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

Markets Review

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

Global equity markets were mixed during the second quarter. Overall, the MSCI ACWI Index rose 2.87% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index fell 1.10%. In terms of style, value stocks underperformed their growth counterparts during the quarter, with the MSCI ACWI Value Index trailing the MSCI ACWI Growth Index by 6.79%.

The MSCI EAFE Index fell 0.42% during the second quarter, while the MSCI ACWI ex USA Index increased 0.96%. Within the MSCI EAFE Index, Asia was the largest detractor, while the U.K. gained the most. On a sector basis, five of the eleven sectors within the MSCI EAFE Index posted negative returns, with Consumer Discretionary, Real Estate and Materials recording the largest losses. Conversely, Health Care, Financials and Energy performed the best.

The global economy remained resilient, with the IMF estimating global growth to remain steady at 3.2% as inflation converges toward targeted levels. The U.K. hit the 2.0% annual inflation target in May, while the eurozone and U.S. were close behind at 2.6% and 3.3%, respectively. Given the improved inflation outlook, the European Central Bank announced its first rate cut in almost five years, lowering its key rate by 25 basis points to 3.75%. However, the U.K. and U.S. left rates unchanged, citing lingering economic uncertainty and the need for greater confidence that lower levels of inflation would be sustainable.

In Asia, after making a historic change in monetary policy in March, Japan kept its benchmark interest rate unchanged at 0.0% to 0.1% and announced an upcoming plan to unwind its $5 trillion balance sheet. However, with the yen hitting a 34-year low in April, Governor Kazuo Ueda did not rule out an additional rate hike in July. Meanwhile, China also kept its benchmark lending rates unchanged, highlighting the PBOC’s limited policy options as the economy struggles to recover.

In geopolitics, tensions remained high, as Hamas rejected the U.S.-led ceasefire proposal and Israel continued attacks in central and southern Gaza. Conflict between Israel and Hezbollah continued, prompting concerns from U.S. Defenese Secretary Lloyd Austin that heightened activity between the two groups could escalate into a regional war. In Ukraine, conditions in northern Kharkiv stabilized after Russia’s offensive in May, aided by additional weapons and permissions provided by Ukraine’s Western allies. However, a new Russian front line in the north and pressure in the east continues to stretch Ukrainian forces, leading to more civilian deaths. Lastly, trade tensions between the U.S. and China flared, as President Biden announced an increase in tarrifs on $18 billion of Chinese imports.

Performance and Attribution Summary

For the second quarter of 2024, Aristotle Capital’s International Equity Composite posted a total return of -0.85% gross of fees (-0.96% net of fees), underperforming the MSCI EAFE Index, which returned -0.42%, and the MSCI ACWI ex USA Index, which returned 0.96%. Please refer to the table below for detailed performance.

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

From a sector perspective, the portfolio’s underperformance relative to the MSCI EAFE Index can be attributed to both allocation effects and security selection. Security selection in Information Technology and Communication Services as well as an overweight in Consumer Discretionary detracted the most from the portfolio’s relative performance. Conversely, security selection in Consumer Staples, Energy and Financials contributed to relative return.

Regionally, security selection was responsible for the portfolio’s underperformance, while allocation effects had a positive impact. Security selection in the U.K. detracted the most from relative performance, while an underweight and security selection in Asia contributed.

Contributors and Detractors for 2Q 2024

Relative Contributors	Relative Detractors
Cameco	Accenture
DBS Group	Magna International
Erste Group Bank	Pan Pacific International
Munich Reinsurance	AkzoNobel
Alcon	LVMH

Accenture, the global IT services and consulting firm, was the largest detractor during the quarter. The broader consulting industry has seen a softening of demand as corporate clients have reined in spending amid higher interest rates and macroeconomic uncertainty. While we understand the cyclical nature of the industry, with Accenture’s revenue down just 1% year-over-year, we believe the recent pressure on the company’s share price to be overdone. Bookings have remained strong in the first half of the year, especially for large deals, while generative AI sales surpassed $2 billion for the same period. Accenture’s end-to-end services, functional and geographic scale, industry expertise, and integration within client systems make it uniquely able to perform the large-scale digital transformations its corporate customers’ demand. Moreover, we believe Accenture’s breadth of research and development resources make it well positioned to continue to provide solutions and deepen its partnerships with many of the world’s largest companies as they respond to and seek to implement constantly evolving technologies (including generative AI).

Magna International, a Canada‐based global auto parts, systems and assembly company, was one of the largest detractors for the period. The company lowered its 2024 sales guidance, having seen a slowdown in electric vehicle (EV) adoption across its customer base and expecting a halt in Fisker Ocean production. Despite concerns over automakers delaying EV rollouts, we continue to believe in the longer-term investment catalysts for Magna. These include the company’s ability to enhance margins from operational improvements and leverage its distinctive capabilities to supply parts for an increasingly electrified and autonomous fleet of vehicles. Magna specializes in lightweighting—a necessity for heavy internal combustion engines and electric vehicles—and has made years of investments in self-driving technologies. In addition, with leading market share positions in many of its core markets and products, we believe Magna remains well positioned to benefit as content‐per‐vehicle increases and automotive parts and systems become more complex.

Cameco, one of the world’s largest publicly traded uranium producers, was the top contributor during the period.Support from governments and policymakers for nuclear energy has continued to increase in 2024 as countries realize it can play a crucial role in both promoting energy security and lowering dependence on fossil fuels to meet environmental goals. With higher demand for uranium across the world, Cameco’s production was up more than 25% year-over-year, and its long-term supply contracts have increased (annual commitments now standing at 28 million pounds per year through 2028). We view these fundamental improvements as further proof Cameco is making progress on our catalyst of increasing its uranium volume sold at higher prices, all while lowering production costs through scale and its access to some of the highest-grade ore on the planet. In addition, we believe the company’s continued integration of Westinghouse Electric Company’s market-leading downstream capabilities will allow it to offer a highly competitive nuclear fuel solution. In our opinion, this puts Cameco on track to enjoy higher levels of FREE cash flow and the ability to de-risk its balance sheet as it meets global energy needs.

 DBS Group, Singapore’s largest bank¹,was a leading contributor. The bank reported strong results, with net interest margins (NIMs) expanding due to the higher-for-longer rate environment and net fee income surpassing $1 billion for the first time. We view these improvements as evidence DBS is executing on previously identified catalysts, including market share gains in wealth management and profitable expansion outside of Singapore. As such, wealth management fees were up ~47% year-over-year as the unit experienced inflows, as well as continued growth in AUM. A large portion of this increase was supported by its 2023 acquisition of Citigroup’s consumer banking business in Taiwan. We continue to admire DBS’s leadership in digital banking and believe it will allow the company to drive further efficiency gains, improve the customer experience, and increase its footprint and penetration both domestically and across Asia.

¹As measured by assets as of June 30, 2024.

Recent Portfolio Activity

During the quarter, we sold our position in Novartis and invested the proceeds in Roche.

We have been investors in the Swiss pharmaceutical company Novartis for over a decade, having first purchased shares in 2011. During our holding period, the company has undergone significant changes. Vasant (“Vas”) Narasimhan was promoted to CEO in 2018 and, we believe, has positively influenced the company’s culture and helped shift the business more toward innovative medicines. Examples include the sale of Novartis’s consumer (over-the-counter) joint venture; the divestiture of its vaccines and animal health businesses; the spinoff of Alcon, a global leader in the treatment of eye diseases and eye conditions (also an International Equity holding); and most recently, the spinoff of generics manufacturer Sandoz. As part of its portfolio transformation, Novartis has been able to improve its margins and gain share of branded pharmaceuticals. With many catalysts having neared completion, we decided to sell Novartis to fund the purchase of what we believe is a more optimal investment in Roche.

Roche Holding AG

Founded in 1896 and headquartered in Switzerland, Roche is one of the world’s largest biotechnology and diagnostics companies. The company produced over CHF 58 billion in revenue in 2023, just under half of which was generated in the United States. Roche’s drugs are used to treat conditions in a variety of areas, including oncology (~43% of pharmaceuticals sales), neuroscience (~19%), immunology (~14%), hemophilia (~9%) and others (~15%). The company is also the leading provider of in-vitro diagnostics, with approximately 20% global market share.

Roche’s scale and unique structure, having both a pharmaceutical portfolio (~75% of group revenue) and a diagnostics business (~25%), positions it as a pioneer in personalized healthcare. This evolving field uses diagnostic tests to determine which treatments will work best for patients. Approximately two-thirds of Roche’s R&D projects focus on combining targeted therapies with companion diagnostics.

High-Quality Business

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

• Long and proven history in the research and development of innovative medicines;
• Economies of scale allow for cost advantages, with more than 29 billion diagnostic tests delivered and millions of patients treated with Roche medicines in 2023;
• Significant expertise in creating molecularly targeted therapies, particularly to fight cancer; and
• Roche’s ability to pair drugs with diagnostics can reduce up-front investments, shorten development timelines and boost the commercial potential of new products.

Attractive Valutaion

We believe increased sales of certain products will lead to higher levels of FREE cash flow than are currently appreciated by the market. Considering Roche’s ~4% dividend yield and our projections of higher future earnings, we view the company to be attractively valued with a normalized P/E of ~14x. We estimate this provides an approximately 30% upside to the share price at time of purchase.

Compelling Catalysts

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

• Continued market share gains within oncology, including for Perjeta to treat breast cancer, Tecentriq for lung cancer, Venclexta for blood cancer and others;

• Increased penetration of Hemlibra for hemophilia and Ocrevus for multiple sclerosis;
• Further recognition of value and incremental use cases for portions of the diagnostics division; and

Potential Future Catalysts: Pipeline of possible blockbuster developments, such as Roche’s Brainshuttle technology used to deliver antibodies to treat neurological diseases, could become catalysts. While the pipeline assets are not (yet) reflected in our estimate of intrinsic value, at present we view these assets as “free options.”

Conclusion

As economic data points fluctuate from quarter to quarter and the macroeconomic outlook remains uncertain, we focus on individual businesses. This quarter we highlighted some of the unique characteristics of Roche which, we believe, afford the company a competitive advantage relative to peers. Rather than attempt to predict central bank policy, GDP, or elections, we will continue to identify and study what we deem to be high-quality companies. It is our core belief that the fundamentals of a business are the most important determinates of its long-term worth.

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

Markets Review

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

Global equity markets continued to climb during the first quarter. Overall, the MSCI ACWI Index rose 8.20% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index fell 2.08%. In terms of style, value stocks underperformed their growth counterparts during the quarter, with the MSCI ACWI Value Index trailing the MSCI ACWI Growth Index by 2.65%.

The MSCI EAFE Index climbed 5.78% during the first quarter, while the MSCI ACWI ex USA Index increased 4.69%. Within the MSCI EAFE Index, Asia and Europe & Middle East were the strongest performers, while the U.K. gained the least. On a sector basis, eight of the eleven sectors within the MSCI EAFE Index posted positive returns, with Information Technology, Consumer Discretionary and Financials generating the largest gains. Conversely, Utilities, Consumer Staples and Materials declined.

Economic conditions varied by region, though most developed countries reported slowing inflation. For the month of February, both the U.K. and U.S. reported annual inflation descending toward the 3% mark, while the eurozone recorded an annual rate of 2.6%. As such, the respective central banks held monetary policy steady while signaling the possibility of rate cuts starting in June as the countries make progress toward the 2% target.

However, in Asia, Japan raised interest rates for the first time since 2007 to a range of 0.0% to 0.1%, as both inflation and wage growth have recently accelerated. This marked a historic shift and ended Japan’s period of negative rates, finally removing the world’s last remaining negative rates regime. Conversely, China lowered its five-year loan prime rate to bolster its faltering economy that is battling deflation and a troubled real estate sector.

In geopolitics, the conflict in the Middle East continued, with increased fighting in Lebanon and direct conflict in the Red Sea between the U.S. and Yemen’s Houthis, which have targeted more than two dozen ships traveling to and from the Suez Canal. The heightened activity in surrounding countries has sparked concerns of further regional escalation and the possibility of a wider conflict. In Europe, Russia made small advances in Ukraine, including the capture of the city of Avdiivka, as Ukrainian troops struggle with supply shortages. The U.S. has recently partnered with countries such as South Korea and Turkey to provide additional ammunition and supplies to Ukraine.

Performance and Attribution Summary

For the first quarter of 2024, Aristotle Capital’s International Equity ADR Composite posted a total return of 3.89% gross of fees (3.73% net of fees), underperforming the MSCI EAFE Index, which returned 5.78%, and the MSCI ACWI ex USA Index, which returned 4.69%. Please refer to the table below for detailed performance.

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

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

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

Contributors and Detractors for 1Q 2024

Relative Contributors	Relative Detractors
Safran	Daikin Industries
Munich Reinsurance	Sony
GlaxoSmithKline	AIA Group
Pan Pacific International	Accenture
Credicorp	Azko Nobel

Sony, the global provider of videogames and consoles, image sensors, music and movies, was one of the largest detractors for the period. Sony cut its guidance from 25 million PlayStation 5 (PS5) units sold to 21 million units for the fiscal year. Despite the underwhelming hardware results, management has emphasized the importance of balancing profitability and sales in the latter stage of the PS5’s life cycle which it expects to achieve through engagement, with monthly active users reaching a record high of 123 million accounts. Furthermore, we will continue to monitor management’s ability to improve game development, streamline project management and control costs, as Sony has already begun to implement structural reforms in its Game & Network Services segment. In its Pictures segment, Sony terminated its merger with Zee Entertainment, as closing conditions were not met within the set two-year window. Nevertheless, management believes India remains a promising market and will proactively explore opportunities to bolster its position in the country. We remain confident in Sony’s ability to build on its industry leadership, and we feel the company’s continued optimization of business operations, including its plan for a partial spinoff of its Financial Services business, positions the company to enhance long-term value.

AIA Group, a pan-Asian life insurance company headquartered in Hong Kong, was one of the largest detractors for the quarter. While macro concerns over the state of the Chinese economy may have placed pressure on AIA’s share price during the quarter, business fundamentals continue to improve. As evidence, the company’s VONB* increased 33% in 2023. This, in our opinion, reflects AIA’s resiliency and the progress it has made across Asia, with mainland China, Hong Kong and the ASEAN countries (excluding Vietnam) all reporting double-digit percentage increases. The company has also completed a multi-year digital transformation that has not only reduced costs per transaction by over 30% but has also improved customer experience. (85% of customer transactions are now completed in a day or less.) With these technological investments in place, the support of its highly productive agency sales force, and further partnerships with major banks, we remain confident in AIA’s ability to continue increasing its market share in mainland China and expanding across Asia.

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

Safran, the French aerospace propulsion and equipment manufacturer, was the top contributor. As the leading supplier of narrow-body aircraft engines, Safran has benefited from the increase in narrow-body air traffic (above 2019 levels) and an aging fleet of aircraft that has spurred demand for required service. Part of our attraction to Safran is the nature of its product categories, which tend to exhibit pricing power, and the benefits of higher-margin aftermarket businesses, which we expect to expand in the years ahead. As an example, the company recently signed several multi-year equipment contracts with international airline customers. In addition, deliveries of Safran’s new-generation LEAP engines (which reduce fuel consumption and CO2 emissions) increased 38% in 2023, supporting the company’s proposed 63% year-over-year dividend increase. Longer term, we believe Safran will benefit from the continued transition to LEAP engines as airlines upgrade their fleets to be more efficient and environmentally friendly.

Munich Re, the world’s largest reinsurance company, was a leading contributor for the quarter. The company reported strong results as it continues to win market share, leverage its global scale and demonstrate underwriting discipline. Perhaps counterintuitively, recent global crises, such as war in both the Middle East and Ukraine and natural disaster losses that topped $100 billion, as well as the impact of inflation, showcase Munich Re’s strengths. Through these crises, the company has, we believe, displayed its prudent risk-taking and global diversification. Moreover, Munich Re (and its peers) have benefited from industry-wide price increases, which have contributed to increased return of capital to shareholders. The company raised its dividend by nearly 30% in 2023 and announced a new €1.5 billion share buyback program. We continue to believe Munich Re is attractively positioned to gain market share in a variety of areas, including cybersecurity, specialty insurance and in the fast-growing economies in Asia where the market is large, but insurance penetration remains relatively low.

Recent Portfolio Activity

During the quarter, we invested in dsm-firmenich. Following the merger of DSM and Firmenich, an ADR was reintroduced, allowing us to add the company to the ADR portfolio. We have owned the company for clients invested in our ordinary share portfolio since the fourth quarter of 2022.

dsm-firmenich

Founded in 1902, dsm-firmenich is a Dutch-Swiss multinational corporation. The company has nearly 30,000 employees (including more than 2,000 scientists in 15 research laboratories) across 60 countries. dsm-firmenich produces flavors, fragrances and pure active ingredients (e.g., vitamins, lipids, minerals, enzymes and UV filters) that go into a wide range of products, including food, drinks, medical nutrition, cosmetics, and pet and animal products.

Over the past two decades, legacy DSM has gone through a dramatic transformation, divesting nearly all of its cyclical, commodity chemicals businesses and investing the proceeds in specialty nutrition product companies with more stable sales and higher profit margins. The 2023 merger with Firmenich, a global flavors and fragrances company, completed the transition into a pure-play nutrition, health and ingredients company. The combined businesses, now known as dsm-firmenich, have more than €12 billion in annual revenue across four segments: Perfumery & Beauty (~30% of sales); Animal Nutrition & Health (25%); Taste, Texture & Health (25%); and Health, Nutrition & Care (20%).

High-Quality Business

Some of the quality characteristics we have identified for dsm-firmenich include:

• Leading market share positions in numerous categories;
• Many markets dsm-firmencich participates in consolidated and enjoy stable margins due to high barriers to entry; and
• Scale and global footprint results in close relationships with.

Attractive Valuation

Valuation is attractive based on our estimates of higher normalized cash earnings power. Moreover, we believe the current valuation reflects dsm-firmenich’s historical status as a commodity conglomerate and does not fully appreciate the improvement in quality that can be created as a result of the merger with Firmenich. We recognize this transaction is the largest in dsm-firmenich’s history and brings considerable integration risks; however, we believe current valuation provides a margin of safety for the long-term investor.

Compelling Catalysts

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

• Successful integration of Firmenich merger, as well as previous bolt-on acquisitions, can produce revenue and expense synergies, along with an improved business mix;
• Continued market share gains from recently launched product innovations (e.g., Bovaer, an animal health nutritional product that reduces methane emissions); and
• Balance sheet optionality as low leverage allows for increased return of capital to shareholders while simultaneously continuing bolt-on acquisitions.

Conclusion

Despite the U.S. economy’s continued expansion, economic data points remain mixed. Additionally, investors face uncertainty the rest of the year, whether it be the path of central bank policy, the outcome of the 2024 U.S. presidential election, or the potential for new and/or escalating geopolitical conflicts.

However, while our analysis considers long-term developments in the macroeconomy, we focus most of our time and attention on individual companies that, in our opinion, possess a combination of qualities that are sustainable and difficult to reproduce. It is our belief that a diversified portfolio of investments in these companies will thrive over full market cycles.

Markets Review

The U.S. equity market continued to rally, as the S&P 500 Index rose 10.56% during the period. Concurrently, the Bloomberg U.S. Aggregate Bond Index fell, returning -0.78% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 2.42%.

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

Gains were broad-based, as ten of the eleven sectors within the Russell 1000 Growth index finished higher. The Utilities and Communications Services were the best-performing sectors. Consumer Discretionary had the least gains followed by the Real Estate sector finishing lower for the quarter.

U.S. economic growth remained positive, as real GDP increased at an annual rate of 3.4% in the fourth quarter, though less than the third quarter’s 4.9% reading. The composition of growth was broad-based, having been driven by consumer spending, state and local government investment, and exports. In more recent data, consumer spending increased 0.8% month-over-month in February—the largest gain since January 2023—while housing starts surged 11.6%, touching the highest level in nearly two years. Furthermore, the labor market remained resilient, with unemployment at 3.9% and real average hourly earnings increasing 1.1% year-over-year in February. Meanwhile, inflation, though lower than its level at the end of last year, slightly increased during the quarter, as annual CPI rose from 3.1% in January to 3.2% in February.

Due to continued steady economic growth, the strength of the labor market and higher-than-expected inflation data, the Federal Reserve maintained the benchmark federal funds rate’s targeted range of 5.25% to 5.5% for the fifth consecutive meeting. Chair Powell reaffirmed that the policy rate is likely at its peak for this tightening cycle, but also emphasized that reducing policy restraint too soon or too much could reverse the progress already made by the central bank. However, most recent committee projections indicate that the federal funds rate will be at 4.6% at the end of this year and it will soon be appropriate to slow the pace of the Fed’s balance-sheet runoff.

On the corporate earnings front, results were mixed, as S&P 500 companies reported earnings growth of 4.0%, the second straight quarter of year-over-year growth, but fewer companies exceeded EPS estimates compared to the previous period. Inflation continued to be a major talking point, but companies reported resilient consumer spending, leading to fewer mentions of a potential recession on earnings calls.

Lastly, in U.S. politics, Congress passed, and President Biden signed, the $1.2 trillion spending package that will fund the government for the rest of the fiscal year. In election news, both President Biden and former President Trump secured enough delegates to clinch their parties’ respective nominations, setting up the first presidential rematch in nearly 70 years.

Performance and Attribution Summary

For the first quarter of 2024, Aristotle Atlantic’s Focus Growth Composite posted a total return of 10.42% gross of fees (10.40% net of fees), underperforming the 11.41% total return of the Russell 1000 Growth Index.

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 first quarter the portfolio’s underperformance relative to the Russell 1000 Growth Index was due to both allocation effects and security selection. Security selection in Health Care and Financials detracted the most from relative returns. Conversely, security selection in Information Technologies and an underweight in Consumer Discretionary contributed the most to relative performance.

Contributors and Detractors for 1Q 2024

Contributors

Nvidia

Nvidia contributed to portfolio performance in the first quarter, as the company continues to see accelerating demand for its GPU semiconductors from hyperscalers and enterprises. Nvidia’s GPU semiconductors continue to be the industry-leading building blocks of the accelerated computing data-center architecture to drive AI compute and applications.

Apple

Apple contributed to portfolio performance in the first quarter due to the strategy’s underweight relative to the benchmark. Investors continue to be concerned about weak handset sales globally, as well as declining market share and competitive dynamics in the Chinese market, as Huawei has returned to the market with a more competitive premium-priced handset. Apple has yet to demonstrate a competitive AI product, which could present further competitive headwinds for the company.

Detractors

S&P Global

S&P Global detracted from portfolio performance in the quarter, as shares were weak following a lower-than-expected earnings report and newly issued fiscal year 2024 financial guidance that was slightly below expectations. The company’s lower-than-expected forecast of bond issuance activity for the year was the primary focus of the guidance, although management acknowledged that the guidance is likely conservative, which could result in actual activity exceeding expectations later in the year.

Adaptive Biotechnologies

Adaptive Biotechnologies detracted from portfolio performance in the quarter as investors waited for the outcome of the strategic review. Post quarter-end, Adaptive announced that it plans to continue to run its minimal residual disease (MRD) diagnostic business along with its immune medicine drug discovery business. The company mentioned that after fielding multiple offers for the MRD business, it believes it can attract significantly more value for the asset once it reaches profitability. Adaptive reiterated its plan for EBITDA breakeven in late 2025 and cashflow breakeven in 2026. The company also pre-announced first quarter revenue that came in ~9% ahead of consensus estimates. We believe Adaptive is trading at a very low valuation, and we believe the potential remains strong.

Recent Portfolio Activity

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

Buys

Expedia Group

Expedia Group provides online travel services for leisure and small business travelers. The company offers a wide range of travel, shopping and reservation services and also provides real-time access to schedule, pricing and availability information for airlines, hotels and car rental companies. Expedia serves customers worldwide.

We see Expedia benefiting from the growth in booking travel online, both for leisure and corporate travel. The company also benefits from rapid growth in alternative accommodations and vacation home rentals through VRBO. The main sources of revenue and profitability are from hotel and vacation home rentals. Additionally, Expedia has exposure to airline ticket sales and automobile rentals. Following the COVID-19 pandemic, Expedia’s debt has been reduced, technology platforms have been rationalized, share repurchase has resumed and we expect a dividend will eventually be reinstated.

Sells

Tesla

We sold Tesla due to deteriorating fundamentals, and there have been significant negative earnings revisions over the past year. Tesla has announced several price cuts to its vehicles and has underscored competition in electric vehicles (EVs) globally. China seems especially competitive. More U.S. EV offerings are expected this year. The Full-Self Driving Capability feature is controversial, has regulatory and litigation risk, and has been chronically late. Elon Musk is trying to gain additional voting shares in Tesla stock. This could present governance issues where his voting share could exceed his economic share of the company.

Outlook

The equity markets in the first quarter finished strong despite a rise in interest rates from year end.  The move in interest rates is due to inflation staying above the targeted level set by the Federal Reserve.  Expectations for a 2024 rate reduction have been pushed out into the back half of the year.  A resilient U.S. economy has provided support for higher corporate profits.  The first quarter double-digit returns on top of a very strong fourth quarter leave equity valuations at the high end of historical averages. The continued uncertainty around geopolitical tensions and the pending US Presidential election will add to market volatility. Although a pause in equity prices is likely, higher earnings and an easing interest rate cycle should help support equity prices for the balance of the year. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles. 

Markets Review

The U.S. equity market continued to rally, as the S&P 500 Index rose 10.56% during the period. Concurrently, the Bloomberg U.S. Aggregate Bond Index fell, returning -0.78% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 2.42%.

Gains were broad-based, as ten of the eleven sectors within the Russell 1000 Growth index finished higher. The Utilities and Communications Services were the best-performing sectors. Consumer Discretionary had the least gains followed by the Real Estate sector finishing lower for the quarter.

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

U.S. economic growth remained positive, as real GDP increased at an annual rate of 3.4% in the fourth quarter, though less than the third quarter’s 4.9% reading. The composition of growth was broad-based, having been driven by consumer spending, state and local government investment, and exports. In more recent data, consumer spending increased 0.8% month-over-month in February—the largest gain since January 2023—while housing starts surged 11.6%, touching the highest level in nearly two years. Furthermore, the labor market remained resilient, with unemployment at 3.9% and real average hourly earnings increasing 1.1% year-over-year in February. Meanwhile, inflation, though lower than its level at the end of last year, slightly increased during the quarter, as annual CPI rose from 3.1% in January to 3.2% in February.

Due to continued steady economic growth, the strength of the labor market and higher-than-expected inflation data, the Federal Reserve maintained the benchmark federal funds rate’s targeted range of 5.25% to 5.5% for the fifth consecutive meeting. Chair Powell reaffirmed that the policy rate is likely at its peak for this tightening cycle, but also emphasized that reducing policy restraint too soon or too much could reverse the progress already made by the central bank. However, most recent committee projections indicate that the federal funds rate will be at 4.6% at the end of this year and it will soon be appropriate to slow the pace of the Fed’s balance-sheet runoff.

On the corporate earnings front, results were mixed, as S&P 500 companies reported earnings growth of 4.0%, the second straight quarter of year-over-year growth, but fewer companies exceeded EPS estimates compared to the previous period. Inflation continued to be a major talking point, but companies reported resilient consumer spending, leading to fewer mentions of a potential recession on earnings calls.

Lastly, in U.S. politics, Congress passed, and President Biden signed, the $1.2 trillion spending package that will fund the government for the rest of the fiscal year. In election news, both President Biden and former President Trump secured enough delegates to clinch their parties’ respective nominations, setting up the first presidential rematch in nearly 70 years.

Performance and Attribution Summary

For the first quarter of 2024, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of 9.74% gross of fees
(9.61% net of fees), underperforming the 11.41% return of the Russell 1000 Growth Index.

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 first quarter the portfolio’s underperformance relative to the Russell 1000 Growth index was due to both allocation effects and security selection. Security selection in Health Care and Communication Services detracted the most from relative returns. Conversely security selection in Information Technologies and Consumer Discretionary contributed the most to relative performance.

Contributors and Detractors for 1Q 2024

Contributors

Nvidia

Nvidia contributed to portfolio performance in the first quarter, as the company continues to see accelerating demand for its GPU semiconductors from hyperscalers and enterprises. Nvidia’s GPU semiconductors continue to be the industry-leading building blocks of the accelerated computing data-center architecture to drive AI compute and applications.

Tesla

The underweight in Tesla contributed to portfolio performance in the first quarter. The company missed its fourth quarter 2023 earnings estimates, which were reported in January of 2024. While demand for electric vehicles (EVs) is growing, the growth rate has slowed. Tesla has lowered prices on its EVs. Consensus estimates for the full-year 2024 have been declining. 

Detractors

Adobe

Adobe detracted from portfolio performance in the first quarter as the company reported inline first quarter 2024 earnings but provided a weaker-than-expected second quarter guide which has increased investor skepticism of meeting the fiscal year 2024 guide.  The landscape for GenAI products in digital media has become more competitive with multiple product launches and there continues to be concerns around the overall competitive environment for digital content creation companies such as Adobe.  Despite concerns, we see the company continuing to execute very well in all areas of its business and view the slate of the second half 2024 new products launches as being a key catalyst for the stock.

Expedia Group

Expedia Group detracted from portfolio performance in the first quarter of 2024.  The company reported slightly better than expected fourth quarter 2023 earnings in February 2024. The announcement of the departure of the current CEO was not well received by investors. In addition, while the full year 2024 outlook was in line with consensus estimates, the first quarter of 2024 is expected to be below consensus estimates. 

Recent Portfolio Activity

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

Sells

Constellation Brands

We sold Constellation Brands on concerns that above-average beer trends may begin to slow following strong distributions gains for Modelo and Pacifico.  Constellation has performed well, and we remain concerned that their Wine & Spirits business will continue to see margin pressure as consumers shift towards higher-end brands. 

Outlook

The equity markets in the first quarter finished strong despite a rise in interest rates from year end.  The move in interest rates is due to inflation staying above the targeted level set by the Federal Reserve.  Expectations for a 2024 rate reduction have been pushed out into the back half of the year.  A resilient U.S. economy has provided support for higher corporate profits.  The first quarter double-digit returns on top of a very strong fourth quarter leave equity valuations at the high end of historical averages. The continued uncertainty around geopolitical tensions and the pending US Presidential election will add to market volatility. Although a pause in equity prices is likely, higher earnings and an easing interest rate cycle should help support equity prices for the balance of the year. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles. 

Markets Review

The U.S. equity market continued to rally, as the S&P 500 Index rose 10.56% during the period. Concurrently, the Bloomberg U.S. Aggregate Bond Index fell, returning -0.78% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 2.42%.

Gains were broad-based, as ten of the eleven sectors within the S&P 500 index finished higher. Communications Services was the best-performing sector. While the Real Estate sector finished the first quarter lower.

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

U.S. economic growth remained positive, as real GDP increased at an annual rate of 3.4% in the fourth quarter, though less than the third quarter’s 4.9% reading. The composition of growth was broad-based, having been driven by consumer spending, state and local government investment, and exports. In more recent data, consumer spending increased 0.8% month-over-month in February—the largest gain since January 2023—while housing starts surged 11.6%, touching the highest level in nearly two years. Furthermore, the labor market remained resilient, with unemployment at 3.9% and real average hourly earnings increasing 1.1% year-over-year in February. Meanwhile, inflation, though lower than its level at the end of last year, slightly increased during the quarter, as annual CPI rose from 3.1% in January to 3.2% in February.

Due to continued steady economic growth, the strength of the labor market and higher-than-expected inflation data, the Federal Reserve maintained the benchmark federal funds rate’s targeted range of 5.25% to 5.5% for the fifth consecutive meeting. Chair Powell reaffirmed that the policy rate is likely at its peak for this tightening cycle, but also emphasized that reducing policy restraint too soon or too much could reverse the progress already made by the central bank. However, most recent committee projections indicate that the federal funds rate will be at 4.6% at the end of this year and it will soon be appropriate to slow the pace of the Fed’s balance-sheet runoff.

On the corporate earnings front, results were mixed, as S&P 500 companies reported earnings growth of 4.0%, the second straight quarter of year-over-year growth, but fewer companies exceeded EPS estimates compared to the previous period. Inflation continued to be a major talking point, but companies reported resilient consumer spending, leading to fewer mentions of a potential recession on earnings calls.

Lastly, in U.S. politics, Congress passed, and President Biden signed, the $1.2 trillion spending package that will fund the government for the rest of the fiscal year. In election news, both President Biden and former President Trump secured enough delegates to clinch their parties’ respective nominations, setting up the first presidential rematch in nearly 70 years.

Performance and Attribution Summary

For the first quarter of 2024, Aristotle Atlantic’s Core Equity Composite posted a total return of 12.02% gross of fees (11.91% net of fees), outperforming the S&P 500 Index, which recorded a total return of 10.56%.

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 first quarter, the portfolio’s outperformance relative to the S&P 500 Index was due to security selection. Security selection in Information Technology and Consumer Discretionary contributed the most to relative performance. Conversely, security selection in Health Care and Consumer Staples detracted from relative performance.

Contributors and Detractors for 1Q 2024

Contributors

Nvidia

Nvidia contributed to portfolio performance in the first quarter, as the company continues to see accelerating demand for its GPU semiconductors from hyperscalers and enterprises. Nvidia’s GPU semiconductors continue to be the industry-leading building blocks of the accelerated computing data-center architecture to drive AI compute and applications.

Apple

Apple contributed to portfolio performance in the first quarter due to the strategy’s underweight relative to the benchmark. Investors continue to be concerned about weak handset sales globally, as well as declining market share and competitive dynamics in the Chinese market, as Huawei has returned to the market with a more competitive premium-priced handset. Apple has yet to demonstrate a competitive AI product, which could present further competitive headwinds for the company.

Detractors

Darling Ingredients

Darling Ingredients detracted from portfolio performance in the quarter, as shares were weak following an in-line quarterly earnings report in which Darling refrained from providing full-year guidance due to low fat prices and its view that fat prices had bottomed. Rather than attempting to predict where fat prices might go during the year, management explained that it wanted to wait until the first quarter earnings call to provide more color. The company did talk about a soft floor for EBITDA in the $1.45 billion to $1.55 billion range for the year should fat prices remain depressed. Darling Ingredients remains confident in the discussions it is having with global cargo and passenger air carriers about takeaway agreements for its planned sustainable aviation fuel production, and any announcement could prove to be a catalyst given the depressed valuation currently. We believe shares should re-rate as investors gain confidence in the long-term cashflow generation ability of the company’s unique assets.

Zoetis

Zoetis detracted from portfolio performance in the quarter, despite a solid U.S. launch of Librela, a drug to treat osteoarthritis in dogs, in the U.S.   Management addressed safety concerns on Librela, citing extremely low incidences of Ataxia in dogs.  We believe that concerns about these safety issues negatively impacted Zoetis in the quarter.  Shares now trade at a discount to five-year average valuation multiples and continue to benefit from increase pet ownership and increasing protein demand in the company’s livestock business.   

Recent Portfolio Activity

The table below shows all buys and sells completed during the quarter.

Outlook

The equity markets in the first quarter finished strong despite a rise in interest rates from year end.  The move in interest rates is due to inflation staying above the targeted level set by the Federal Reserve.  Expectations for a 2024 rate reduction have been pushed out into the back half of the year.  A resilient U.S. economy has provided support for higher corporate profits.  The first quarter double-digit returns on top of a very strong fourth quarter leave equity valuations at the high end of historical averages. The continued uncertainty around geopolitical tensions and the pending US Presidential election will add to market volatility. Although a pause in equity prices is likely, higher earnings and an easing interest rate cycle should help support equity prices for the balance of the year. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.