Aristotle and Artisan Funds: Q2 2024 Market Insights and Performance Analysis

Aristotle Core Equity Q2 2024 Commentary

For the second quarter of 2024, Aristotle Atlantic's Core Equity Composite posted a total return of 5.61% gross of fees (5.51% net of fees), outperforming the S&P 500 Index, which recorded a total return of 4.28%. The U.S. equity market achieved record highs, as the S&P 500 Index rose 4.28% during the period. Gains were once again driven by the "Magnificent 7." This narrow group of stocks was responsible for the majority of the S&P 500's return during the quarter. Concurrently, the Bloomberg U.S. Aggregate Bond Index returned 0.07% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 10.50%. On a sector basis, gains were made from five of the eleven sectors within the S&P 500 index led by Information Technology and Communication Services. The worst performing sectors were Materials and Industrials. Data released during the period showed that U.S. economic growth slowed to an annual rate of 1.4% in the first quarter from 3.4% in the last quarter of 2023, as consumer spending, exports and government spending decelerated. Meanwhile, CPI inflation rose at an annual rate of 3.4% in April and 3.3% in May. This combination of sluggish economic growth and persistent inflation raised concerns about potential stagflation. However, the U.S. labor market remained strong, with unemployment at 4.0%, and consumer spending continued to grow. Due to the unchanged macroeconomic landscape, with elevated inflation and a healthy labor market, the Federal Reserve (Fed) maintained the benchmark federal funds rate's targeted range of 5.25% to 5.50% and continued reducing its holdings of Treasury securities. Fed Chair Powell emphasized patience in monetary policy changes and indicated it may take longer than expected to lower rates, as the committee is seeking greater confidence that inflation is sustainably moving toward its 2% target. Corporate earnings were strong, with S&P 500 companies reporting earnings growth of 6.0% and more companies exceeding EPS estimates compared to the previous quarter. Despite slowing economic growth, fewer companies discussed the potential for a recession on earnings calls, and fewer companies mentioned inflation. In geopolitics, tensions remained high as President Biden hiked tariffs on $18 billion of imports from China in a bid to protect U.S. workers and businesses. In the Middle East, the U.S. continued efforts to stabilize maritime traffic in the Red Sea while also facing criticism from Israeli Prime Minister Netanyahu, who claimed the U.S. was withholding weapons from Israel. The U.S. presidential campaign season also began in earnest, with the first debate between incumbent Joe Biden and Republican rival Donald Trump taking place in June. For the second quarter of 2024, Aristotle Atlantic's Core Equity Composite posted a total return of 5.61% gross of fees (5.51% net of fees), outperforming the S&P 500 Index, which recorded a total return of 4.28%. During the second quarter, the portfolio's outperformance relative to the S&P 500 Index was primarily due to security selection. Security selection in Information Technology and Health Care contributed the most to relative performance. Conversely, security selection in Consumer Staples and Consumer Discretionary detracted from relative performance. Nvidia contributed to portfolio performance in the second quarter as investors continued to view positively the new product roadmap for the rest of the year. The company sees 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. Alphabet contributed to portfolio performance in the second quarter, boosted by a strong earnings report featuring better-than-expected revenues across all businesses. The company's positive commentary on the long-term monetization of its AI investments, dividend initiation and increase in its share buyback program contributed to the strong performance. Additionally, evidence increasingly suggests that competitors' GenAI use cases have not disrupted Alphabet's search business, allowing the company to maintain its market leadership and attract incremental advertising dollars. Darling Ingredients detracted from portfolio performance in the quarter, as shares continued to be weak following an in-line quarterly earnings report where the company provided initial 2024 EBITDA guidance of $1.3B to $1.4B, below consensus estimates. On a positive note, the company called out improving fat prices exiting the first quarter. Additionally, in its renewable diesel joint venture, the company has worked through higher-cost feedstocks contracted during start-up, so renewable diesel margins should improve on the lower input prices. We believe there are several catalysts for Darling going forward, including the blenders tax credit transitioning to a producer's tax credit on January 1, 2025 and positive commentary around contracting sustainable aviation fuel (SAF) at a $1-$2 per gallon premium to renewable diesel. SAF production starts were pulled forward to the fourth quarter from prior guidance of early 2025. Norfolk Southern detracted from performance in the second quarter. The company reported a worse-than-expected earnings result for its first quarter in late April. In the second quarter, the company has been reporting weaker-than-expected railcar volumes on its network. This weaker volume has resulted in some sell-side analysts reducing their estimates for the second quarter of 2024. In addition, sentiment is weak because an activist shareholder was not successful in replacing the CEO of Norfolk Southern during a proxy battle in May; however, the activist did succeed in replacing some board members. The table below shows all buys and sells completed during the quarter. Amphenol is one of the world's largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors and interconnect systems; antennas; sensors and sensor-based products; and coaxial and high-speed specialty cable. The company estimates, based on recent reports of industry analysts, that worldwide sales of interconnect and sensor-related products were approximately $235 billion in 2023. The company aligns its businesses into three reportable business segments: Harsh Environment Solutions, Communications Solutions, and Interconnect and Sensor Systems. The company sells products to customers in a diversified set of end markets. We see Amphenol benefiting from increased spending by cloud service providers, hyperscalers and enterprises on new data center architectures that enable AI computing technologies. The increased interconnect content that AI-enabled data centers require, we believe, will underpin a double-digit sales growth outlook for the company over the next few years. The company has attractive end-market diversification, with exposure to both short-cycle and long-cycle, and no single end market vertical represents more than 25% of revenues. Additionally, Amphenol has strong free cash flow generation, which has supported a successful M&A strategy that has driven enhanced advancement. Boston Scientific is a global developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. The company develops cardiovascular and cardiac rhythm management products, including imaging catheters, imaging systems and guidewires. It also makes devices used for electrophysiology, endoscopy, pain management (neuromodulation), urology and pelvic health, including laser systems, hydrogel systems and brain stimulation systems. Boston Scientific markets its products in about 130 countries; the U.S. generates about 60% of revenue. We believe Boston Scientific, as a leader in medical devices, is benefiting from the strong utilization trends coming out of COVID, positive demographic trends with aging patients, and new product innovation to gain market share. The company has executed well against the long-range plan issued last fall, which calls for organic sales growth in the range of 8%-10%, 150 basis points of operating margin expansion and category leadership over the period 2024 through 2026. Additionally, we see a consistent track record of accelerating organic sales growth and a track record of accretive M&A. Microchip develops, manufactures and sells smart, connected and secure embedded control solutions used by its customers for a wide variety of applications. With over 30 years of technology leadership, Microchip's broad product portfolio is a Total System Solution for its customers that can provide a large portion of the silicon requirements in their applications. Total System Solution is a combination of hardware, software and services that helps customers increase their revenue, reduce their costs and manage their risks compared to other solutions. Microchip's synergistic product portfolio empowers disruptive growth trends, including 5G, data centers, sustainability, Internet of Things and edge computing, advanced driver assist systems and autonomous driving, and electric vehicles in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial. We believe Microchip's Total System Solution will continue to support industry share gains and margin expansion as end-market demand for industrial and Internet of Things compute needs begins to recover off current lows. Management has accelerated the drawdown of high customer inventory levels by shutting down manufacturing facilities, and current industry data as well as commentary from peers indicates that overall end demand is seeing early signs of improvement. The company has a demonstrated track record of margin expansion, and we expect to see gross margins trough at the current level and, through internal efficiencies and pricing initiatives for its Total System Solution, expand and drive increasing operating margins and higher levels of free cash flow. We sold Abbott Laboratories given the full valuation and the complexity of its combined businesses. While we like the company's continuous glucose monitoring business FreeStyle Libre and its aggregate medical device business, we are less excited about the prospects for its nutritional business and established pharmaceuticals business. Recent news of a large jury award at an infant formula competitor has us concerned that the overhang of this litigation could be an ongoing negative for Abbott for some time. We sold Accenture and see more limited upside for Accenture due to continuing trends of more selective IT budget spend and a reallocation of IT budgets to support AI initiatives. We believe growth rates for IT services will be lower over the next few years as enterprises continue to digest spending from the pandemic and focus on more cost-benefit analysis for IT initiatives, leading to longer sales cycles and more targeted projects. We sold Teleflex given its below-peer revenue growth rates and seeming lack of participation in the broader pickup in health care utilization. Teleflex has struggled with recent acquisitions underperforming expectations, and the expected recovery in UroLift volumes remains elusive. The equity markets in the second quarter posted positive returns, led by the broadening secular trend in AI. The move in interest rates was muted in the quarter as markets await a clear signal from the Federal Reserve on the timing of a rate reduction. On the margin, economic activity slowed, with multiple ISM manufacturing readings in contraction territory and a weakening housing market. Equity valuations remain high, with AI-focused companies contributing the most to these elevated levels. The geopolitical situation remains very unsettled, and a U.S. presidential election moves into focus, adding to the level of uncertainty. With many issues unresolved, we could see markets move into a period of higher volatility off very low levels. The equity markets continue to reflect the positive backdrop of growing earnings and a potential lowering of interest rates. 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. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Aristotle Focus Growth Q2 2024 Commentary

For the second quarter of 2024, Aristotle Atlantic's Focus Growth Composite posted a total return of 8.71% gross of fees (8.68% net of fees), outperforming the 8.33% total return of the Russell 1000 Growth Index. The U.S. equity market achieved record highs, as the S&P 500 Index rose 4.28% during the period. Gains were once again driven by the "Magnificent 7." This narrow group of stocks was responsible for the majority of the S&P 500's return during the quarter. Concurrently, the Bloomberg U.S. Aggregate Bond Index returned 0.07% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 10.50%. On a sector basis, gains were made from seven of the eleven sectors within the Russell 1000 Growth index led by Information Technology and Communication Services. The worst performing sectors were Materials and Industrials. Data released during the period showed that U.S. economic growth slowed to an annual rate of 1.4% in the first quarter from 3.4% in the last quarter of 2023, as consumer spending, exports and government spending decelerated. Meanwhile, CPI inflation rose at an annual rate of 3.4% in April and 3.3% in May. This combination of sluggish economic growth and persistent inflation raised concerns about potential stagflation. However, the U.S. labor market remained strong, with unemployment at 4.0%, and consumer spending continued to grow. Due to the unchanged macroeconomic landscape, with elevated inflation and a healthy labor market, the Federal Reserve (Fed) maintained the benchmark federal funds rate's targeted range of 5.25% to 5.50% and continued reducing its holdings of Treasury securities. Fed Chair Powell emphasized patience in monetary policy changes and indicated it may take longer than expected to lower rates, as the committee is seeking greater confidence that inflation is sustainably moving toward its 2% target. Corporate earnings were strong, with S&P 500 companies reporting earnings growth of 6.0% and more companies exceeding EPS estimates compared to the previous quarter. Despite slowing economic growth, fewer companies discussed the potential for a recession on earnings calls, and fewer companies mentioned inflation. In geopolitics, tensions remained high as President Biden hiked tariffs on $18 billion of imports from China in a bid to protect U.S. workers and businesses. In the Middle East, the U.S. continued efforts to stabilize maritime traffic in the Red Sea while also facing criticism from Israeli Prime Minister Netanyahu, who claimed the U.S. was withholding weapons from Israel. The U.S. presidential campaign season also began in earnest, with the first debate between incumbent Joe Biden and Republican rival Donald Trump taking place in June. For the second quarter of 2024, Aristotle Atlantic's Focus Growth Composite posted a total return of 8.71% gross of fees (8.68% net of fees), outperforming the 8.33% total return of the Russell 1000 Growth Index. During the second quarter, the portfolio's outperformance relative to the Russell 1000 Growth Index was due to allocation effects and security selection. Security selection in Information Technology contributed the most to relative performance. Conversely, security selection in Health Care detracted from relative performance. Nvidia contributed to portfolio performance in the second quarter as investors continued to view positively the new product roadmap for the rest of the year. The company sees 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. KLA contributed to portfolio performance in the second quarter as the company reported a strong March quarter. The results were driven by better-than-expected performance in patterning and services segments. The company also provided positive commentary on customer orders and increased visibility on growing sequential revenue through the rest of 2024. Commentary surrounding wafer fab equipment (WFE) spending for 2024 shows improving demand, with 2024 at least flat versus 2023 and growing customer spend driven by strong foundry/logic and high bandwidth memory demand from accelerating AI-compute infrastructure spend. Visa detracted from portfolio performance in the second quarter despite a solid earnings report early in the quarter that highlighted continued growth in payment volumes and value-added services. However, shares declined late in the quarter due to a court denying a proposed settlement that would have ended interchange fee-related litigation between Visa, Mastercard and merchant plaintiffs. As a result, uncertainty surrounding the possible outcomes of the litigation has created an overhang for Visa's shares, even though interchange fees are charged by card-issuing financial institutions, not networks like Visa and Mastercard. Dexcom detracted from performance in the quarter as the stock price gave back all the strong gains from the first quarter of this year. The company reported strong first quarter earnings, beating consensus estimates for the top and bottom lines, highlighted by 25% organic revenue growth. Additionally, it raised the low end of full-year revenue guidance based on the strong start to the year, with record new patient starts. Dexcom is launching an over-the-counter continuous glucose monitoring device set to target the over 25 million Type 2 diabetes patients who are not dependent on insulin. Furthermore, the medical device company recently expanded its salesforce to better address the ~200K primary care physicians in the United States. We see several catalysts going forward, and the stock is trading at a discount to historical valuation metrics. The table below shows all buys and sells completed during the quarter, followed by a brief rationale. Analog Devices is a global semiconductor leader dedicated to solving customers' most complex engineering challenges. The company delivers innovations that connect technology to human breakthroughs and play a critical role at the intersection of the physical and digital worlds by providing the building blocks to sense, measure, interpret, connect and power. Analog designs, manufactures, tests and markets a broad portfolio of solutions, including integrated circuits, software and subsystems that leverage high-performance analog, mixed-signal and digital signal processing technologies. Its comprehensive product portfolio, deep domain expertise and advanced manufacturing capabilities extend across high-performance precision and high-speed mixed-signal, power management and processing technologies, including data converters, amplifiers, power management, radio frequency, integrated circuits, edge processors and other sensors. The company's customers include original equipment manufacturers and customers that build electronic subsystems for integration into larger systems. We see the company's analog products providing exposure to high-growth trends, including automotive electrification and driver assistance systems, factory intelligence and automation, the Intelligent Edge, Internet of Things device proliferation, and sustainable energy. We expect the company to return excess free cash flow, benefiting shareholders. Broadcom is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. The company strategically focuses its research and development resources to address niche opportunities in target markets and leverage its extensive portfolio of U.S. and other patents and other intellectual property to integrate multiple technologies and create system-on-chip component and software solutions that target growth opportunities. Broadcom designs products and software that deliver high performance and provide mission-critical functionality. The company has a history of innovation in the semiconductor industry and offers thousands of products that are used in end products such as enterprise and data center networking, home connectivity, "set-top boxes broadband access", telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Broadcom differentiates itself through its high-performance design and integration capabilities and focuses on developing products for target markets where it believes it can earn attractive margins. We view Broadcom's semiconductor business as being very well positioned to benefit from secular growth in data center networking, which is being driven by AI and cloud computing. The company continues to invest in research and development, and we see this as a competitive advantage for the company. Broadcom's infrastructure software business is a recurring revenue business model that provides mission-critical mainframe support software to its customer base. The recent VMware acquisition will enhance this business strategy and accelerate the growth rate of this business unit, as VMware's product suite includes key tools for AI server upgrades. Our long-term investment thesis is supported by Broadcom's success in its strategy of maintaining technology and market share leadership in mission-critical markets with high switching costs and deep profit pools. We sold ON Semiconductor and have become more cautious on the global automotive market, especially for electric vehicles, which we believe will see a period of slower sales due to both new infrastructure requirements and consumers becoming more knowledgeable about the potential costs and issues with owning EVs. In addition, the market is becoming a lot more competitive on the supply side, with many new models being launched simultaneously, which we believe will lead to pricing pressures for the OEMs, which could create pricing headwinds for suppliers such as ON Semiconductor. While we see global EV penetration as continuing to increase over the next decade, supported by government incentives, we remain cautious in the near term and believe we are entering a period of lower sales trends following the explosive growth of the past three years. The equity markets in the second quarter posted positive returns, led by the broadening secular trend in AI. The move in interest rates was muted in the quarter as markets await a clear signal from the Federal Reserve on the timing of a rate reduction. On the margin, economic activity slowed, with multiple ISM manufacturing readings in contraction territory and a weakening housing market. Equity valuations remain high, with AI-focused companies contributing the most to these elevated levels. The geopolitical situation remains very unsettled, and a U.S. presidential election moves into focus, adding to the level of uncertainty. With many issues unresolved, we could see markets move into a period of higher volatility off very low levels. The equity markets continue to reflect the positive backdrop of growing earnings and a potential lowering of interest rates. 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. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Aristotle Small Cap Equity Q2 2024 Commentary

Our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Small caps gave back some of their first quarter gains with the Russell 2000 index delivering a total return of -3.28%. Potential slowing in the US economy weighed on investor sentiment but lent credence to a soft landing scenario in 2024. The Consumer Price Index (CPI) drifted lower during the quarter, coming in below expectations at 3.0% as inflationary pressures have eased. Employment was muddled during the period as non-farm payroll growth was positive but volatile while unemployment steadily climbed to 4.1%. Despite softening data, the Federal Reserve (Fed) held its ground on easing at its June meeting, forecasting only one Fed funds rate cut in 2024, down from 3 cuts from its March meeting. The U.S. Treasury yield curve steepened with the yield on the 10-year note rising 16 basis points (BPS) to end June at 4.36%. Stylistically, growth stocks outperformed their value counterparts during the quarter as evidenced by the Russell 2000 Growth Index returning -2.92% compared to -3.64% for the Russell 2000 Value Index. There were three sectors that posted a positive absolute return in the growth index while all sectors in the value index were negative. Two of the largest names in the growth index for the first quarter, Super Micro and MicroStrategy, were the worst performers in the second quarter. Whether the underperformance was a function of decreasing AI enthusiasm or selling in advance of the two companies graduating to the larger Russell 1000 Index, it's fair to say that the concentration and performance impact from both companies will be discussed by active small cap managers and academics for years to come. Pockets of exuberance can still be seen in the small cap universe as noted by the fact that Carvana, a volatile used car selling platform that had completed a distressed debt exchange in the fall of 2023, was the top contributor in the Russell 2000 Value Index as well as a top contributor in the Growth Index. At the sector level, only two of the eleven sectors in the Russell 2000 Index recorded positive returns during the second quarter, led by the Consumer Staples (+2.28%), Utilities (+0.13%), and Communication Services (-0.63%) sectors. Conversely, Consumer Discretionary (-5.99%), Industrials (-4.41%), and Health Care (-4.29%) all lagged. Looking at market factors, profitable companies outperformed loss makers by nearly 200 bps during the quarter. For the second quarter of 2024, the Aristotle Small Cap Equity Composite posted a total return of -1.56% net of fees (-1.41% gross of fees), outperforming the -3.28% total return of the Russell 2000 Index. Outperformance was primarily driven by security selection while allocation effects also contributed. Overall, security selection was strongest within the Information Technology, Energy, and Financials sectors and weakest in Consumer Discretionary, Health Care, and Materials. From an allocation perspective, the portfolio benefitted from an underweight in Consumer Discretionary and an overweight in Information Technology, however, this was partially offset by an overweight in Industrials and an underweight in Financials. Ardmore Shipping (ASC), a product and chemical transportation company focused on modern mid-sized vessels, appreciated amid global refinery shifts and geopolitical factors, boosted voyage lengths and demand for product tankers. We maintain a position, as we believe the company continues to operate from a position of strength, driven by recent shareholder-friendly capital allocation decisions, strong operating performance, and a favorable industry supply-demand backdrop. Dycom Industries (DY), a provider of engineering and construction services to the telecommunications and cable television industries, benefitted from continued growth in its core business, funding tailwinds, and expanding margins as demand for wireline services continues to grow. We maintain a position as we believe the company remains well positioned for longer-term growth alongside secular trends for expanding fiber deployments to support faster broadband connectivity speeds and opportunities to deploy fiber to rural or underserved areas across the country. Carter's (CRI), a leading marketer of baby and young children's apparel in North America, declined amid a cautious consumer spending environment and weak direct-to-consumer trends for the business during the quarter. We maintain our position as we believe the company has a strong brand in a stable category and that store rationalization efforts and an improving demographic backdrop can drive a sales recovery in the business in periods to come. Cerence (CRNC), a developer of voice-connected technology for the transportation market, declined after guiding down the full-year revenue forecast along with the CFO's departure. As discussed later, the investment team decided to sell the full position during the quarter. Chart Industries (GTLS), an industrial equipment manufacturer that provides cryogenic equipment for storage, distribution, and other processes within the industrial gas and LNG, hydrogen, helium, carbon capture and water treatment industries was added to the portfolio. Strong forward demand for LNG and accelerating hydrogen opportunities coupled with company-specific improvement initiatives should benefit the company moving forward. Littelfuse (LFUS), a designer and manufacturer of circuit protection, power control, and sensing products for the automotive, industrial, medical, and consumer end markets, was added to the portfolio. We believe the company's dominant position in circuit protection and growing presence in automotive sensors and power semiconductors/components should benefit from ongoing efforts to solve power control and connection problems between the digital and physical worlds. Cerence (CRNC), a provider of speech recognition and voice technologies for automotive applications was sold as the company embarked on a strategic shift to capitalize on the AI opportunity disrupting the financial progress we were anticipating. PowerSchool (PWSC), a leading provider of cloud-based software for K-12 education in North America, was removed from the portfolio following the announcement the company was being taken private by investment firm Bain Capital. We continue to remain optimistic about the long-term potential for the small-cap segment of the U.S. market as valuations and potential tailwinds bode well for the asset class. As we look out to the second half of 2024, we are cautiously constructive as encouraging signs of economic stability are balanced by now consensus expectations of a soft landing scenario and the pricing of risk. So, despite greater clarity over the Fed's path from here, there remains a long list of items creating uncertainty that could lead to greater volatility in 2024 including, but not limited to, signs that inflationary pressures have not yet fully dissipated, geopolitical tensions, U.S. equity index concentration issues, ongoing commercial real estate and regional banking concerns, and the looming presidential election. We are well aware that most of these issues are well known, but the timing and magnitude of the impact of any and all of these issues remains unpredictable. Therefore, as we always have, we will continue to avoid the temptation to forecast their outcome in favor of assessing the potential impact from a range of potential outcomes within our company‐specific, bottom-up analysis, and quality focus. From an asset class perspective, valuations of small versus large continue to remain near multi-decade lows, which we believe suggests a more favorable setup for small caps relative to large caps in the periods to come (15.6x P/E for the Russell 2000 Index vs. 24.8x P/E for the Russell 1000 Index). Against a backdrop of moderating inflation, normalized interest rates, and a still growing U.S. economy, it looks to us that small-cap's stretch of underperformance has the potential to end. If the economy continues to stabilize, our view is that valuations are likely to rise for those businesses that have largely sat out the mega-cap performance regime. It also helps that the well-noted concentration in large caps is reaching 50-year highs and small cap valuation relative to large cap is at multi-decade lows, therefore any fundamentally driven repositioning is likely to benefit small caps more than larger companies, in our view. Lastly, we believe smaller caps remain better positioned to benefit from the reshoring of U.S. manufacturing, a pickup in M&A activity, the CHIPS Act, and several infrastructure projects on the horizon. Our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Overweights in Industrials and Information Technology are mostly a function of our underlying company specific views rather than any top-down predictions for each sector. Conversely, we continue to be underweight in Consumer Discretionary, as we have been unable to identify what we consider to be compelling long-term opportunities that fit our discipline given the rising risk profiles of many retail businesses and a potential deceleration in goods spending following a period of strength. While the portfolio's allocation to Health Care is modestly below that of the benchmark, we continue to remain underweight the Biotechnology industry as many companies within that group do not fit our discipline due to their elevated levels of binary risk. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy's sector positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Aristotle Large Cap Growth Q2 2024 Commentary

The equity markets in the second quarter posted positive returns, led by the broadening secular trend in AI. Markets Review The U.S. equity market achieved record highs, as the S&P 500 Index rose 4.28% during the period. Gains were once again driven by the "Magnificent 7." This narrow group of stocks was responsible for the majority of the S&P 500's return during the quarter. Concurrently, the Bloomberg U.S. Aggregate Bond Index returned 0.07% for the quarter. In terms of style, the Russell 1000 Value Index underperformed its growth counterpart by 10.50%. On a sector basis gains were made from seven of the eleven sectors within the Russell 1000 Growth index led by Information Technology and Communication Services. The worst performing sectors were Materials and Industrials. Data released during the period showed that U.S. economic growth slowed to an annual rate of 1.4% in the first quarter from 3.4% in the last quarter of 2023, as consumer spending, exports and government spending decelerated. Meanwhile, CPI inflation rose at an annual rate of 3.4% in April and 3.3% in May. This combination of sluggish economic growth and persistent inflation raised concerns about potential stagflation. However, the U.S. labor market remained strong, with unemployment at 4.0%, and consumer spending continued to grow. Due to the unchanged macroeconomic landscape, with elevated inflation and a healthy labor market, the Federal Reserve (Fed) maintained the benchmark federal funds rate's targeted range of 5.25% to 5.50% and continued reducing its holdings of Treasury securities. Fed Chair Powell emphasized patience in monetary policy changes and indicated it may take longer than expected to lower rates, as the committee is seeking greater confidence that inflation is sustainably moving toward its 2% target. Corporate earnings were strong, with S&P 500 companies reporting earnings growth of 6.0% and more companies exceeding EPS estimates compared to the previous quarter. Despite slowing economic growth, fewer companies discussed the potential for a recession on earnings calls, and fewer companies mentioned inflation. In geopolitics, tensions remained high as President Biden hiked tariffs on $18 billion of imports from China in a bid to protect U.S. workers and businesses. In the Middle East, the U.S. continued efforts to stabilize maritime traffic in the Red Sea while also facing criticism from Israeli Prime Minister Netanyahu, who claimed the U.S. was withholding weapons from Israel. The U.S. presidential campaign season also began in earnest, with the first debate between incumbent Joe Biden and Republican rival Donald Trump taking place in June. Performance and Attribution Summary For the second quarter of 2024, Aristotle Atlantic's Large Cap Growth Composite posted a total return of 8.77% gross of fees (8.71% net of fees), outperforming the 8.33% return of the Russell 1000 Growth Index. Performance (%) 2Q24 1 Year 3 Years 5 Years Since Inception* Large Cap Growth Composite (gross) 8.77 28.37 6.81 16.08 18.05 Large Cap Growth Composite (NET) 8.71 27.71 6.37 15.61 17.58 Russell 1000 Growth Index 8.33 33.48 11.27 19.32 19.43 Click to enlarge During the second quarter, the portfolio's outperformance relative to the Russell 1000 Growth Index was primarily due to security selection. Security selection in Information Technology and Financials contributed the most to relative performance. Conversely, security selection in Heath Care and Industrials detracted from relative performance. Contributors and Detractors for 2Q 2024 Relative Contributors Relative Detractors Nvidia (NVDA) Dexcom (DXCM) KLA Corporation (KLAC) Darling Ingredients (DAR) Guardant Health (GH) Visa (V) Costco Wholesale (COST) Expedia Group (EXPE) Vertex Pharmaceuticals (VRTX) Norfolk Southern (NSC) Click to enlarge Contributors Nvidia Nvidia contributed to portfolio performance in the second quarter as investors continued to view positively the new product roadmap for the rest of the year. The company sees 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. KLA Corporation KLA contributed to portfolio performance in the second quarter as the company reported a strong March quarter. The results were driven by better-than-expected performance in patterning and services segments. The company also provided positive commentary on customer orders and increased visibility on growing sequential revenue through the rest of 2024. Commentary surrounding wafer fab equipment (WFE) spending for 2024 shows improving demand, with 2024 at least flat versus 2023 and growing customer spend driven by strong foundry/logic and high bandwidth memory (HBM) demand from accelerating AI-compute infrastructure spend. Detractors Dexcom Dexcom detracted from performance in the quarter as the stock price gave back all the strong gains from the first quarter of this year. The company reported strong first quarter earnings, beating consensus estimates for the top and bottom lines, highlighted by 25% organic revenue growth. Additionally, it raised the low end of full-year revenue guidance based on the strong start to the year, with record new patient starts. Dexcom is launching an over-the-counter continuous glucose monitoring device set to target the over 25 million Type 2 diabetes patients who are not dependent on insulin. Furthermore, the medical device company recently expanded its salesforce to better address the ~200K primary care physicians in the United States. We see several catalysts going forward, and the stock is trading at a discount to historical valuation metrics. Darling Ingredients Darling Ingredients detracted from portfolio performance in the quarter, as shares continued to be weak following an in-line quarterly earnings report where the company provided initial 2024 EBITDA guidance of $1.3B to $1.4B, below consensus estimates. On a positive note, the company called out improving fat prices exiting the first quarter. Additionally, in its renewable diesel joint venture, the company has worked through higher-cost feedstocks contracted during start-up, so renewable diesel margins should improve on the lower input prices. We believe there are several catalysts for Darling going forward, including the blenders tax credit transitioning to a producer's tax credit on January 1, 2025 and positive commentary around contracting sustainable aviation fuel (SAF) at a $1-$2 per gallon premium to renewable diesel. SAF production starts were pulled forward to the fourth quarter from prior guidance of early 2025. Recent Portfolio Activity The table below shows all buys and sells completed during the quarter, followed by a brief rationale. Buys Sells Analog Devices (ADI) ON Semiconductor (ON) Broadcom (AVGO) Click to enlarge Buys Analog Devices Analog Devices is a global semiconductor leader dedicated to solving customers' most complex engineering challenges. The company delivers innovations that connect technology to human breakthroughs and play a critical role at the intersection of the physical and digital worlds by providing the building blocks to sense, measure, interpret, connect and power. Analog designs, manufactures, tests and markets a broad portfolio of solutions, including integrated circuits, software and subsystems that leverage high-performance analog, mixed-signal and digital signal processing technologies. Its comprehensive product portfolio, deep domain expertise and advanced manufacturing capabilities extend across high-performance precision and high-speed mixed-signal, power management and processing technologies, including data converters, amplifiers, power management, radio frequency, integrated circuits, edge processors and other sensors. The company's customers include original equipment manufacturers and customers that build electronic subsystems for integration into larger systems. We see the company's analog products providing exposure to high-growth trends, including automotive electrification and driver assistance systems, factory intelligence and automation, the Intelligent Edge, Internet of Things device proliferation, and sustainable energy. We expect the company to return excess free cash flow, benefiting shareholders. Broadcom Broadcom is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. The company strategically focuses its research and development resources to address niche opportunities in target markets and leverage its extensive portfolio of U.S. and other patents and other intellectual property to integrate multiple technologies and create system-on-chip component and software solutions that target growth opportunities. Broadcom designs products and software that deliver high performance and provide mission-critical functionality. The company has a history of innovation in the semiconductor industry and offers thousands of products that are used in end products such as enterprise and data center networking, home connectivity, "set-top boxes broadband access", telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Broadcom differentiates itself through its high-performance design and integration capabilities and focuses on developing products for target markets where it believes it can earn attractive margins. We view Broadcom's semiconductor business as being very well positioned to benefit from secular growth in data center networking, which is being driven by AI and cloud computing. The company continues to invest in research and development, and we see this as a competitive advantage for the company. Broadcom's infrastructure software business is a recurring revenue business model that provides mission-critical mainframe support software to its customer base. The recent VMware acquisition will enhance this business strategy and accelerate the growth rate of this business unit, as VMware's product suite includes key tools for AI server upgrades. Our long-term investment thesis is supported by Broadcom's success in its strategy of maintaining technology and market share leadership in mission-critical markets with high switching costs and deep profit pools. Sells ON Semiconductor We sold ON Semiconductor and have become more cautious on the global automotive market, especially for electric vehicles, which we believe will see a period of slower sales due to both new infrastructure requirements and consumers becoming more knowledgeable about the potential costs and issues with owning EVs. In addition, the market is becoming a lot more competitive on the supply side, with many new models being launched simultaneously, which we believe will lead to pricing pressures for the OEMs, which could create pricing headwinds for suppliers such as ON Semiconductor. While we see global EV penetration as continuing to increase over the next decade, supported by government incentives, we remain cautious in the near term and believe we are entering a period of lower sales trends following the explosive growth of the past three years. Outlook The equity markets in the second quarter posted positive returns, led by the broadening secular trend in AI. The move in interest rates was muted in the quarter as markets await a clear signal from the Federal Reserve on the timing of a rate reduction. On the margin, economic activity slowed, with multiple ISM manufacturing readings in contraction territory and a weakening housing market. Equity valuations remain high, with AI-focused companies contributing the most to these elevated levels. The geopolitical situation remains very unsettled, and a U.S. presidential election moves into focus, adding to the level of uncertainty. With many issues unresolved, we could see markets move into a period of higher volatility off very low levels. The equity markets continue to reflect the positive backdrop of growing earnings and a potential lowering of interest rates. 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. Disclosures The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Atlantic makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Large Cap Growth strategy. Not every client's account will have these characteristics. Aristotle Atlantic reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and, in the aggregate, may represent only a small percentage of an account's portfolio holdings. The performance attribution presented is of a representative account from Aristotle Atlantic's Large Cap Growth Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account's period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks. The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Atlantic does not guarantee the accuracy, adequacy or completeness of such information. Aristotle Atlantic Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. AAP-2407-12 Performance Disclosure Composite returns for all periods ended June 30, 2024 are preliminary pending final account reconciliation. Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Index Disclosure The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index has been selected as the benchmark and is used for comparison purposes only. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The S&P 500® Index is the Standard & Poor's Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies. The Index covers all industries except transportation and utilities. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite includes over 3,000 companies, more than most other stock market indices. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index of domestic investment grade bonds, including corporate, government and mortgage-backed securities. The WTI Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for oil consumed in the United States. The 3-Month U.S. Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of three months. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest directly in these indices. Click to enlarge Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Aristotle Capital Management is an independent/employee-owned investment management organization that specializes in equity and fixed income portfolio management for institutional and advisory clients worldwide.

Artisan Global Equity Fund Q2 2024 Commentary

While our banks and insurance brokerage holdings performed well, other holdings in the financials sector dragged returns lower on a relative basis. With inflation slowing in many countries, equity markets saw modest returns in Q2. Stocks in emerging markets and North America performed particularly well. Growth outperformed value stocks in most regions. The market yield on the 10-Year US Treasury ended the quarter flat. US equity indices climbed higher. The core personal consumption expenditures price index, which excludes volatile food and energy costs, fell to 2.6% year-over-year in May, moving closer toward the Fed's target rate of 2%. Concurrently, the economy grew modestly while the unemployment rate ticked up, a sign that two years of restrictive policy measures could finally be taking a hold. Exuberance over artificial intelligence (AI) continued to be a catalyst for technology and media stocks. The ECB cut its policy rate by 25bps. The market and economy in Europe showed little growth. European parliamentary elections created a risk-off environment favoring value stocks. In the euro area, the core inflation rate ticked up slightly to 2.9% year-over-year in May from April's 2.7%, a two-year low. Japanese stocks picked up in the final weeks of the quarter. The core consumer price index rose 2.5% year-over-year in May, after a dip in April. Private consumption remained weak, however, likely due to the increase in prices. Nevertheless, as wages increase, and consumers adjust to higher prices, moderate inflation could benefit an economy that has struggled with economic stagnation for the past several decades. A falling yen helped exports surge 13.5% year-over-year in May, up from an 8.3% rise in April. The portfolio came up short against its benchmark, the MSCI AC World Index, this quarter. The effects of our sector weightings held back relative results. However, year to date the portfolio has outperformed. A below-benchmark weighting in information technology reduced relative returns this quarter. Our technology and AI-related holdings are mostly classified as communication and consumer stocks, and they continued to add value in the quarter. The team takes a selective, price-sensitive approach to investing in technology companies we believe are transforming industries. This approach, at times, may lead to an underweight in this sector. While our banks and insurance brokerage holdings performed well, other holdings in the financials sector dragged returns lower on a relative basis. In particular, shares of BFF Bank, an Italian finance and factoring company, declined sharply after the Bank of Italy (BOI) mandated BFF to temporarily halt its dividends, bonuses and international expansion. BFF's management is negotiating with BOI to address concerns about the risk level it assigns to past-due loans. We believe this issue will be resolved and won't significantly impact BFF's stock price over the long run. BFF Bank specializes in acquiring low-risk public sector debt. Its current collection rates are higher than its accounting methodology reflects. The bank has a strong balance sheet and high coverage ratios and has consistently generated profits and high capital returns by targeting underserved markets using low-cost deposits. In a falling rate environment, deposit rates are expected to adjust quicker than its core loans and receivables rates, potentially increasing its net interest margin. Also, our largest financials holding, UBS, was marginally weaker in the quarter after it sought clarification from the Swiss Financial Market Supervisory Authority (FINMA) about additional capital it must maintain following its acquisition of Credit Suisse. The merger was approved last year in an emergency takeover orchestrated by the Swiss government during the banking crisis. Earlier this year, FINMA declared an increase in capital requirements for all systematically important banks, including UBS, now a firm with $5 trillion in post-merger assets. While its shares have returned more than 51% over the last year, UBS' stock price has been under pressure this year due to the proposed changes. We value UBS' leading positions in asset and wealth management, businesses historically characterized by high, stable returns. Consumer discretionary holdings also led to weak performance this quarter. Shares of online travel agency Tui (OTCPK:TUIFF) traded lower on softer-than-expected summer bookings, although quarterly revenues exceeded guidance, and the company's outlook remains positive. Tui also successfully transferred its listing from the London Stock Exchange to the Frankfurt Stock Exchange, positioning it for potential inclusion in the German mid-cap index MDAX and boosting its share price. Tui offers customized travel through a vertically integrated service model, catering to travelers seeking choice, value and exclusive experiences. With robust demand for leisure travel, Tui's unique business strategy and an attractive valuation, we see significant upside potential for this stock. In addition, Indonesia-based retailer and franchise owner Mitra Adiperkasa sold off on weaker-than-expected same-store sales growth, particularly in food and beverage, where a consumer boycott led to an operating loss. While we appreciate its exposure to rising long-term consumption, we exited the position. Lastly, CoStar Group (CSGP), a leader in real estate data and analytics, underperformed this quarter, weighing on the portfolio's real estate sector return. It fell sharply due to lower earnings and continued weakness in commercial real estate, despite strong momentum in the residential market. CoStar has one of the largest and most comprehensive real estate databases in the industry supporting services and online platforms like Apartments.com, Homes.com and LoopNet. Homes.com, now the second-largest residential portal after Zillow, has exceeded all traffic and monetization targets and is an important long-term driver for CoStar, in our view. To enhance the user experience, CoStar recently purchased Matterport, a leading spatial data platform that offers immersive 3D property tours. With these strengths, we expect CoStar to outpace others in the residential market while weathering the current headwinds in the commercial property market. On the positive side, our holdings in health care boosted relative performance as they have all year. San Diego-based Halozyme Therapeutics (HALO) surged after it announced a patent extension for DARZALEX® SC, a bone marrow cancer and blood disorder treatment. This development allows the biotech company to maintain its royalty rate through early 2029 in 37 European countries. Halozyme earns royalties on a number of other treatments as well, including its ENHANZE® drug delivery platform. It recently raised its 2028 royalty guidance based on these positive results. We value the company's strong cash flows, which it has used to support share buybacks. Adding to the strength in health care, genetic testing company Natera (NTRA) rose 18% this quarter on the continued demand for Signatera™, a blood test that detects post-treatment residual cancer. Key drivers for the run-up included a 52% year-over-year increase in revenues and an 18% expansion in gross margins. Management expects the average sales price for Signatera to rise as Medicare extends coverage for the test in certain situations. We believe Signatera represents a $15 billion market opportunity. Also, Novo Nordisk (NVO), a major holding in the portfolio, saw its share price rise this quarter after it published phase 3 clinical trial data for Ozempic®, its type 2 diabetes drug. The study showed Ozempic reduced chronic kidney disease (CKD) and cardiovascular events with fewer adverse reactions compared to a placebo. We believe these results will lead to US Food and Drug Administration (FDA) approval for Ozempic's use in diabetic patients with CKD and/or heart disease, solidifying Novo Nordisk's leading position in both the obesity and type 2 diabetes markets. In industrials, stock selection drove our relative outperformance in the sector. GE Aerospace, formerly General Electric (GE), saw its share price reach its highest level since 2008. Since spinning off its sustainable energy and health care units in 2021, GE Aerospace has outperformed the broader market and the other former GE units given strong demand for its jet engines and aftermarket services (repair, maintenance and parts). The company expects to increase deliveries of its popular LEAP airline engines by 20-25% this year to meet rising air travel demand. Despite industry-wide labor shortages, we are confident in GE Aerospace's pricing power as it works through its order backlog. Further, the company is investing more than $650 million in its manufacturing facilities and supply chain this year to help increase production. In addition, shares of South Korean defense manufacturer LIG Nex1 and other Korean defense stocks surged on the growing cooperation between Seoul's Ministry of Defense and the Polish government. Poland, the largest buyer of South Korean military equipment, more than doubled its defense budget to $31 billion in 2023, following the invasion of Ukraine. In the last two years, LIG Nex1 has secured contracts with the US, Romania, Saudi Arabia and the UAE. The company expects to maintain an order backlog of three to four times annual sales for the next five years as countries boost defense spending amid rising geopolitical tensions. We believe LIG Nex1's cutting-edge technology and strong product portfolio will enable it to outpace many of its peers. This quarter, we reduced our exposure to slowing consumer spending among lower income shoppers within our demographics/consumer trends theme. We sold our position in McDonald's after higher pricing led to consecutive declines in quarterly revenue and net income. As previously mentioned, we sold our position in retailer Mitra Adiperkasa given the boycott and sagging sales. Lastly, after achieving solid gains, we sold Netflix as it approached our target price. In 2023, the streaming video giant began to curtail users' ability to share passwords. After an initial backlash, it added millions of new subscribers. This effort came on the heels of offering an ad-supported tier in 2022 for those who wanted a lower monthly subscription fee. We think Netflix could reach an earnings growth plateau in the second half of the year as the revenue lift from its password-sharing crackdown begins to wane. We also sold two technology holdings with weakening fundamentals. Integrated circuit designer Marvell Technology (MRVL) has been a strong player in data centers, but other parts of its business have struggled, leading to falling revenues and gross profits. We also exited Salesforce on weak bookings and revenue growth, particularly in cloud subscriptions. On the other hand, we added to the stronger performing stocks in our demographics/health care theme. We increased our position in UCB as it continued to find success in its rollout of Bimzelx®, a plaque psoriasis treatment. We believe it could achieve peak sales of $5 billion. UCB's other drugs, including Evenity® for postmenopausal osteoporosis and Fintepla® for childhood epilepsy, are also gaining global approval, supporting the stock's upside potential. We also increased our stake in Otsuka Holdings (OTCPK:OTSKF) after the FDA approved its application for Alzheimer's disease medication REXULTI®, the first treatment in the US for patients with agitation, a neuropsychiatric symptom experienced by about half of all Alzheimer's patients with dementia. Like many of our health care holdings, Otsuka has a strong product pipeline that we think will help it grow revenues faster than consensus estimates, particularly outside of its home market of Japan. We are optimistic about the innovations our health care holdings are developing. Within our broad infrastructure theme, we increased holdings benefiting from strong tailwinds. In transportation, we increased a few of our aerospace positions. For instance, we added to our holdings in Melrose Industries (OTCPK:MLSPF) given surging demand and strong pricing in the lucrative aftermarket business (e.g., maintenance, parts and service). Melrose designs and manufactures components and systems for original equipment manufacturers, such as Boeing (BA) and Airbus (OTCPK:EADSF)(OTCPK:EADSY), in both the commercial and defense aviation industries. We initiated a position in aerospace manufacturer RTX Corporation (RTX), a diversified company that includes airplane engine manufacturer Pratt & Whitney, military technology developer Raytheon and avionics systems provider Collins Aerospace. Revenues are evenly split among the civil, government and military segments, with 40% of Collins' revenues coming from high-margin, recurring aftermarket servicing. RTX benefits from long-standing relationships within each segment, particularly within US defense circles, which provide a barrier to entry. We also scaled up our positions in defense manufacturers LIG Nex1 and Hanwha Aerospace, another South Korean company. During the quarter, Poland agreed to accelerate negotiations with LIG Nex1, sending its shares higher. Hanwha has new deals in process in a number of geographies, including Poland, Romania, the EU, Australia and other Association of Southeast Asian Nations countries. We anticipate Hanwha's product mix will shift to higher margin exports, increasing from 50% of today's order book to 70% by 2025. With ongoing geopolitical conflicts, we believe these companies will continue to grow their order backlogs. Lastly, we exited positions with lower growth profiles. In construction, we sold construction and farm equipment maker CNH Industrial (CNH) on its weak outlook for agriculture, particularly in South America. We also shed our position in heating, cooling and plumbing solutions provider Ferguson. While the company's long-term competitive advantages are promising, it missed its guidance in revenues, and its margin growth slowed. Overall, given shifting market dynamics, we are finding other strong opportunities in this theme. In our financial services theme, we added positions in non-traditional banking services amid falling interest rates in Europe and the US, while increasing holdings in banks benefiting from rising Japanese rates. In addition, we added AJ Gallagher back to the portfolio. As one of the four leading insurance brokerage firms in a global oligopoly, it has significant pricing power. The company continues to grow its market share through strategic acquisitions in the valuable middle market. We also increased our positions in UniCredit and Mediobanca, Italian banks that generate a large portion of their revenues from wealth management, asset management, private banking, consumer credit, insurance and specialty finance. These businesses are typically more resilient in falling rate environments as they do not rely on interest rate spreads as much as do traditional deposit-and-loan banks. In Japan, we added Sumitomo Mitsui Financial to the portfolio. It is the second-largest bank in Japan and one that we think is well positioned to increase net interest margin given the BOJ's recent policy shift. In addition, we believe the company will improve its capital allocation by reducing its cross-holdings and increasing share buybacks. Slowing inflation, a reasonably healthy labor market, loosening monetary policy and an ongoing economic expansion might be the right ingredients to extend this late-cycle market. Even so, we remain mindful of the geopolitical and economic risks and their potential effects on our holdings. When the environment does change, we'll remain committed to our thematic approach, such as those that are part of the travel boom, growing global defense spending, the latest health care innovations or emerging AI productivity tools. That's because our investment approach centers on identifying secular trends and capitalizing on the high-quality companies with reasonable valuations and sustainable growth characteristics that emerge from them. Consequently, we remain optimistic about our ability to create long-term value for our investors that helps them meet their financial goals, even during times of change.

Aristotle Corporate Credit Q2 2024 Commentary

The Fed held rates steady in the second quarter, leaving its benchmark rate unchanged for the seventh consecutive meeting in June. U.S. corporate credit markets delivered mixed performance in the second quarter, as U.S. yields rose and credit spreads widened marginally. The Bloomberg U.S. Aggregate Bond Index eked out a small gain of 0.07% during the quarter but remained in negative territory for the year with a return of -0.71% in the first half. Bank loans continued to outperform both high yield bonds and investment grade corporate bonds with the Credit Suisse Leveraged Loan Index gaining 1.87% during the quarter, bringing its year-to-date return to 4.44%. High yield bonds also gained ground during the period, returning 1.09% during the quarter and 2.58% in the first half, as measured by the Bloomberg U.S. Corporate High Yield Bond Index. Conversely, investment grade corporate bonds continued to struggle as longer duration bonds underperformed, with the Bloomberg U.S. Corporate Bond Index returning -0.09% during the quarter and -0.49% in the first six months of the year. U.S. equity markets continued to advance, as the "Magnificent 7" helped to push the S&P 500 Index to a new all-time high, with a total return of 4.28% in the quarter and 15.29% in the first half of 2024. Economic data released during the second quarter revealed slowing growth and modestly easing inflation. First quarter GDP showed the economy expanding at an annual rate of 1.4%, well below the 3.4% rate seen in the fourth quarter of 2023. Nonetheless, the U.S. labor market remained resilient with nonfarm payrolls beating expectations in May, although the unemployment rate ticked up to 4.0%, the highest level since January 2022. Meanwhile, U.S. inflation eased slightly, as annual CPI fell to 3.3% in May, the lowest since February. The Federal Reserve (Fed) held rates steady in the second quarter, leaving its benchmark rate unchanged for the seventh consecutive meeting in June. According to the Fed's updated Summary of Economic Projections (SEP), the committee now expects only 25 basis points of rate cuts in 2024 and nudged up median rate projections over the next few years. Fed Chair Powell acknowledged the solid pace of U.S. economic activity, a strong job market and easing inflation, but emphasized inflation remains elevated, and the Fed needs to see further progress on inflation before cutting rates. Elsewhere, the U.S. presidential campaign began in earnest and will likely garner further attention ahead of the November election. U.S. Treasuries ended the quarter modestly weaker, with yields rising across the curve. The yield on the U.S. 2-year note climbed roughly 13 basis points during the quarter, and the yield on the U.S. 10-year note rose nearly 19 basis points. While the yield curve steepened marginally during the quarter, the spread between the yield on the 2-year and 10-year notes remained inverted for the 24th consecutive month, extending the longest such inversion in history. Despite moderating over the past two months after peaking in April, yields rose by more than 50 basis points across the curve in the first half. Corporate credit spreads ended the quarter modestly wider after falling to the tightest levels in over two years in early April. High yield bond spreads ended the quarter approximately 10 basis points wider, as measured by the Bloomberg U.S. Corporate High Yield Bond Index, while investment grade corporate bond spreads widened roughly 4 basis points, as measured by the Bloomberg U.S. Corporate Bond Index. U.S. corporate credit issuance remained strong, with refinancing continuing to drive the bulk of issuance. High yield bond supply totaled nearly $78 billion in the quarter, which was modestly slower than the prior quarter but almost double the total from the second quarter of 2023. Leveraged loan supply continued at a torrid pace, totaling roughly $385 billion during the quarter, more than 20% higher than the first quarter and more than quadruple the same period last year. Investment grade corporate issuance moderated after the first quarter's record sum, but topped $300 billion, which brought issuance in the first half to more than $800 billion, nearly 20% higher than the first half of 2023. Following a strong first quarter, high yield bond and leveraged loan funds continued to see inflows during the second quarter. High yield bond fund inflows topped $800 million in a choppy quarter, with more than $5.2 billion in outflows in April followed by steady inflows in both May and June. Leveraged loan fund inflows totaled roughly $7.8 billion during the period, compared to an outflow of nearly $8 billion in the second quarter of 2023. Leveraged loans were bolstered by robust collateralized loan obligation (CLO) demand, with CLO volume topping $52 billion ex-refi/resets during the quarter, more than twice the total from the same period last year. Investment grade corporate bond funds also saw solid inflows, with more than $35 billion of inflows during the quarter, bringing the year-to-date total to over $90 billion. Within the high yield bond market, higher-quality bonds gained ground in the quarter, as 'BB's (+1.32%) outperformed 'B's (+1.03%) and 'CCC's (-0.01%). From an industry perspective, within the Bloomberg U.S. Corporate High Yield Bond Index, Pharmaceuticals (+10.16%), Brokerage (+2.30%) and Financials (+2.17%) outperformed, while Cable & Satellite (-2.00%), Telecommunications (-1.55%) and Media & Entertainment (-1.53%) continued to underperform. Defaults and distressed exchanges moderated in the second quarter. The 12-month trailing, par-weighted U.S. high yield default rate, including distressed exchanges, declined roughly 80 basis points to end the quarter at 1.79% (1.17%, excluding distressed exchanges), more than 1.50% below its long-term historical average. Meanwhile, the loan par-weighted default rate, including distressed exchanges, fell roughly 42 basis points to end June at 3.10% (1.09%, excluding distressed exchanges), roughly in line with its long-term historical average. High Yield Bond The Aristotle High Yield Bond Composite returned 1.55% gross of fees (1.49% net of fees) in the second quarter, outperforming the 1.22% return of the ICE BofA BB-B U.S. Cash Pay High Yield Constrained Index. Security selection was the primary contributor to relative performance. Industry allocation also contributed to relative performance, while sector rotation had a neutral effect. There were no offsetting detractors. Security selection contributed to relative performance led by holdings in Cable & Satellite and Finance Companies. This was partially offset by selection in Pharmaceuticals and Pipelines & Distributors. Industry allocation also contributed to relative performance led by an underweight in Cable & Satellite and an overweight in Finance Companies. This was partially offset by underweights in Technology and Healthcare. Sector rotation had a neutral effect on relative performance, as the allocation to investment grade corporate bonds was offset by the allocation to bank loans. The Aristotle Short Duration High Yield Bond Composite returned 1.42% pure gross of fees (1.29% net of fees) in the second quarter, compared to the 1.38% return of the ICE BofA 1-3 Year BB-B U.S. Cash Pay Fixed Maturity High Yield Constrained Index. Sector rotation was the primary detractor from relative performance, while industry allocation was the primary contributor to relative performance. Sector rotation detracted from relative performance led by the allocation to investment grade corporate bonds. There were no offsetting contributors. Security selection also detracted modestly from relative performance led by holdings in Pharmaceuticals and Healthcare. This was mostly offset by selection in Finance Companies and Pipelines & Distributors. Conversely, industry allocation contributed to relative performance led by an overweight in Pharmaceuticals and an underweight in Cable & Satellite. This was partially offset by an underweight in Technology and an overweight in Pipelines & Distributors. While our overall outlook for U.S. corporate credit markets remains largely unchanged compared to the end of the first quarter, we are beginning to see more dispersion across financial markets as economic growth slows and persistently elevated interest rates impact certain areas of the economy. Nonetheless, we believe underlying fundamentals remain supportive overall, while all-in yields are still relatively attractive. We continue to focus on higher-quality companies in industries with supportive tailwinds as we enter the second half of the year. The macroeconomic outlook has become more balanced over the past few months, as U.S. economic activity has shown signs of slowing despite a healthy labor market and continued support from fiscal spending. While U.S. consumer spending remains relatively healthy in the aggregate, consumer sentiment declined steadily during the quarter, as the divide between higher-end consumers and the rest continues to widen. Globally, the U.S. economy is still the cleanest dirty shirt, as the economies of Europe and China have been unable to gain momentum in the first half of the year. Nonetheless, while U.S. financial markets remained strong on the surface, underlying performance diverged significantly between the largest companies and the rest of the market. We see the possibility of a bumpier road ahead as risks inherently increase when the economy and financial markets rely on narrower leadership to support overall growth. While inflation has shown signs of easing in recent months, it remains above the Fed's target and, as a result, market expectations for future interest rate cuts have been pared back dramatically in the first half of the year. The Fed last hiked rates at its July 2023 meeting, and the current pause is likely to continue for at least a few more months. Despite global central banks (e.g., Bank of Canada and the European Central Bank) beginning to ease in the second quarter, the Fed remains cautious of cutting rates too soon and sparking a reacceleration in inflation. While the next move is almost inevitably lower, barring a major slowdown, we believe the path will be more gradual and shallower than the market expected just a few months ago. Therefore, we remain cautious on rate-sensitive areas of the economy, where we see risks continuing to build. We believe corporate balance sheets remain strong overall, although we are seeing a divergence between higher-quality companies with prudent management teams and smaller firms with significant leverage and higher funding costs. Corporate earnings have remained strong, but the hurdle has only increased and we have begun to see the market punish earnings misses in recent months. We expect to see further difficult debt refinancings for companies with more highly levered capital structures, especially those in secularly declining industries, and we remain cautious of companies with more shareholder-friendly policies. Conversely, we continue to favor what we believe to be higher-quality, larger companies with management teams that have been proactive in shoring up their balance sheets to prepare for potentially slower growth, but we also acknowledge that valuations have become quite compressed. In this segment of the market, we expect spreads to remain rangebound but continue to seek opportunities for relatively attractive all-in yields. In our view, the overall market narrative continues to be dominated by a few major themes, such as artificial intelligence (AI), re-shoring/near-shoring of U.S. manufacturing and the resilient higher-end U.S. consumer. These themes have been apparent for some time, so any shifts to this narrative pose a potential risk. Furthermore, with geopolitical risks rising and uncertainty likely to increase ahead of the U.S. elections, we believe there is less room for error going forward. As a result, we continue to favor companies with sound capital structures in the higher-quality segment of the high yield bond market, where we see relatively attractive income opportunities relative to recent history and the potential for positive total returns. High Yield Bond Positioning In our high yield bond portfolios, we have continued to increase exposure to higher-quality credits in the short-to-intermediate part of the curve, while favoring companies with a domestic (U.S.) focus. We remain focused on fundamental, bottom-up credit selection in segments of the market that we believe should outperform in an environment of slowing growth and elevated risks. Compared to the prior quarter, we kept duration exposure largely unchanged and continue to see opportunities in the belly of the curve that may benefit from a steeper yield curve. Additionally, we increased exposure to 'BB'-rated credits relative to the benchmark and are looking to opportunistically add exposure to 'BBB'-rated credits trading with wider spreads. Despite risk-on sentiment over the past few months, we believe it is notable to see higher-quality credits beginning to outperform. As the potential Fed rate cuts get pushed further into the future, the market is coming around to the major refinancing risks facing some of the lower-quality companies in industries facing secular decline. While this may eventually present opportunities, we do not see favorable risk-reward in bottom-fishing in these parts of the market yet. From an industry perspective, we remain focused on themes we believe should act as a tailwind for specific industries. While we continue to see certain Lodging & Leisure, Retailers & Restaurants and Transportation companies benefitting from a robust higher-end consumer, we have modestly reduced overweights. We also remain overweight certain Energy credits that we believe should benefit from elevated data center power demand from AI. Conversely, we maintained underweights in Cable & Satellite and Telecommunications, where we see persistent elevated rates continuing to weigh on highly levered credits. At the end of the quarter, we held overweights in Energy, Transportation and Retailers & Restaurants alongside underweights in Technology, Telecommunications and Chemicals. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.