In its simplest definition, diversity is the presence of differences.¹ Diversity is essential to bringing together new perspectives to accomplish incredible things. We also recognize on a global scale how differences in beliefs, cultures and unique traits we hold closely to our identity can drive deep division. This paradox points to the delicate balance that must be maintained in understanding and connecting to others. 

At Aristotle², in alignment with our core values, we seek to listen to, understand and embrace the differences within our diverse teams and communities. We value the unique perspectives of our employees that inherently contribute to the firm’s growth and ensure we consistently deliver for our clients. 

This past year has been significant for Aristotle in terms of advancing our commitment to diversity, equity and inclusion (DEI). While we acknowledge that our journey will always be met with challenges, the lessons we have learned this past year have positively influenced our approach and strategy moving forward. We remain open-minded and confident in our approach toward consistently fostering a diverse, equitable and inclusive culture at Aristotle. 

¹Sources: Oxford University Press, Merriam-Webster.

²The term “Aristotle” is used to represent the family of affiliates which is comprised of Aristotle Capital Management, LLC (Aristotle Capital), Aristotle Capital Boston, LLC (Aristotle Boston), Aristotle Credit Partners, LLC (Aristotle Credit) Aristotle Atlantic Partners, LLC (Aristotle Atlantic), Aristotle Pacific Capital, LLC (Aristotle Pacific), and Aristotle Investment Services, LLC (Aristotle Investment Services); which collectively operate under a unified platform known as Aristotle. Each firm is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended.

Markets Review

The U.S. equity market rebounded, as the S&P 500 Index rose 11.69% during the period. Concurrently, the Bloomberg U.S. Aggregate Bond Index rallied, increasing 6.82% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 4.66%.

Gains were broad-based, as ten out of the eleven sectors within the S&P 500 Index finished higher. Real Estate, Financials and Information Technology were the best-performing sectors. Meanwhile, Energy was the only sector to finish in the red, while Consumer Staples and Health Care gained the least.

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

Data released during the period showed that the U.S. economy had accelerated in the third quarter, with real GDP rising at an annual rate of 4.9%—the fastest pace of growth in nearly two years. The robust results were driven by increases in consumer spending and inventory investment. Additionally, single-family housing starts rose 18% month-over-month in November, and the labor market remained tight with 3.7% unemployment. Meanwhile, inflation continued its downward trend, as the annual CPI fell from 3.7% in September to 3.1% in November. The drop was primarily driven by softening energy prices, as both WTI and Brent fell below $80 a barrel. These developments combined to send longer-term interest rates lower, with the 10-year U.S. Treasury yield falling over 70 basis points during the quarter to finish at 3.88%.

As a result of easing inflation, combined with potentially slowing economic activity and a strong but moderating job market, the Federal Reserve (Fed) held the benchmark federal funds rate steady during the quarter. Chair Jerome Powell stated that the central bank’s policy rate is likely at or near its peak for the current tightening cycle, while the Federal Open Market Committee members’ median estimates indicate three quarter-point cuts in 2024.

On the corporate earnings front, results were strong, as 82% of S&P 500 companies exceeded EPS estimates, leading to 4.7% growth in earnings for the Index. Looking forward, analysts expect earnings to accelerate in 2024, with growth of 11.5% year-over-year.

Lastly, in U.S. politics, after backing a bipartisan stopgap funding bill to stave off a partial government shutdown, Congressman Kevin McCarthy was removed as speaker of the United States House of Representatives. This marked the first time in American history that a speaker of the House was ousted through a motion to vacate. Subsequently, Congressman Mike Johnson was elected as McCarthy’s replacement.

Annual Markets Review

After a tumultuous year in 2022, the U.S. equity market rallied in 2023, as the S&P 500 Index posted a full-year return of 26.29%. The increase was primarily driven by the performance of the seven largest companies in the Index, which were responsible for 62% of the S&P 500’s gains. Additionally, after underperforming value last year by the largest amount since 2000, growth recovered, as the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 31.22% for the year. Meanwhile, the fixed income market also rebounded, as the Bloomberg U.S. Aggregate Bond Index rose 5.53% in 2023.

Macroeconomic news was dominated by inflation, central bank policies, regional bank failures and geopolitical conflicts, while other topics, such as artificial intelligence and congressional politics, made headlines as well. Economic data points were mixed throughout the year, and corporate earnings were just as unpredictable.

Performance and Attribution Summary

For the fourth quarter of 2023, Aristotle Atlantic’s Core Equity Composite posted a total return of 12.95% gross of fees (12.84% net of fees), outperforming the S&P 500 Index, which recorded a total return of 11.69%.

Performance (%)	4Q23	1 Year	3 Years	5 Years	10 Years	Since Inception*
Core Equity Composite (gross)	12.95	23.85	6.69	15.91	12.30	13.18
Core Equity Composite (net)	12.84	23.34	6.24	15.43	11.79	12.66
S&P 500 Index	11.69	26.29	10.00	15.68	12.03	12.61

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 fourth quarter, the portfolio’s outperformance relative to the S&P 500 Index was due to both security selection and allocation effects. Security selection in Consumer Discretionary and Financials, as well as an underweight in Energy, contributed the most to relative performance. Conversely, security selection and an overweight in Health Care, as well as security selection in Energy, detracted from relative performance.

Contributors and Detractors for 4Q 2023

Relative Contributors	Relative Detractors
Broadcom	Halliburton
Spirit AeroSystems	Becton, Dickinson & Company
Expedia	Chart Industries
ServiceNow	Darling Ingredients
Teleflex	Antero Resources

Contributors

Broadcom

Broadcom contributed to portfolio outperformance during the quarter, as the company reported fourth quarter results which continued to show strength in its AI business segments. With the VMware acquisition having closed at the end of November, the company also provided positive fiscal year 2024 guidance on its earnings call that included synergy target goals ahead of schedule and a more positive revenue ramp for the combined businesses.

Spirit AeroSystems

Spirit AeroSystems contributed to portfolio outperformance in the fourth quarter. The company replaced the CEO, following a series of manufacturing incidents which resulted in delays in deliveries of fuselages. Additionally, Spirit also came to an agreement with Boeing regarding pricing for the troubled 787 program, which previously was unprofitable. The company also issued equity, which we believe will improve the company’s balance sheet. 

Detractors

Haliburton

Halliburton detracted from portfolio performance, as shares were weak in the fourth quarter due to lower global commodity prices amid concerns about excess oil and natural gas supply levels resulting from slowing global economic activity. 

Becton, Dickinson & Company

Becton Dickinson & Company detracted from portfolio performance in the quarter, as the company announced lower-than-expected guidance for fiscal year 2024. The weaker guidance was mainly driven by adverse moves in foreign exchange markets; however, the guidance seemed to surprise investors, even though we believe the underlying business trends remain solid.

Recent Portfolio Activity

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

Buys	Sells
Eli Lilly	Bristol-Myers
Vertex Pharmaceuticals	PepsiCo

Buys

Eli Lilly & Company

Eli Lilly & Company is a leading pharmaceutical company that develops diabetes, oncology, immunology and neuroscience medicines. The company generates over half of its revenue in the U.S. from its top-selling drugs Trulicity, Verzenio and Taltz. The company operates in a single business segment, Human pharmaceutical products.

Eli Lilly has a deep pipeline in treatment areas focused on metabolic disorders, oncology, immunology and central nervous system disorders. Currently, there are two phase three assets, Orforglipron, an oral GLP-1 and retatrutide, a triple incretin agonist, which have the potential to expand upon the potential success of Mounjaro. We believe that Mounjaro has the potential to commercialize beyond type 2 diabetes and obesity, potentially in the areas mentioned above of heart disease, sleep apnea, fatty liver disease and chronic kidney disease. We belief the premium valuation is supported by this outsized growth profile.

Vertex Pharmaceuticals

Vertex Pharmaceuticals develops drugs for treating cystic fibrosis, cancer, inflammatory bowel, autoimmune disease and neurological disorders. The biotechnology company has four commercial drugs used to treat cystic fibrosis. Vertex has other drugs in development, including additional cystic fibrosis treatments and medications addressing sickle cell disease, beta thalassemia, alpha-1 antitrypsin deficiency and pain.

Vertex is the global leader in treating cystic fibrosis and has additionally built a robust pipeline in several therapeutic areas. Late-stage studies in acute and neuropathic pain are expected to be another catalyst for the company. We believe Vertex’s valuation is attractive and at a discount relative to their 5-year historical average. Additionally, the company is well capitalized, with roughly $12.5 billion in net cash on its balance sheet. 

Sells

Bristol-Myers

We sold our position in Bristol-Myers, following the third quarter earnings report where the company reduced the medium-term guidance on the new product portfolio and lowered its 2025 target. Given the large amount of revenue associated with drugs going off-patent, the new product portfolio was key to the company’s ability to change investor perception. Certain launches are not performing as expected, and others are taking longer to scale. Additionally, Bristol-Myers reduced medium-term operating margin guidance to invest in its commercial drugs and the research and development (R&D) pipeline. We do not believe that the company exhibited the level of defensiveness in the strategy we expected given the low valuation. 

PepsiCo

We sold PepsiCo based on our belief that the inflation and interest rate cycle has peaked, and the company may have difficulty maintaining the recent organic growth trends which were driven mainly by price increases. Furthermore, the market appears to be shifting away from defensive names and into a more cyclical positioning which could cause PepsiCo to lag.

Outlook

Major equity markets in the fourth quarter were positively impacted by a sharp decline in interest rates. The move in interest rates reflects the view that the tightening cycle implemented by the Fed to curb inflation may have run its course.  Expectations for 2024 include rate reductions by the Fed and a high single-digit increase in S&P 500 earnings. Along with this positive view, we also expect a broadening of performance relative to the AI-focused returns in 2023. The sizable move in equity markets in the fourth quarter has left equity valuations at the upper end of historical levels, which could limit the upside, absent positive earnings revisions. The increased geopolitical tensions and a pending U.S. Presidential election may also weigh on markets in 2024. 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 rebounded, as the S&P 500 Index rose 11.69% during the period. Concurrently, the Bloomberg U.S. Aggregate Bond Index rallied, increasing 6.82% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 4.66%.

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.

Gains were broad-based, as ten out of the eleven sectors within the Russell 1000 Growth Index finished higher. Real Estate, Utilities and Information Technology were the best-performing sectors. Meanwhile, Energy was the only sector to finish in the red, while Consumer Staples and Health Care gained the least.

Data released during the period showed that the U.S. economy had accelerated in the third quarter, with real GDP rising at an annual rate of 4.9%—the fastest pace of growth in nearly two years. The robust results were driven by increases in consumer spending and inventory investment. Additionally, single-family housing starts rose 18% month-over-month in November, and the labor market remained tight with 3.7% unemployment. Meanwhile, inflation continued its downward trend, as the annual CPI fell from 3.7% in September to 3.1% in November. The drop was primarily driven by softening energy prices, as both WTI and Brent fell below $80 a barrel. These developments combined to send longer-term interest rates lower, with the 10-year U.S. Treasury yield falling over 70 basis points during the quarter to finish at 3.88%.

As a result of easing inflation, combined with potentially slowing economic activity and a strong but moderating job market, the Federal Reserve (Fed) held the benchmark federal funds rate steady during the quarter. Chair Jerome Powell stated that the central bank’s policy rate is likely at or near its peak for the current tightening cycle, while the Federal Open Market Committee members’ median estimates indicate three quarter-point cuts in 2024.

On the corporate earnings front, results were strong, as 82% of S&P 500 companies exceeded EPS estimates, leading to 4.7% growth in earnings for the Index. Looking forward, analysts expect earnings to accelerate in 2024, with growth of 11.5% year-over-year.

Lastly, in U.S. politics, after backing a bipartisan stopgap funding bill to stave off a partial government shutdown, Congressman Kevin McCarthy was removed as speaker of the United States House of Representatives. This marked the first time in American history that a speaker of the House was ousted through a motion to vacate. Subsequently, Congressman Mike Johnson was elected as McCarthy’s replacement.

Annual Markets Review

After a tumultuous year in 2022, the U.S. equity market rallied in 2023, as the S&P 500 Index posted a full-year return of 26.29%. The increase was primarily driven by the performance of the seven largest companies in the Index, which were responsible for 62% of the S&P 500’s gains. Additionally, after underperforming value last year by the largest amount since 2000, growth recovered, as the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 31.22% for the year. Meanwhile, the fixed income market also rebounded, as the Bloomberg U.S. Aggregate Bond Index rose 5.53% in 2023.

Macroeconomic news was dominated by inflation, central bank policies, regional bank failures and geopolitical conflicts, while other topics, such as artificial intelligence and congressional politics, made headlines as well. Economic data points were mixed throughout the year, and corporate earnings were just as unpredictable.

Performance and Attribution Summary

For the fourth quarter of 2023, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of 13.61% gross of fees
(13.43% net of fees), underperforming the 14.16% return of the Russell 1000 Growth Index.

Performance (%)	4Q23	1 Year	3 Years	5 Years	Since Inception*
Large Cap Growth Composite (gross)	13.61	36.83	4.68	17.62	16.51
Large Cap Growth Composite (net)	13.43	36.14	4.24	17.14	16.04
Russell 1000 Growth Index	14.16	42.68	8.86	19.49	17.78

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

Contributors and Detractors for 4Q 2023

Relative Contributors	Relative Detractors
Expedia	Chart Industries
Tesla	Darling Ingredients
DexCom	ON Semiconductors
ServiceNow	Adaptive Biotechnologies
KLA	Tenable Holdings

Contributors

Expedia

Expedia contributed to portfolio performance in the fourth quarter. The company reported strong third quarter earnings in early November. The company has also completed its multi-year technology platform migrations, which have been a drag on growth and profit margin. The company also announced a $5 billion share buyback program.

Tesla

Tesla contributed to portfolio performance in the fourth quarter due to our underweight position relative to the growth index. Tesla reported disappointing third quarter earnings in mid-October in part, due to downtime at some factories that were being upgraded. The CEO expressed concern that higher interest rates were impacting demand for automobiles and would not comment on growth expectations for 2024. However, the expected scale production of the Cybertruck is 12 to 18 months in the future which we believe will negatively impact short-term growth.

Detractors

Chart Industries

Chart Industries detracted from portfolio performance in the fourth quarter. The company reported disappointing third quarter earnings and revenue in late October. According to company management, the shortfall was due to the timing of the deliveries of some projects that were delayed into the fourth quarter of 2023 and into 2024. On a positive note, initial earnings and revenue guidance for 2024 EPS were disclosed on the October earnings call, which was significantly above analyst consensus. This guidance was reaffirmed at the company’s investor day in December.

Darling Ingredients

Darling Ingredients detracted from portfolio performance in the quarter, as shares were weak following a lower-than-expected earnings report and a reduction in annual guidance. The reduction was largely driven by lower margins in their Diamond Green Diesel renewable diesel joint venture due to lower renewable identification numbers (RINs) and lower soybean oil prices. We believe these issues should prove to be short-term headwinds, as margins normalize in the coming quarters.

Recent Portfolio Activity

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

Buys	Sells
Datadog	Enphase Energy
	Tenable Holdings

Buys

Datadog

Datadog is the observability and security platform for cloud applications. The company’s SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management, real-user monitoring, and many other capabilities to provide unified, real-time observability and security for its customers’ entire technology stack. The platform is used by organizations of all sizes and across a wide range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations, security and business teams, accelerate time to market for applications, reduce time to problem resolution, secure applications and infrastructure, understand user behavior, and track key business metrics.

We believe headwinds from cloud spend optimizations are moderating, and the company should benefit from improved cloud spend dynamics in 2024-2025. We consider Datadog to be a key part of the Information Technology stack, as businesses expand on their digital transformation initiatives and continue to transition operations to the cloud. The company has been successful in customer acquisition growth and a strong financial profile with increased free cash flow margins.

Sells

Enphase Energy

We sold our position in Enphase due to slowing demand for residential solar energy, primarily driven by rising interest rates and potentially increasing competition. During the second quarter earnings report in July, the company lowered its guidance for the third quarter microinverter, and we believed there was a heightened risk that Enphase would lower guidance again. We remain optimistic about Enphase’s competitive advantages over the long term in the residential solar energy market, but we prefer to wait for more apparent evidence of a rebound before considering a reinvestment in the company.

Tenable Holdings

We sold Tenable, as we believe the company could see increasing pressure from larger cybersecurity providers with more extensive product platforms and more competitive pricing dynamics.

Outlook

Major equity markets in the fourth quarter were positively impacted by a sharp decline in interest rates. The move in interest rates reflects the view that the tightening cycle implemented by the Fed to curb inflation may have run its course. Expectations for 2024 include rate reductions by the Fed and a high single-digit increase in S&P 500 earnings. Along with this positive view, we also expect a broadening of performance relative to the AI-focused returns in 2023. The sizable move in equity markets in the fourth quarter has left equity valuations at the upper end of historical levels, which could limit the upside, absent positive earnings revisions. The increased geopolitical tensions and a pending U.S. Presidential election may also weigh on markets in 2024. 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 rebounded, as the S&P 500 Index rose 11.69% during the period. Concurrently, the Bloomberg U.S. Aggregate Bond Index rallied, increasing 6.82% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 4.66%.

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 out of the eleven sectors within the Russell 1000 Growth Index finished higher. Real Estate, Utilities and Information Technology were the best-performing sectors. Meanwhile, Energy was the only sector to finish in the red, while Consumer Staples and Health Care gained the least.

Data released during the period showed that the U.S. economy had accelerated in the third quarter, with real GDP rising at an annual rate of 4.9%—the fastest pace of growth in nearly two years. The robust results were driven by increases in consumer spending and inventory investment. Additionally, single-family housing starts rose 18% month-over-month in November, and the labor market remained tight with 3.7% unemployment. Meanwhile, inflation continued its downward trend, as the annual CPI fell from 3.7% in September to 3.1% in November. The drop was primarily driven by softening energy prices, as both WTI and Brent fell below $80 a barrel. These developments combined to send longer-term interest rates lower, with the 10-year U.S. Treasury yield falling over 70 basis points during the quarter to finish at 3.88%.

As a result of easing inflation, combined with potentially slowing economic activity and a strong but moderating job market, the Federal Reserve (Fed) held the benchmark federal funds rate steady during the quarter. Chair Jerome Powell stated that the central bank’s policy rate is likely at or near its peak for the current tightening cycle, while the Federal Open Market Committee members’ median estimates indicate three quarter-point cuts in 2024.

On the corporate earnings front, results were strong, as 82% of S&P 500 companies exceeded EPS estimates, leading to 4.7% growth in earnings for the Index. Looking forward, analysts expect earnings to accelerate in 2024, with growth of 11.5% year-over-year.

Lastly, in U.S. politics, after backing a bipartisan stopgap funding bill to stave off a partial government shutdown, Congressman Kevin McCarthy was removed as speaker of the United States House of Representatives. This marked the first time in American history that a speaker of the House was ousted through a motion to vacate. Subsequently, Congressman Mike Johnson was elected as McCarthy’s replacement.

Annual Markets Review

After a tumultuous year in 2022, the U.S. equity market rallied in 2023, as the S&P 500 Index posted a full-year return of 26.29%. The increase was primarily driven by the performance of the seven largest companies in the Index, which were responsible for 62% of the S&P 500’s gains. Additionally, after underperforming value last year by the largest amount since 2000, growth recovered, as the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 31.22% for the year. Meanwhile, the fixed income market also rebounded, as the Bloomberg U.S. Aggregate Bond Index rose 5.53% in 2023.

Macroeconomic news was dominated by inflation, central bank policies, regional bank failures and geopolitical conflicts, while other topics, such as artificial intelligence and congressional politics, made headlines as well. Economic data points were mixed throughout the year, and corporate earnings were just as unpredictable.

Performance and Attribution Summary

For the fourth quarter of 2023, Aristotle Atlantic’s Focus Growth Composite posted a total return of 15.02% gross of fees (14.99% net of fees), outperforming the 14.16% total return of the Russell 1000 Growth Index.

Performance (%)	4Q23	1 Year	3 Years	5 Years	Since Inception*
Focus Growth Composite (gross)	15.02	37.21	3.87	16.93	12.52
Focus Growth Composite (net)	14.99	37.08	3.77	16.74	12.27
Russell 1000 Growth Index	14.16	42.68	8.86	19.49	15.34

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

Contributors and Detractors for 4Q 2023

Relative Contributors	Relative Detractors
DexCom	Darling Ingredients
ServiceNow	Adaptive Biotechnologies
KLA	ON Semiconductor
S&P Global	Guardant Health
Netflix	Thermo Fisher Scientific

Contributors

DexCom

Dexcom contributed to portfolio performance during the quarter, following a better-than-expected earnings report and an increase in full-year guidance. The company is benefiting from a new product introduction with the G-7 series and new Medicare reimbursement for basal insulin users. Additionally, Dexcom has been under pressure most of 2023 on the success of GLP-1 companies and the fear that these novel weight loss therapies could hurt the prospects for companies operating in obesity-related comorbidities such as Diabetes. The shares had a broad reversal of this trend in the fourth quarter and many of the affected names rebounded, including Dexcom.

ServiceNow

ServiceNow contributed to portfolio performance during the fourth quarter, as investors focused on improving momentum across the NOW platform following strong third quarter results at the end of October. In addition, ServiceNow continues to announce new product enhancements to the platform to support artificial intelligence (AI) capabilities with early signs of customer adoption.

Detractors

Adaptive Biotechnologies

Adaptive Biotechnologies detracted from portfolio performance, following a lower-than-expected earnings report and a reduction in guidance. The company also announced the initiation of a strategic review to evaluate the separation of the diagnostics and drug-discovery parts of their business. Adaptive Biotechnologies clinical testing volume was strong in the fourth quarter, and average selling prices began to improve. We believe the strategic review has the potential to unlock value in the name.

Darling Ingredients

Darling Ingredients detracted from portfolio performance in the quarter, as shares were weak following a lower-than-expected earnings report and a reduction in annual guidance. The reduction was largely driven by lower margins in their Diamond Green Diesel renewable diesel joint venture due to lower renewable identification numbers (RINs) and lower soybean oil prices. We believe these issues should prove to be short-term headwinds, as margins normalize in the coming quarters. 

Recent Portfolio Activity

There were no new buys or sells during the quarter.

Outlook

Major equity markets in the fourth quarter were positively impacted by a sharp decline in interest rates. The move in interest rates reflects the view that the tightening cycle implemented by the Fed to curb inflation may have run its course. Expectations for 2024 include rate reductions by the Fed and a high single-digit increase in S&P 500 earnings. Along with this positive view, we also expect a broadening of performance relative to the AI-focused returns in 2023. The sizable move in equity markets in the fourth quarter has left equity valuations at the upper end of historical levels, which could limit the upside, absent positive earnings revisions. The increased geopolitical tensions and a pending U.S. Presidential election may also weigh on markets in 2024. 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.

A young boy was holding two apples with both hands.
His mother came in and softly asked with a smile:

“Sweetie, could you please give your mom one of your two apples?”

The boy looked up at his mom for some seconds, then he suddenly
took a quick bite on one apple, and then quickly on the other.

The mom tried very hard not to show her disappointment.
Then the boy handed one of the bitten apples to his mom and said:

“Mommy, here you are, this is the sweeter one.”

The moral being to delay judgement until one has all the facts.  That’s how jury trials work.  That’s why a baseball season has 162 games.  That’s why one waits to see the literal paint dry before purchasing enough to finish the wall.  And that’s why, in most cities, weathermen wait for the first raindrop before making their predictions.

It is no different in investing.

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

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

Markets Review

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

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

Annual Markets Review

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

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

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

Performance and Attribution Summary

For the fourth quarter of 2023, Aristotle Capital’s Global Equity Composite posted a total return of 11.99% gross of fees
(11.90% net of fees), outperforming the MSCI World Index, which returned 11.42%, and the MSCI ACWI Index, which returned 11.03%. Please refer to the table below for detailed performance.

Performance (%)	4Q23	1 Year	3 Years	5 Years	10 Years	Since Inception*
Global Equity Composite (gross)	11.99	20.16	6.12	12.79	9.38	10.02
Global Equity Composite (net)	11.90	19.80	5.80	12.42	9.00	9.58
MSCI World Index (net)	11.42	23.79	7.27	12.80	8.60	9.54
MSCI ACWI Index (net)	11.03	22.20	5.75	11.71	7.92	8.62

Contributors and Detractors for 4Q 2023

Relative Contributors	Relative Detractors
Lennar	Rentokil Initial
Nemetschek	Jazz Pharmaceuticals
Martin Marietta Materials	FMC Corporation
Qualcomm	Alcon
Brookfield	TotalEnergies

Lennar, one of the nation’s largest homebuilders, was the top contributor for the period. Increasing mortgage rates reached a peak during the fourth quarter, but Lennar’s dynamic pricing model, combined with its digital marketing platform and buyer incentives, continued to drive volume and generate cash flow, all while reducing construction cycle times, returning capital to shareholders and further lowering the company’s debt. In 2023, Lennar delivered 73,000 homes (a 10% year-over-year volume increase).The company’s land light strategy also continues to move forward, with 76% of land now controlled through options, as compared to 69% a year ago (and less than 30% in 2015).Over our decade-plus investment in Lennar, we have admired the management team’s ability to respond to changing housing dynamics. We believe Lennar’s current land and pricing strategy should continue to support enhanced FREE cash flow generation. In addition, Lennar’s strong balance sheet, prudent inventory management and further ability to implement cost and production efficiencies position it well to meet demand amid the decade-long undersupply of homes in the U.S.

Nemetschek, a project management software solutions provider for the architecture, engineering and construction industry, was the one of the largest contributors for the quarter. Over the past couple of years, the company has made significant efforts to transition the business from a license to a subscription SaaS (software as a service) model, which we expected would drive higher and more stable revenues per user while creating more long-term value for customers. In line with this strategy, the company reported that ~75% of its revenues are now recurring, up from ~65% last year. Furthermore, with the backdrop of stable demand and strong operational execution, management reported EBITDA margins at the high end of guidance and raised its revenue projections for the year. We believe the optimization of Nemetschek’s business model, continued improvement in operational efficiency through efforts like internalization, and product innovation such as the open and cloud-based dTwin platform, will lead to long-term improvements in profitability and position the company for market share gains as building complexity continues to increase.

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

FMC Corporation, the global provider of crop protection solutions, was the largest detractor for the year and a top detractor for the fourth quarter. Following robust orders during the 2020-2022 period, customer destocking persisted throughout 2023, particularly in Latin America. Despite strong end-market demand, market forces, including inflationary prices and sharply higher interest rates, have combined to motivate customers to draw down existing inventories. As a result, FMC lowered its 2023 guidance and introduced a global restructuring initiative. In November, we attended FMC’s Investor Day where management detailed its strategic plans and introduced mid-term financial goals. We came away with increased confidence that FMC is at or near a cyclical bottom and that management is taking appropriate actions in navigating the worst downcycle the crop protection market has seen in more than 40 years.

Recent Portfolio Activity

Buys	Sells
MonotaRO	Kubota

During the quarter, we sold our position in Kubota and invested in a new position, MonotaRO.

We first invested in Kubota, the maker of tractors and construction machinery, during the second quarter of 2015. During our holding period, the company has increased its agricultural sales by entering wet field markets in Southeast Asia, gained share of small tractors/construction machinery in North America, and restructured its water and environment segment. We decided to sell in favor of what we think is a more compelling investment opportunity. However, we will continue to monitor this high-quality company and follow with interest its attempts to increase its presence in India, a very attractive tractor market where Kubota has yet to prove whether it will be able to take meaningful share.

MonotaRO Co., Ltd.

Established in Japan in 2000, MonotaRO operates a business-to-business (B2B) e-commerce platform, selling about 20 million items (over 650,000 SKUs) to more than 8 million customers (mostly in Japan). The company is an MRO (maintenance, repair and operations) distributor focused on small- and mid-sized companies (~two-thirds of customers), with manufacturing, construction and auto repair industries accounting for the majority of sales. For those reading this online, MonotaRO’s business may seem simple or even obvious; however, the company’s unique profile (>95% of sales are online) and innovative solutions, we believe, provide its customers a distinct value proposition and its shareholders a compelling opportunity to own a leader in a fragmented industry.

MonotaRO serves as a one-stop solution, allowing customers to shop for millions of products via a centralized location. Its transparent pricing saves clients time and reduces costs by removing the need to rely on independent catalogs, individual quotes or separate orders. The company sources its merchandise from thousands of suppliers (i.e., manufacturers and wholesalers) in ten countries and carries over 500,000 products in stock, ready for same-day shipment from its own distribution centers. In addition, its ONE SOURCE Lite allows large clients to link their purchasing management systems to MonotaRO’s, providing company-wide visibility of items and purchases and an integrated experience.

MonotaRO operates as a consolidated subsidiary of U.S.-based Grainger (an industrials supplier) and provides consulting services to the parent’s e-commerce businesses in the U.S., Germany and the U.K.

High-Quality Business

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

• High barriers to entry given that scale is essential to most products in the MRO market, which requires high variety yet small lot ordering, making it imperative to offer a high number of SKUs while investing in technology to provide easier curation and shorter delivery times;
• The company’s vast product breath, combined with its advanced data analytics, allows it to analyze procurement behaviors and better predict which items to keep in inventory. The client is able to spend less time ordering and can count on reliable delivery;
• Attractive business fundamentals, as ordering can be cumbersome, and clients value reliability, convenience and variety more so than price. The MRO market is also highly fragmented and inefficient. As MonotaRO expands, the more difficult it becomes for others to compete; and
• Expertise in database marketing leads to high repeat order rates, while its integrated purchasing management system into large corporations increases their switching costs.

Attractive Valuation

Using our estimates of normalized sales attained through continued market share gains, we believe MonotaRO’s current stock price is offered at a discount to our estimate of the company’s intrinsic value.

Compelling Catalysts

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

• Ability to continue gaining share from inefficient small players (e.g., door-to-door dealers relying on people, catalogs and even fax machines);
• Increasing existing customers’ sales through technological improvements (e.g., website personalization and recommendation displays) aimed at reducing the time it takes to (1) find, (2) purchase and (3) receive products;
• Further penetration into enterprise customers should provide a larger source for sales growth, as this segment represents a higher customer lifetime value as well as stickiness; and
• Growth in sales of MonotaRO’s private label offering of approximately 300,000 products that are higher margin yet provide savings to clients.

Conclusion

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

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

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

Markets Review

Despite posting overall gains, global equity markets were shocked with another war and humanitarian crisis as tensions between Israel and Hamas reached a watershed during the quarter. In response to the deadly terrorist attack on civilians by Hamas, Israel commenced a military campaign in the Gaza Strip. While concerns that the war might spread throughout the entire Middle East abated during the period, the complex religious, ethnic and political makeup of the region could complicate diplomatic relationships in the future.

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

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

Annual Markets Review

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

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

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

Performance and Attribution Summary

For the fourth quarter of 2023, Aristotle Capital’s International Equity Composite posted a total return of 10.41% gross of fees (10.31% net of fees), underperforming the MSCI EAFE Index, which returned 10.42%, and outperforming the MSCI ACWI ex USA Index, which returned 9.75%. Please refer to the table below for detailed performance.

Performance (%)	4Q23	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity Composite (gross)	10.41	18.54	3.32	8.81	5.17	5.63
International Equity Composite (net)	10.31	18.00	2.84	8.30	4.66	5.13
MSCI EAFE Index (net)	10.42	18.24	4.02	8.16	4.28	2.76
MSCI ACWI ex USA Index (net)	9.75	15.62	1.55	7.08	3.83	2.35

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

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

Nemetschek, a project management software solutions provider for the architecture, engineering and construction industry, was the largest contributor for the quarter. Over the past couple of years, the company has made significant efforts to transition the business from a license to a subscription SaaS (software as a service) model, which we expected would drive higher and more stable revenues per user while creating more long-term value for customers. In line with this strategy, the company reported that ~75% of its revenues are now recurring, up from ~65% last year. Furthermore, with the backdrop of stable demand and strong operational execution, management reported EBITDA margins at the high end of guidance and raised its revenue projections for the year. We believe the optimization of Nemetschek’s business model, continued improvement in operational efficiency through efforts like internalization, and product innovation, such as the open and cloud-based dTwin platform, will lead to long-term improvements in profitability and position the company for market share gains as building complexity continues to increase.

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

Recent Portfolio Activity

Buys	Sells
Daikin Industries	Dassault Systèmes
	Sandoz

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

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

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

Daikin Industries, Ltd.

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

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

High-Quality Business

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

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

Attractive Valuation

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

Compelling Catalysts

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

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

Conclusion

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

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