Columbia Funds Q2 2024 Investment Commentary: Insights from Acorn, International, and Dividend Income Funds

Columbia Acorn Fund Q2 2024 Investment Commentary

For monthly performance information, please check online at columbiathreadneedleus.com. The second quarter saw market sentiment shift dramatically. The fund outperformed during April's market retreat, providing a degree of downside protection, before lagging during May's market recovery, accounting for the bulk of underperformance relative to the benchmark. We attribute the performance shortfall primarily to a disappointing earnings season for many of our holdings and a market that penalized any "noise" with large pullbacks. While the fund lagged the benchmark slightly for June, relative performance began to recover toward the end of the month. Throughout this time, we adhered to the fund's disciplined process and rigorous risk management, which we believe softened the underperformance and also positions the fund to benefit from a recovery for most of these beaten-down holdings. The benchmark saw declines across most sectors, with only utilities and communication services finishing in positive territory. The sectors posting the biggest losses were materials, industrials and financials. Positioning in information technology, health care and consumer discretionary weighed most heavily on the fund's relative performance, while positioning in financials, communication services and industrials proved additive. Stock selection was the principal driver of relative performance rather than sector allocation. Average annual total returns (%) for period ending June 30, 2024 Our strategy is focused on generating strong three-year returns with below-benchmark risk. We are growth investors who seek to hold innovative and high-quality small- and mid-cap companies trading at discounts to their intrinsic value. We view many of these undervalued, and often underfollowed, companies as "classification misfits," as the stock price reflects a misunderstanding of the business model, which leads the market to either underestimate some positive long-term attribute or overstate a near-term risk. Such stocks present a significant source of potential outperformance as companies exceed expectations and the market ultimately recognizes their quality. Top holdings (% of net assets) as of June 30, 2024 Top five contributors - Effect on return (%) as of June 30, 2024 Top five detractors - Effect on return (%) as of June 30, 2024 In our view, the quarter's underperformance reflects drawdowns for many of our holdings that undervalued their future growth potential. We anticipate that many of these stocks will recover over the next two or three quarters as trends stabilize and the market again begins to look to the future. That said, if we don't see such a recovery, we will be prepared to conclude that our thesis is broken and move on from holdings as appropriate. Out of the dozen or so companies held in the fund that posted weak results, we did sell one and put some others on a "short leash," while adding to roughly half. We remain valuation sensitive and continue our disciplined approach of trimming stocks as they approach our expected valuations and adding to those with more attractive risk-reward profiles. As we have continued to state, in managing the fund we are macro aware but mainly focused on stock picking and taking advantage of the natural inefficiencies found in small- and mid-cap stocks. We make decisions based on fundamentals and relative risk- reward profiles. That said, barring the next "black swan" event (e.g., another pandemic or financial crisis), we view the economy as resilient even as it is clearly slowing and on a path to bringing inflation over time down to the Federal Reserve's 2% target. The Acorn Fund portfolio is positioned with risk below the benchmark, while maintaining higher growth and profitability characteristics. By sector, the largest overweight remains in consumer discretionary, a diverse sector with many classification misfits and idiosyncratic growth drivers. We are also overweight industrials, an area with various attractive subsectors, including some benefiting from spending around infrastructure, data centers and defense, which are relatively insulated from macro concerns. The fund is underweight information technology, as many of these growing companies have valuations that are objectively high, although we do continue to see pockets of opportunity in beaten-down software stocks and hardware names with underappreciated tailwinds from artificial intelligence and rebounding auto trends. Within health care, we are underweight biotechnology, which has become a larger part of the benchmark. Outcomes for most clinical-stage companies are binary, and funding is not likely to recover to the elevated levels of 2020-2021. That said, we will invest in later-stage companies with a mix of clinical and commercial products that help limit the downside. While the first half of 2024 continued the trend of outperformance for large-to-mega-cap stocks, we see potential for this disparity to diminish as the year progresses, given an environment of flat-to-declining rates and small-cap valuations that are at historical lows versus large caps.

Columbia Acorn International Fund Q2 2024 Investment Commentary

For monthly fund performance, please check columbiathreadneedleus.com. After generally trending higher early in the quarter, international equities sold off in June to close with a narrow loss. European stocks were the key drivers of the late downturn, following election results in France and other nations that suggested far right, populist parties were poised to make gains. On the positive side, the European Central Bank and Swiss National Bank each cut interest rates by a quarter point, and the Bank of England was expected to follow suit before year end. Positive contributions to the benchmark return were led by Taiwanese equities, while the Japanese market, which is by far the largest benchmark constituent, weighed most heavily on returns. Performance leadership within the market was narrow and focused on companies viewed as likely beneficiaries of initiatives related to artificial intelligence. The fund's outperformance vs. the benchmark was primarily driven by stock selection, most notably within Japan, Germany, the U.K. and Australia, while selection weighed most heavily on performance within Mexico and India. In sector terms, selection within financials and health care led positive contributions, while selection within real estate detracted. Average annual total returns (%) for period ending June 30, 2024 Top five contributors - Effect on return (%) as of June 30, 2024 Top five detractors - Effect on return (%) as of June 30, 2024 Rather than focusing on trying to predict the macroeconomic backdrop, we will continue to take a bottom-up approach to investing in individual companies, many of which have leading market share in medium-size or smaller markets. That said, we are monitoring a wide range of non-company-specific risk factors. Among others, these include inflation, central bank policies, China's recovery efforts, conflicts in the Middle East and Europe and elections globally. Consistent with this backdrop of heightened uncertainty, we have been trimming or exiting more illiquid positions, as well as realizing gains on some of the stocks within growth sectors that have led recent performance.

Columbia Dividend Income Fund Q2 2024 Investment Commentary

For monthly fund performance, please check online at columbiathreadneedleus.com. Average annual total returns (%) for period ending June 30, 2024 The major large-cap U.S. equity indexes climbed to a series of record highs in the second quarter, but leadership became increasingly narrow amid rising uncertainty about the outlook for the economy and interest rates. While economic growth remained positive overall, signs of strain in specific areas -- particularly mid- to lower-end consumers -- dampened the outlook for the second half of the year. In addition, statements from U.S. Federal Reserve officials appeared to indicate that there were unlikely to be meaningful rate cuts until 2025. These developments contributed to modest losses in market segments with greater vulnerability to slowing growth and higher rates. Both mid- and small-cap stocks lost ground based on returns of -3.35% and -3.28%, respectively, for the Russell Midcap Index and Russell 2000 Index (RTY). The quarter was also characterized by weakness in the value style, as gauged by the -2.17% return of the Russell 1000 Value Index. Still, broad-based large-cap measures such as the Russell 1000 Index -- which rose 3.57% -- finished in positive territory thanks to continued strength in growth stocks. The Russell 1000 Growth Index surged 8.33%, far outpacing the broader market. Performance in this area was driven by a very narrow group of mega-cap technology companies that have become an increasingly large percentage of the total U.S. market. The top six stocks in the Russell 1000 Index had a weighting of nearly 30% as of June 30, meaning that gains in this segment were sufficient to offset the weaker returns elsewhere. Top five contributors - Effect on return (%) as of June 30, 2024 Top five detractors - Effect on return (%) as of June 30, 2024 Selection within financials led positive contributions, driven by a bias toward higher-quality banks. In addition, a lack of exposure to non-dividend payer Berkshire Hathaway (BRK.A, BRK.B) proved additive as shares of the insurance-heavy conglomerate lagged in the quarter. In addition, an underweight to real estate investment trusts (REITs) contributed positively. REIT valuations are interest-rate sensitive. The pushing out of expectations for Fed rate cuts and the rise in Treasury yields over the quarter weighed on the sector broadly. Other leading individual contributors to performance included Walmart (WMT), as the low-cost retailer has seen its results benefit from increased demand from more affluent consumers impacted by inflation. In addition, Walmart has seen strong growth in e-commerce sales while continuing to expand its profitable digital advertising offering. On the downside, the majority of the fund's underperformance was driven by a lack of exposure to a handful of non-dividend paying mega-cap stocks viewed as leading beneficiaries of initiatives around artificial intelligence. Within information technology, the fund did not hold chipmaker Nvidia (NVDA), which has seen its results propelled by AI spending, or Apple (AAPL), which is viewed as positioned to benefit from adding AI features to its consumer devices. Within communication services, not holding Alphabet (GOOG,GOOGL) detracted notably, as the company's Google search engine continues to add AI-enabled capabilities. Elsewhere within communication services, an overweight to Comcast (CMCSA) detracted, as concerns about growth in the broader broadband segment and increasing competition from fixed wireless providers continued to weigh on shares of the broadband provider. Selection within health care detracted, driven by overweights to more defensive biotechnology and pharmaceutical stocks Johnson & Johnson (JNJ), Merck (MRK) and AbbVie (ABBV). An additional detractor was the lack of exposure to Eli Lilly (LLY), which has seen its shares boosted by the approval and uptake of GLP-1 drugs for treating obesity. Within consumer discretionary, Home Depot (HD) was a leading laggard, as results for the building materials and home improvement retailer have suffered from a housing market stalled by higher interest rates. Finally, within industrials, weak freight volumes have negatively impacted railroad operator Union Pacific (UNP), while shares of aerospace precision motion and control technology company Parker Hannifin (PH) experienced profit-taking after a period of strength. We continue to consistently implement an investment process that focuses on identifying companies that can be winners over the long term rather than chasing the current market preference. We look for companies with sustainable free cash flow, defensible profit margins, capital discipline and strong balance sheets, in the belief that such companies carry the potential to increase dividends throughout the economic cycle and through up and down markets. The recent shift in market expectations toward a more extended period of higher interest rates has shown signs of favoring the higher quality companies we tend to hold, at the expense of companies viewed as vulnerable to higher capital costs. However, we believe the strategy's consistent focus on quality factors should benefit relative performance over full market cycles.