter, with Real Estate, Communication Services and Consumer Staples posting the largest declines. Meanwhile, Consumer Discretionary, Energy and Financials declined the least.

With sustained levels of heightened inflation and continued tightening by the Federal Reserve, recessionary fears persisted throughout the period, as the U.S. economy contracted in both the first and second quarters of 2022. After setting a new 40-year high in June, the CPI remained elevated, recording an 8.3% rise for the year ended in August. Higher prices have weighed on consumers, as sentiment hit multi-year lows. However, the labor market remains tight with unemployment at 3.5% in September. During the first nine months of 2022, payroll employment rose 3.7 million to a record 152.9 million. In tandem, consumer spending during the first and second quarters increased 1.8% and 1.5%, respectively, on a quarter-over-quarter basis.

In response, the Federal Reserve raised the federal funds rate 0.75% in both July and September, moving the benchmark rate to a range of 3.00% to 3.25%, all while continuing to unwind its balance sheet. Restrictive monetary policy has perhaps most visibly impacted interest-rate sensitive sectors, in particular housing, as mortgage rates breached 7%—a 20-year high—and residential investment declined 14% year-over-year in the second quarter. Additionally, the U.S. Dollar Index (DXY) reached a two-decade high, deepening concerns for the durability of U.S. export demand and causing some central banks such as the Bank of Japan to intervene and support their currency.

On the corporate earnings front, although 76% of the companies in the S&P 500 Index exceeded earnings expectations, 72 companies provided negative guidance, the most since the fourth quarter of 2019. The mixed signals highlight the continued backdrop of uncertainty heading into the last quarter of the year.

In geopolitical news, tensions between the U.S. and China flared up as Nancy Pelosi visited Taiwan despite protests from the Chinese deputy foreign minister. The worsening relations with China, combined with the ongoing war in Ukraine, continued to stoke concerns surrounding further geopolitical disruption, inflation and the outlook for global economic activity.

Performance and Attribution Summary

For the third quarter of 2022, Aristotle Atlantic’s Focus Growth Composite posted a total return of -5.18% gross of fees (-5.20% net of fees), underperforming the -3.60% total return of the Russell 1000 Growth Index. Since its inception on March 1, 2018, the Focus Growth Composite has posted an annualized return of 7.82% gross of fees (7.54% net of fees), while the Russell 1000 Growth Index has reported a total return of 10.46%.

	3Q22	YTD	1 Year	3 Years	Since Inception*
Focus Growth Composite (gross)	-5.18	-35.01	-30.00	6.54	7.82
Focus Growth Composite (net)	-5.20	-35.07	-30.08	6.41	7.54
Russell 1000 Growth Index	-3.60	-30.66	-22.59	10.66	10.46

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

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

Contributors and Detractors for 3Q 2022

Relative Contributors	Relative Detractors
Darling Ingredients	ServiceNow
Guardant Health	Bio-Techne
MSCI	Horizon Therapeutics
DexCom	Ball
Snowflake	Nvidia

Contributors

Darling Ingredients

Darling Ingredients was a relative contributor in the third quarter, bouncing back from weakness at the end of the prior quarter. The company reported what we view as solid second quarter earnings and gave positive guidance on future renewal diesel trends. The Energy sector was up in the third quarter, which also provided a tailwind to Darling’s energy operations. 

Guardant Health

Guardant shares were up in the third quarter, bouncing back from weakness in the second quarter. Guardant reported solid 40% year-over-year growth in clinical test volumes and 65% growth in biopharmaceutical test volumes. Shares have been strong in anticipation of the fourth quarter read out from the ongoing Eclipse clinical trial, evaluating Guardant’s test for early detection of colorectal cancer. 

Detractors

ServiceNow

Underperformance in the third quarter can be attributed to ServiceNow’s slight miss on the second quarter earnings and guidance that was lower than expected for its third quarter outlook. The company is facing headwinds from the weaker macroeconomic conditions and a tempered outlook resulting from elongated sales cycles and an overall slowing software spending environment. These worsening conditions were highlighted by many software companies during the second quarter earnings season. We expect this to be temporary for ServiceNow where the long-term thesis of the company’s platform strategy and relevance to digital transformation strategies remain intact. The stock was also impacted by the rapid increase in interest rates during the third quarter and the resulting contraction of multiples on high-growth software stocks. 

Bio-Techne

Bio-Techne shares were weak in the third quarter. The company reported results in line with consensus with 14% organic revenue growth. We believe part of the decline is attributable to the rise in U.S. Treasury yields, which tends to have an outsized negative impact on high-valuation growth stocks. Bio-Techne continues to execute on the diverse aspects of its growth plans. We believe that Bio-Techne continues to be in an enviable position of manufacturing high performance research and diagnostic tools and supplies to the biopharmaceutical industry.

Recent Portfolio Activity

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

Buys	Sells
Thermo Fisher Scientific	Ball
UnitedHealth Group	Salesforce

Buys

Thermo Fisher Scientific

Thermo Fisher Scientific is considered one of the world’s leaders in serving science. The company makes and distributes analytical instruments, scientific equipment, consumables and other laboratory supplies. Thermo Fisher Scientific operates in four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Product and Biopharma Services.

We see Thermo Fisher Scientific as one of the leading management teams in our coverage both through solid execution and savvy Mergers & Acquisitions (M&A). The company is a diversified provider of research and discovery instruments, tools, consumables, and services, and offers a broad-based play on the increased Research & Development (R&D) spend from the biopharma industry. Thermo Fisher Scientific continues to see organic growth in the high single digits with acquisitions increasing their overall portfolio composition and gaining market share.

UnitedHealth Group

UnitedHealth Group is a leading U.S. health insurer offering a variety of plans and services to group and individual customers nationwide. Its health benefits segment manages health maintenance organization, preferred provider organization and point-of-service plans, as well as Medicare, Medicaid, state-funded, and supplemental vision and dental options. In addition, UnitedHealth Group’s Optum health services units—OptumHealth, OptumInsight and OptumRx—provide wellness and care management programs, financial services, information technology solutions, and pharmacy benefit management services to individuals and the health care industry.

We believe UnitedHealth Group is well-positioned as a leader in commercial and government insurance markets with a broad complimentary service offering through Optum Health. As one of the largest health care payers and providers, we believe the company has unique insights and scale to continue to evolve the health care delivery process and drive above industry profitability and growth. We believe UnitedHealth Group’s track record of financial strength and stability warrants a premium in share valuation.

Sells

Ball

We sold Ball following a very disappointing second quarter earnings and outlook that has caused us to reevaluate the long-term growth potential of the North American beverage can market. The competitive environment appears to have increased more quickly than management has anticipated. We believe it is prudent to sell the entire position as Ball is forced to reevaluate its growth strategy and shift its capital deployments. Market conditions in North America could spread to other global markets over the next couple of years. 

Salesforce

We sold Salesforce to reduce our weighting in the Information Technology sector. Salesforce held their investor day, and the company reiterated their organic Fiscal Year 2026 revenue target of $50 billion. This target remains more back-end loaded based on current slowing macroeconomic conditions and requires new annual contract growth well ahead of what the company has been averaging for the past few years. We are skeptical that the company will be able to achieve this revenue target organically and see Merger & Acquisitions (M&A) as being key to achieving the growth. While we believe Salesforce has shown good success in growing its non-CRM clouds, we do see more competitive pressures emerging for the Marketing and Customer Service Clouds, specifically on the pricing side during a global economic slowdown.

Outlook

With the S&P 500 Index now trading at 15x forward earnings, we believe the multiple compression is reflected in current equity market valuation levels. The market focus has now shifted to the reduction in earnings estimates to reflect the expectations of a recession. This can impact the cyclical sectors compared to the growth sectors, feeling the brunt of the multiple contraction. International markets will likely continue to struggle with the sizable rise in commodity prices along with a stronger U.S. dollar adding to their woes. If there are any credit issues it may very well show in either emerging markets or Europe. The two most important economic indicators we will be focused on are weekly unemployment insurance claims and the monthly Consumer Price Index (CPI). The Federal Reserve will likely continue to tighten until the tight labor markets ease. We believe the equity markets should rally on any material uptick in unemployment claims or a CPI that comes in below the consensus survey. Russia’s response to Ukraine’s recent success in regaining territory could also weigh heavily on markets in the fourth quarter. Our focus will continue to be at the company level, with an emphasis on companies with secular tailwinds or strong product driven cycles.

Disclosures

The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) 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 purchase 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 Atlantic makes in the future will be profitable or equal the performance of the listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Focus Growth strategy. Not every client’s account will have these characteristics. Aristotle Atlantic 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 Atlantic’s Focus Growth 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 Atlantic does not guarantee the accuracy, adequacy or completeness of such information.

Aristotle Atlantic Partners, 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 Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.  

Markets Review

The U.S. equity market finished lower for the third consecutive quarter, as the S&P 500 Index fell 4.88% during the period, bringing its year-to-date return to -23.87%. Concurrently, the Bloomberg U.S. Aggregate Bond Index dropped 4.75% for the quarter, bringing its year-to-date return to -14.61%. In terms of style, the Russell 1000 Growth Index outperformed its value counterpart by 2.02% during the quarter. Nevertheless, for the year-to-date period, the Russell 1000 Value Index has still outperformed the Russell 1000 Growth Index by 12.91%.

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

On a sector basis, nine out of eleven sectors within the Russell 1000 Growth Index finished lower for the quarter, with Real Estate, Communication Services and Consumer Staples posting the largest declines. Meanwhile, Consumer Discretionary, Energy and Financials declined the least.

With sustained levels of heightened inflation and continued tightening by the Federal Reserve, recessionary fears persisted throughout the period, as the U.S. economy contracted in both the first and second quarters of 2022. After setting a new 40-year high in June, the CPI remained elevated, recording an 8.3% rise for the year ended in August. Higher prices have weighed on consumers, as sentiment hit multi-year lows. However, the labor market remains tight with unemployment at 3.5% in September. During the first nine months of 2022, payroll employment rose 3.7 million to a record 152.9 million. In tandem, consumer spending during the first and second quarters increased 1.8% and 1.5%, respectively, on a quarter-over-quarter basis.

In response, the Federal Reserve raised the federal funds rate 0.75% in both July and September, moving the benchmark rate to a range of 3.00% to 3.25%, all while continuing to unwind its balance sheet. Restrictive monetary policy has perhaps most visibly impacted interest-rate sensitive sectors, in particular housing, as mortgage rates breached 7%—a 20-year high—and residential investment declined 14% year-over-year in the second quarter. Additionally, the U.S. Dollar Index (DXY) reached a two-decade high, deepening concerns for the durability of U.S. export demand and causing some central banks such as the Bank of Japan to intervene and support their currency.

On the corporate earnings front, although 76% of the companies in the S&P 500 Index exceeded earnings expectations, 72 companies provided negative guidance, the most since the fourth quarter of 2019. The mixed signals highlight the continued backdrop of uncertainty heading into the last quarter of the year.

In geopolitical news, tensions between the U.S. and China flared up as Nancy Pelosi visited Taiwan despite protests from the Chinese deputy foreign minister. The worsening relations with China, combined with the ongoing war in Ukraine, continued to stoke concerns surrounding further geopolitical disruption, inflation and the outlook for global economic activity.

Performance and Attribution Summary

For the third quarter of 2022, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of -4.87% gross of fees  (-4.95% net of fees), underperforming the -3.60% total return of the Russell 1000 Growth Index. Since its inception on November 1, 2016, the Large Cap Growth Composite has posted an annualized return of 13.67% gross of fees (13.23% net of fees), while the Russell 1000 Growth Index has reported a total return of 14.40%.

	3Q22	YTD	1 Year	3 Years	5 Years	Since Inception*
Large Cap Growth Composite (gross)	-4.87	-32.95	-27.38	8.07	11.17	13.67
Large Cap Growth Composite (net)	-4.95	-33.13	-27.64	7.65	10.73	13.23
Russell 1000 Growth Index	-3.60	-30.66	-22.59	10.66	12.16	14.40

Sources: FactSet
*The Large Cap Growth Composite has an inception date of November 1, 2016. Past performance is not indicative of future results. Aristotle Atlantic Large Cap Growth Equity Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

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

Contributors and Detractors for 3Q 2022

Relative Contributors	Relative Detractors
Darling Ingredients	ServiceNow
O’Reilly Automotive	Bio-Techne
Guardant Health	Ball
Sage Therapeutics	Tenable Holdings
DexCom	Adaptive Biotechnologies

Contributors

Darling Ingredients

Darling Ingredients was a relative contributor in the third quarter, bouncing back from weakness at the end of the prior quarter. The company reported, what we view as, solid second quarter earnings and gave positive guidance on future renewal diesel trends. The Energy sector was up in the third quarter, which also provided a tailwind to Darling’s energy operations. 

O’Reilly Automotive

O’Reilly Automotive outperformed the Consumer Discretionary sector because its business is expected to be more resilient in an economic downturn. The company’s second quarter earnings were slightly below consensus estimates; however, the outlook for the rest of the year showed steady growth despite difficult comparisons with the second half of 2021. O’Reilly Automotive continues to grow its store base and has recently announced an expansion into Mexico. The company operates in an industry where competition has historically remained rational through the economic cycle.  

Detractors

ServiceNow

Underperformance in the third quarter can be attributed to ServiceNow’s slight miss on the second quarter earnings and guidance that was lower than expected for its third quarter outlook. The company is facing headwinds from the weaker macroeconomic conditions and a tempered outlook resulting from elongated sales cycles and an overall slowing software spending environment. These worsening conditions were highlighted by many software companies during the second quarter earnings season. We expect this to be temporary for ServiceNow where the long-term thesis of the company’s platform strategy and relevance to digital transformation strategies remains intact. The stock was also impacted by the rapid increase in interest rates during the third quarter and the resulting contraction of multiples on high-growth software stocks. 

Bio-Techne

Bio-Techne shares were weak in the third quarter. The company reported results in line with consensus with 14% organic revenue growth. We believe part of the decline is attributable to the rise in U.S. Treasury yields, which tends to have an outsized negative impact on high-valuation growth stocks. Bio-Techne continues to execute on the diverse aspects of its growth plans. We believe that Bio-Techne continues to be in an enviable position of manufacturing high performance research and diagnostic tools and supplies to the biopharmaceutical industry.

Recent Portfolio Activity

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

Buys	Sells
UnitedHealth Group	Ball
	Salesforce
	Global Payments

Buys

UnitedHealth Group

UnitedHealth Group is a leading U.S. health insurer offering a variety of plans and services to group and individual customers nationwide. Its health benefits segment manages health maintenance organization, preferred provider organization and point-of-service plans, as well as Medicare, Medicaid, state-funded, and supplemental vision and dental options. In addition, UnitedHealth Group’s Optum health services units—OptumHealth, OptumInsight and OptumRx—provide wellness and care management programs, financial services, information technology solutions, and pharmacy benefit management services to individuals and the health care industry.

We believe UnitedHealth Group is well-positioned as a leader in commercial and government insurance markets with a broad complimentary service offering through Optum Health. As one of the largest health care payers and providers, we believe the company has unique insights and scale to continue to evolve the health care delivery process and drive above industry profitability and growth. We believe UnitedHealth Group’s track record of financial strength and stability warrants a premium in share valuation. 

Sells

Ball

We sold Ball following a very disappointing second quarter earnings and outlook that has caused us to reevaluate the long-term growth potential of the North American beverage can market. The competitive environment appears to have increased more quickly than management has anticipated. We believe it is prudent to sell the entire position as Ball is forced to reevaluate its growth strategy and shift its capital deployments. Market conditions in North America could spread to other global markets over the next couple of years. 

Salesforce

We sold Salesforce to reduce our weighting in the Information Technology sector. Salesforce held their investor day, and the company reiterated their organic Fiscal Year 2026 revenue target of $50 billion. This target remains more back-end loaded based on current slowing macroeconomic conditions and requires new annual contract growth well ahead of what the company has been averaging for the past few years. We are skeptical that the company will be able to achieve this revenue target organically and see Merger & Acquisitions (M&A) being key to achieving the growth. While we believe Salesforce has shown good success in growing its non-CRM clouds, we do see more competitive pressures emerging for the Marketing and Customer Service Clouds, specifically on the pricing side during a global economic slowdown.

Global Payments

We sold Global Payments to reduce our weighting in the Information Technology sector. The company has benefited from the post-COVID-19 recovery in consumer spending, but we see the emerging macroeconomic headwinds in the U.S. and Europe as a risk to the company’s topline growth outlook. Almost 70% of the business is related to consumer spending and the number of payment transactions. The company has approximately 15% revenue exposure to Europe and recently announced an acquisition of EVO Payments which has ~40% European exposure. We view the outlook for the European consumer and Small- and Medium-Sized Business (SMB) environment as having turned more negative and as Global Payments continues to face a strong competitive environment from new fintech payment companies. We believe it was prudent to reduce our exposure to payment processors.

Outlook

With the S&P 500 Index now trading at 15x forward earnings we believe the multiple compression is reflected in current equity market valuation levels. The market focus has now shifted to the reduction in earnings estimates to reflect the expectations of a recession. This can impact the cyclical sectors compared to the growth sectors, feeling the brunt of the multiple contraction. International markets will likely continue to struggle with the sizable rise in commodity prices along with a stronger U.S. dollar adding to their woes. If there are any credit issues it may very well show in either emerging markets or Europe. The two most important economic indicators we will be focused on are weekly unemployment insurance claims and the monthly Consumer Price Index (CPI). The Federal Reserve will likely continue to tighten until the tight labor markets ease. We believe the equity markets should rally on any material uptick in unemployment claims or a CPI that comes in below the consensus survey. Russia’s response to Ukraine’s recent success in regaining territory could also weigh heavily on markets in the fourth quarter. Our focus will continue to be at the company level, with an emphasis on companies with secular tailwinds or strong product driven cycles.

Disclosures

The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) 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 purchase 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 Atlantic 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 Atlantic Large Cap Growth strategy. Not every client’s account will have these characteristics. Aristotle Atlantic 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 Atlantic’s Large Cap Growth 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 Atlantic does not guarantee the accuracy, adequacy or completeness of such information.

Aristotle Atlantic Partners, 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 Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.