Markets Review

The U.S. equity market ended the year on a strong note, with the S&P 500 Index rising 2.41% during the period. In contrast, the Bloomberg U.S. Aggregate Bond Index declined, falling 3.06% for the quarter.

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

On a sector basis, gains were made from six of the eleven sectors within the Russell 1000 Growth Index, led by Consumer Discretionary and Energy. The worst-performing sectors were Real Estate and Materials.

The U.S. economy continued to demonstrate resilience, with real GDP growing at an annualized rate of 3.1%, according to the BEA’s most recent report. Increases in consumer spending, exports, nonresidential fixed investment and federal government spending drove the economic expansion. Retail sales rose 3.8% year-over-year in November, supported by a 2.7% increase in disposable personal income for the most recent quarter.

The labor market remained tight but showed signs of softening, as the unemployment rate edged up to 4.2% in November. Inflation remained relatively stable, rising modestly to an annual rate of 2.7%, as measured by the Consumer Price Index (CPI).

As was widely expected, the Federal Reserve (Fed) implemented two rate cuts during the quarter, setting the federal funds target rate at 4.25% to 4.50%. Fed Chair Jerome Powell emphasized the importance of finding a balance—reducing policy restraint too rapidly could hinder progress on inflation, while acting too slowly could weaken economic activity and the labor market. Still, he indicated that both the economy and monetary policy are on solid footing.

Corporate earnings also showed strength, as S&P 500 companies reported 5.8% earnings growth, marking the fifth consecutive quarter of positive results. A majority of companies exceeded EPS expectations, with only 61 companies issuing negative EPS guidance—the lowest figure since the fourth quarter of 2021. Looking ahead to 2025, consensus estimates project earnings growth of 14.8% for the calendar year, signaling optimism among analysts.

On the political front, Donald Trump was elected as the 47th president of the United States, becoming the first Republican to win the popular vote since 2004. The Republican Party also won the Senate and kept control of the House of Representatives, though with narrow majorities.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Atlantic’s Focus Growth Composite posted a total return of 5.05% gross of fees (5.03% net of fees), underperforming the 7.07% total return of the Russell 1000 Growth Index.

Performance (%)	4Q24	1 Year	3 Years	5 Years	Since Inception*
Focus Growth Composite (gross)	5.05	29.69	5.90	15.56	14.89
Focus Growth Composite (net)	5.03	29.57	5.79	15.45	14.65
Russell 1000 Growth Index	7.07	33.36	10.47	18.96	17.83

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

During the fourth quarter, the portfolio’s underperformance relative to the Russell 1000 Growth index was due to a combination of allocation effects and security selection. Security selection in Consumer Discretionary and Information Technology detracted the most from relative performance. Conversely, security selection in Health Care and Communication Services contributed.

Contributors and Detractors for 4Q 2024

Relative Contributors	Relative Detractors
Expedia	UnitedHealth
Eli Lilly	Trane Technologies
Visa	Prologis
ServiceNow	Bio-Techne
Netflix	S&P Global

Detractors

UnitedHealth

UnitedHealth Group detracted from performance in the fourth quarter following the tragic shooting of its insurance division CEO and increased focus on health insurance industry practices. A bipartisan bill was introduced that could force companies that own pharmacy benefit managers to divest their pharmacy operations, which would impact United’s Optum unit.

Trane Technologies

Trane Technologies detracted from performance in the fourth quarter of 2024. The company reported better than expected revenue and earnings growth at the end of October. The stock declined in December despite two investor conferences early in the month where the company reiterated expectations that current strong trends in commercial HVAC will continue into 2025, the service business is continuing to experience low double-digit growth, and the residential business is expected to improve from a lull in 2024. Higher interest rates have been a drag on industrial stock performance generally in December. Strength in the US dollar in 2025 will impact large cap companies like Trane, which have international exposure.

Contributors

Expedia

Expedia contributed to performance in the fourth quarter of 2024. In early November, the company reported better-than-expected EBITDA and EPS for the third quarter. Full-year guidance for 2024 was increased. The vacation rental business, Vrbo, returned to modest growth after a few quarters of decline. The balance sheet is close to target leverage ratio. There is a share repurchase authorization for approximately 13% of outstanding shares.

Eli Lilly

Eli Lilly contributed to performance in the fourth quarter. While shares underperformed, our underweight position versus the benchmark resulted in a positive contribution to relative returns. Lilly shares were weak following an uncharacteristic third quarter earnings miss driven by softer-than-expected sales of its blockbuster diabetes and obesity drugs. The company blamed this partly on wholesaler destocking. Lilly reinforced its view that end demand for the drugs remains strong.

Recent Portfolio Activity

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

Buys	Sells
Eli Lilly	DexCom

Buys

Eli Lilly

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

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

Sells

Dexcom

We sold Dexcom after the surprisingly weak second quarter earnings report and only a modest recovery in the third quarter. The U.S. sales trends remain weak, and we believe that it could take a while for Dexcom to regain the premium multiple it has historically enjoyed. Dexcom is working to fix the durable medical equipment (DME) sales channel, and this could take time. The recently announced Stelo product for non-diabetic users could add an additional level of variability to quarterly earnings reports as well.

Outlook

The equity markets in the fourth quarter moved higher as investors anticipated a market benefit from a full sweep by Republicans in the November election. Interest rates for the quarter were little changed but did move sharply intraquarter due to a shift in the Fed away from a more accommodative policy. Expectations for 2025 include a couple of further rate reductions by the Fed and earnings increasing over 10% for the year. The markets will track closely the new administration’s stance on certain policies, along with the pace and level of reductions in regulations. Tariffs will be a focal point, as any action could add to concerns for higher inflation. Valuation levels remain elevated, and equity price appreciation will largely be dependent on earnings growth for the year. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

Markets Review

The U.S. equity market ended the year on a strong note, with the S&P 500 Index rising 2.41% during the period. In contrast, the Bloomberg U.S. Aggregate Bond Index declined, falling 3.06% for the quarter.

On a sector basis, gains were made from six of the eleven sectors within the Russell 1000 Growth Index, led by Consumer Discretionary and Energy. The worst-performing sectors were Real Estate and Materials.

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

The U.S. economy continued to demonstrate resilience, with real GDP growing at an annualized rate of 3.1%, according to the BEA’s most recent report. Increases in consumer spending, exports, nonresidential fixed investment and federal government spending drove the economic expansion. Retail sales rose 3.8% year-over-year in November, supported by a 2.7% increase in disposable personal income for the most recent quarter.

The labor market remained tight but showed signs of softening, as the unemployment rate edged up to 4.2% in November. Inflation remained relatively stable, rising modestly to an annual rate of 2.7%, as measured by the Consumer Price Index (CPI).

As was widely expected, the Federal Reserve (Fed) implemented two rate cuts during the quarter, setting the federal funds target rate at 4.25% to 4.50%. Fed Chair Jerome Powell emphasized the importance of finding a balance—reducing policy restraint too rapidly could hinder progress on inflation, while acting too slowly could weaken economic activity and the labor market. Still, he indicated that both the economy and monetary policy are on solid footing.

Corporate earnings also showed strength, as S&P 500 companies reported 5.8% earnings growth, marking the fifth consecutive quarter of positive results. A majority of companies exceeded EPS expectations, with only 61 companies issuing negative EPS guidance—the lowest figure since the fourth quarter of 2021. Looking ahead to 2025, consensus estimates project earnings growth of 14.8% for the calendar year, signaling optimism among analysts.

On the political front, Donald Trump was elected as the 47th president of the United States, becoming the first Republican to win the popular vote since 2004. The Republican Party also won the Senate and kept control of the House of Representatives, though with narrow majorities.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of 6.29% gross of fees (6.15% net of fees), underperforming the 7.07% return of the Russell 1000 Growth Index.

Performance (%)	4Q24	1 Year	3 Years	5 Years	Since Inception*
Large Cap Growth Composite (gross)	6.29	28.48	6.46	16.07	17.91
Large Cap Growth Composite (net)	6.15	27.90	5.99	15.58	17.43
Russell 1000 Growth Index	7.07	33.36	10.47	18.96	19.59

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

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

Contributors and Detractors for 4Q 2024

Relative Contributors	Relative Detractors
Expedia	Tesla
Eli Lilly	UnitedHealth Group
Chart Industries	KLA Corporation
ServiceNow	Bio-Techne
Guardant Health	Broadcom

Detractors

Tesla

Tesla detracted from performance in the fourth quarter of 2024. The stock had a strong performance in the fourth quarter, and our portfolio has an underweight position relative to the benchmark weight. Tesla reported better-than-expected third quarter earnings in late October. Given the CEO of Tesla’s position as an advisor to President-elect Trump, performance in the shares accelerated following the U.S. presidential election. There are expectations that regulation for autonomous driving will be centralized with the federal government. There have been reports in the press that tax incentives for electric vehicles will be eliminated or reduced, which could have a negative impact on Tesla’s subscale competitors.

UnitedHealth Group

UnitedHealth Group detracted from performance in the fourth quarter following the tragic shooting of its insurance division CEO and increased focus on health insurance industry practices. A bipartisan bill was introduced that could force companies that own pharmacy benefit managers to divest their pharmacy operations, which would impact United’s Optum unit.

Contributors

Expedia

Expedia contributed to performance in the fourth quarter of 2024. In early November, the company reported better-than-expected EBITDA and EPS for the third quarter. Full-year guidance for 2024 was increased. The vacation rental business, Vrbo, returned to modest growth after a few quarters of decline. The balance sheet is close to target leverage ratio. There is a share repurchase authorization for approximately 13% of outstanding shares.

Eli Lilly

Eli Lilly was a relative contributor in the fourth quarter, as shares underperformed and we are underweight versus the benchmark. Lilly shares were weak following an uncharacteristic third quarter earnings miss driven by softer-than-expected sales of its blockbuster diabetes and obesity drugs. The company blamed this partly on wholesaler destocking. Lilly reinforced its view that end demand for the drugs remains strong.

Recent Portfolio Activity

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

Buys	Sells
Amphenol	Honeywell
	Dexcom

Buys

Amphenol

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 datacenter architectures that enable AI computing technologies. The increased interconnect content that AI-enabled datacenters 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.

Sells

Dexcom

We sold Dexcom after the surprisingly weak second quarter earnings report and only a modest recovery in the third quarter. The U.S. sales trends remain weak, and we believe that it could take a while for Dexcom to regain the premium multiple it has historically enjoyed. Dexcom is working to fix the durable medical equipment (DME) sales channel, and this could take time. The recently announced Stelo product for non-diabetic users could add an additional level of variability to quarterly earnings reports as well.

Honeywell

We sold Honeywell in the Large Cap Growth strategy to reduce our overweight in Industrials. We plan to reallocate the proceeds into Information Technology companies with what we consider to be better growth prospects.

Outlook

The equity markets in the fourth quarter moved higher as investors anticipated a market benefit from a full sweep by Republicans in the November election. Interest rates for the quarter were little changed but did move sharply intraquarter due to a shift in the Fed away from a more accommodative policy. Expectations for 2025 include a couple of further rate reductions by the Fed and earnings increasing over 10% for the year. The markets will track closely the new administration’s stance on certain policies, along with the pace and level of reductions in regulations. Tariffs will be a focal point, as any action could add to concerns for higher inflation. Valuation levels remain elevated, and equity price appreciation will largely be dependent on earnings growth for the year. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

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

Markets Review

In the Middle East, a tenuous ceasefire was made between Israel and Hezbollah, as well as seeming progress toward a ceasefire between Israel and Hamas. However, tensions also escalated as Israel, in response to an Iranian missile attack, conducted a precision strike on military targets in Iran. Concerns over a regional conflict have intensified, as the two countries have drawn closer to a potentially more forceful direct encounter. The Middle East also experienced a shock in politics, as the Islamist militant group Hayat Tahrir al-Sham overthrew the Iranian and Russian-backed dictator Bashar al-Assad in Syria. Europe and Asia were not immune to instability, as the French parliament passed a vote of no confidence against Prime Minister Michel Barnier, and the South Korean National Assembly voted to impeach President Yoon Suk Yeol after he declared martial law.

Even with the continued uncertainty stoked by geopolitical conflicts and political regime changes across the globe, the IMF projects global economic growth to hold steady at 3.2% for 2024 and 2025. Additionally, global inflation continues to decline, resulting in global headline inflation projections of 3.5% for 2025 – below the 2000-2019 average of 3.6%. As western countries continue to target a 2% annual rate of inflation, the Federal Reserve, European Central Bank and Bank of England all cut key interest rates during the period. In Asia, Japan’s index of service-sector inflation hit its highest level since 1995, as rising wages have caused companies to pass on higher costs. Though the Bank of Japan did not raise rates at its most recent meeting, Governor Kazuo Ueda has indicated that the central bank would continue to raise rates if inflation sustainably hit a 2% annual rate. Meanwhile, China announced a $1.4 trillion stimulus package to address local government debt issues and support its economy. The Chinese government hopes to repair municipal balance sheets rather than directly injecting money into the economy (which it has done in the past).

Annual Markets Review

Global equity markets continued climbing in 2024 following a strong year in 2023, as the MSCI ACWI posted a full-year return of 17.49%. Additionally, growth outperformed value, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 13.46% in 2024. Meanwhile, fixed income markets lagged, as the Bloomberg Global Aggregate Bond Index fell by 1.69%.

Although the equity market remained strong in 2024 amid resilient global growth, uncertainty heading into 2025 is high, as geopolitical conflicts remain unsolved, central bank policy effects have yet to fully play out and countries’ governments are changing leadership.

Therefore, rather than trying to predict the unpredictable, we choose to focus on individual businesses and their long-term prospects. We believe by focusing on what is analyzable in the long run, we will be able to weather short-term volatility and provide attractive returns over the long term for our clients.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Capital’s International Equity ADR Composite posted a total return of -7.28% gross of fees (-7.34% net of fees), outperforming the MSCI EAFE Index, which returned -8.11%, and the MSCI ACWI ex USA Index, which returned -7.60%. Please refer to the table below for detailed performance.

Performance (%)	4Q24	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity ADR Composite (gross)	-7.28	7.46	1.53	5.97	6.66	6.28
International Equity ADR Composite (net)	-7.34	7.00	1.03	5.47	6.16	5.78
MSCI EAFE Index (net)	-8.11	3.82	1.65	4.73	5.20	5.18
MSCI ACWI ex USA Index (net)	-7.60	5.53	0.82	4.10	4.80	4.66

Cameco, one of the world’s largest uranium producers, was a major contributor during the period. With the continued focus on artificial intelligence and clean energy, the demand for nuclear energy remained robust. Some of the largest companies in the world, such as Amazon, Google and Meta, announced nuclear power agreements in the quarter. Given Cameco’s tier-one assets in reliable jurisdictions, proven operating experience and strong reputation, we believe the company is in a unique position to benefit as various industries and governments pursue clean, reliable and scalable sources of energy. Correspondingly, Cameco increased its production outlook, having already secured commitments that net an average of 29 million pounds per year over the next four years. We believe Cameco’s continued ability to efficiently increase production while securing long-term contracts will lead to sustainably higher levels of normalized FREE cash flow. While its Canada-based mines and Westinghouse unit are executing well, production was recently suspended at Cameco’s Inkai joint venture in Kazakhstan. We believe production will restart soon and note that Cameco’s share of Inkai’s production amounts to less than 10% of total Cameco volumes, a figure that can be offset with increased production at the company’s MacArthur River and Key Lake mines in Canada.

Sony, the global provider of videogames and consoles, image sensors, music, and movies, was a top contributor for the period. The company reported strong results driven by third-party gaming revenue and record PlayStation 5 console profitability. This was achieved despite lower console sales, which, in our view, exemplifies the strength of PlayStation’s network effects. PlayStation is the world’s largest gaming platform with 116 million monthly active users, making it an attractive market for game developers and allowing users to play the most advanced games at lower costs than PCs. In its Pictures segment, Crunchyroll (the anime business Sony acquired from AT&T in 2020) signed a distribution agreement with YouTube Primetime Channels, the market share leader in streaming services, which we believe will increase Crunchyroll’s subscriber base. Though a singular example, it illustrates management’s ability to better execute and further improve the segment’s profitability, a catalyst we previously identified. In addition, Sony reported improved sales of image sensors for mobile products as the global smartphone market continued its gradual recovery. Sony’s image sensor business has the largest global market share, and we believe, longer term, it is uniquely positioned to benefit from increasing demand for both autonomous driving technology in vehicles and improved image quality in smartphone cameras. As such, we continue to admire Sony’s capacity to build on its industry leadership and optimize its operations, which includes its plan for a partial spinoff of its Financial Services segment in October 2025.

DSM-Firmenich (DSM), the Dutch-Swiss nutrition, health and bioscience company, was the leading detractor for the quarter. Despite a decline in share price, the company continued to increase its sales across segments following customer destocking in 2023. Within its largest segment – Perfumery & Beauty – we believe DSM will uniquely benefit, as customers look to differentiate their products and increase fragrance dosage levels. The company has also made progress on the integration of its 2023 merger with Firmenich, a catalyst we previously identified, which we expect to create further sales and product development synergies. With low leverage, the company is in a strong position to pursue additional bolt-on acquisitions and return cash to shareholders, all while it executes on shedding lower-margin segments. As such, during the quarter, the company completed the sale of its yeast extracts and marine lipid business and remains on track with plans to divest its Animal Nutrition & Health segment. We believe this should enhance overall profitability, as DSM’s global scale, close relationships with customers and ability to innovate allow the company to continue to gain global market share across the businesses it operates.

Ashtead Group, a U.K.-headquartered equipment rental company, was one of the largest detractors. Though rental revenues grew 2% year-over-year, shares declined as weaker local commercial construction markets weighed on growth and fleet utilization. In December, Ashtead also announced its intention to move to a U.S. primary listing (while retaining a U.K. listing), a reflection of the company’s large U.S. footprint. This process will take time, as management intends to first discuss the proposal with shareholders before putting forward a formal resolution. Despite the cyclical nature of the construction industry, which can impact short-term results, we believe Ashtead will continue to gain market share in North America as more customers choose to rent rather than purchase equipment. We estimate rental penetration in the U.S. (~90% of EBITDA) is roughly 55% compared to 75% in the U.K., which provides ample runway. During our nearly four years as shareholders, Ashtead has further consolidated the rental industry, which we believe should result in a more disciplined and attractive market. The company also continues to make progress on the catalyst of growing its higher-margin specialty business, which includes HVAC equipment and scaffolding. Moreover, we believe Ashtead will be able to further utilize its national footprint and procurement power to increase its market share and enhance its FREE cash flow (of which it plans to return up to $1.5 billion to shareholders via buybacks over the next 18 months).

Recent Portfolio Activity

Buys	Sells
None	None

Consistent with our long-term horizon and low turnover, there were no new purchases or sales completed during the quarter.

Conclusion

While investment managers are typically judged by their performance, we often remind our clients and prospects that performance is an outcome of an investment process. Short-term performance, in particular, can be fleeting.  We are proud to report that our strategy outperformed its benchmarks in 2024; however, we highlight that this is a result of our focus on the inputs of our time-tested investment process, not a focus on performance. Our process involves identifying what we believe to be high-quality businesses that are trading at a discount to their intrinsic value. While there are myriad variables – both micro and macro – that influence stock prices on a short-term basis, we believe the ultimate worth of a business is determined by company specific fundamentals. As such, regardless of short-term market influences or performance outcomes, we will remain true to our investment process.  

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

Markets Review

In the Middle East, a tenuous ceasefire was made between Israel and Hezbollah, as well as seeming progress toward a ceasefire between Israel and Hamas. However, tensions also escalated as Israel, in response to an Iranian missile attack, conducted a precision strike on military targets in Iran. Concerns over a regional conflict have intensified, as the two countries have drawn closer to a potentially more forceful direct encounter. The Middle East also experienced a shock in politics, as the Islamist militant group Hayat Tahrir al-Sham overthrew the Iranian and Russian-backed dictator Bashar al-Assad in Syria. Europe and Asia were not immune to instability, as the French parliament passed a vote of no confidence against Prime Minister Michel Barnier, and the South Korean National Assembly voted to impeach President Yoon Suk Yeol after he declared martial law.

Even with the continued uncertainty stoked by geopolitical conflicts and political regime changes across the globe, the IMF projects global economic growth to hold steady at 3.2% for 2024 and 2025. Additionally, global inflation continues to decline, resulting in global headline inflation projections of 3.5% for 2025 – below the 2000-2019 average of 3.6%. As western countries continue to target a 2% annual rate of inflation, the Federal Reserve, European Central Bank and Bank of England all cut key interest rates during the period. In Asia, Japan’s index of service-sector inflation hit its highest level since 1995, as rising wages have caused companies to pass on higher costs. Though the Bank of Japan did not raise rates at its most recent meeting, Governor Kazuo Ueda has indicated that the central bank would continue to raise rates if inflation sustainably hit a 2% annual rate. Meanwhile, China announced a $1.4 trillion stimulus package to address local government debt issues and support its economy. The Chinese government hopes to repair municipal balance sheets rather than directly injecting money into the economy (which it has done in the past).

Annual Markets Review

Global equity markets continued climbing in 2024 following a strong year in 2023, as the MSCI ACWI posted a full-year return of 17.49%. Additionally, growth outperformed value, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 13.46% in 2024. Meanwhile, fixed income markets lagged, as the Bloomberg Global Aggregate Bond Index fell by 1.69%.

Although the equity market remained strong in 2024 amid resilient global growth, uncertainty heading into 2025 is high, as geopolitical conflicts remain unsolved, central bank policy effects have yet to fully play out and countries’ governments are changing leadership.

Therefore, rather than trying to predict the unpredictable, we choose to focus on individual businesses and their long-term prospects. We believe by focusing on what is analyzable in the long run, we will be able to weather short-term volatility and provide attractive returns over the long term for our clients.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Capital’s Global Equity Composite posted a total return of -7.72% gross of fees (-7.80% net of fees), underperforming the MSCI ACWI Index, which returned -0.99%, and the MSCI World Index, which returned -0.16%. Please refer to the table below for detailed performance.

Performance (%)	4Q24	YTD	1 Year	3 Years	5 Years	10 Years	Since Inception*
Global Equity Composite (gross)	-7.72	3.67	1.01	7.93	9.45	9.45	9.56
Global Equity Composite (net)	-7.80	3.34	0.69	7.59	9.08	9.08	9.13
MSCI ACWI Index (net)	-0.99	17.49	5.44	10.06	9.23	9.23	9.23
MSCI World Index (net)	-0.16	18.67	6.34	11.17	9.95	9.95	10.17

Microchip Technology, the microcontroller (MCU) and analog semiconductor producer, was one of the largest detractors for the period. Revenues continued to decline amid the severe inventory correction, which has persisted in most end markets other than defense and aerospace since early 2023. In addition, Microchip’s board unexpectedly announced that CEO Ganesh Moorthy (who led the company since 2021) would retire with the current chairman and long-tenured former CEO Steve Sanghi returning. Mr. Sanghi returned on an interim basis, allowing the company to focus on turnaround efforts without near-term plans to search for a replacement. We have admired Mr. Sanghi’s skill at navigating past chip cycles and will closely track the company’s ability to execute on restructuring initiatives, which aim to resize its manufacturing footprint and reduce inventory. This includes plans to soon shut down the company’s wafer fabrication facility in Arizona, which the company expects should generate annual cash savings of approximately $90 million. Despite recent missteps in inventory management that were exacerbated by cyclical headwinds, we are optimistic about management’s plans to right-size its business. Moreover, we remain confident that Microchip’s broad portfolio is uniquely positioned to increase its market share in 16- and 32-bit MCUs and areas including IoT, 5G infrastructure, autonomous driving and data centers.

DSM-Firmenich (DSM), the Dutch-Swiss nutrition, health and bioscience company, was one of the largest detractors. Despite a decline in share price, the company continued to increase its sales across segments following customer destocking in 2023. Within its largest segment – Perfumery & Beauty – we believe DSM will uniquely benefit, as customers look to differentiate their products and increase fragrance dosage levels. The company has also made progress on the integration of its 2023 merger with Firmenich, a catalyst we previously identified, which we expect to create further sales and product development synergies. With low leverage, the company is in a strong position to pursue additional bolt-on acquisitions and return cash to shareholders, all while it executes on shedding lower-margin segments. As such, during the quarter, the company completed the sale of its yeast extracts and marine lipid business and remains on track with plans to divest its Animal Nutrition & Health segment. We believe this should enhance overall profitability, as DSM’s global scale, close relationships with customers and ability to innovate allow the company to continue to gain global market share across the businesses it operates.

Norwegian Cruise Line Holdings, one of the world’s largest cruise ship operators, was a major contributor during the quarter. With post pandemic consumer sentiment regarding the cruise industry continuing to improve, the company has seen strong advanced booking trends, improving occupancy levels and an upward momentum in pricing. Norwegian Cruise Line has also simultaneously executed on optimizing ship operating costs and instituting a new fuel purchasing program, which has allowed the company to offset inflation. Furthermore, the company continues to make progress on its multibillion-dollar efforts to upgrade and expand its fleet, with one of the company’s newest ships, Allura, ready to set sail in 2025. We believe the company’s cost-saving initiatives and fleet improvements will lead to higher levels of profitability and FREE cash flow, allowing the company to continue to reduce debt and increase its intrinsic value.

Sony, the global provider of videogames and consoles, image sensors, music, and movies, was a top contributor for the period. The company reported strong results driven by third-party gaming revenue and record PlayStation 5 console profitability. This was achieved despite lower console sales, which, in our view, exemplifies the strength of PlayStation’s network effects. PlayStation is the world’s largest gaming platform with 116 million monthly active users, making it an attractive market for game developers and allowing users to play the most advanced games at lower costs than PCs. In its Pictures segment, Crunchyroll (the anime business Sony acquired from AT&T in 2020) signed a distribution agreement with YouTube Primetime Channels, the market share leader in streaming services, which we believe will increase Crunchyroll’s subscriber base. Though a singular example, it illustrates management’s ability to better execute and further improve the segment’s profitability, a catalyst we previously identified. In addition, Sony reported improved sales of image sensors for mobile products as the global smartphone market continued its gradual recovery. Sony’s image sensor business has the largest global market share, and we believe, longer term, it is uniquely positioned to benefit from increasing demand for both autonomous driving technology in vehicles and improved image quality in smartphone cameras. As such, we continue to admire Sony’s capacity to build on its industry leadership and optimize its operations, which includes its plan for a partial spinoff of its Financial Services segment in October 2025.

Recent Portfolio Activity

Buys	Sells
None	None

Consistent with our long-term horizon and low turnover, there were no new purchases or sales completed during the quarter.

Conclusion

While in 2024 we delivered positive absolute returns, our portfolio’s relative performance is nevertheless disappointing. Despite this, we remain confident in our time-tested investment process which has a longer-term orientation. By definition, value investors often seek to invest in companies that are not “in vogue” with investors. As a result, we believe our quality oriented approach to intrinsic value investing is best measured over a full market cycle, which we define as three to five years. While the market in 2024 was largely driven by narrowly focused investment themes, we remain confident that, over the long term, stock prices will track business fundamentals. 

Markets Review

The U.S. equity market ended the year on a strong note, with the S&P 500 Index rising 2.41% during the period. In contrast, the Bloomberg U.S. Aggregate Bond Index declined, falling 3.06% for the quarter.

On a sector basis, gains were made in four of the eleven sectors within the S&P 500 Index, led by Consumer Discretionary and Communication Services. The worst-performing sectors were Materials and Health Care.

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

The U.S. economy continued to demonstrate resilience, with real GDP growing at an annualized rate of 3.1%, according to the BEA’s most recent report. Increases in consumer spending, exports, nonresidential fixed investment and federal government spending drove the economic expansion. Retail sales rose 3.8% year-over-year in November, supported by a 2.7% increase in disposable personal income for the most recent quarter.

The labor market remained tight but showed signs of softening, as the unemployment rate edged up to 4.2% in November. Inflation remained relatively stable, rising modestly to an annual rate of 2.7%, as measured by the Consumer Price Index (CPI).

As was widely expected, the Federal Reserve (Fed) implemented two rate cuts during the quarter, setting the federal funds target rate at 4.25% to 4.50%. Fed Chair Jerome Powell emphasized the importance of finding a balance—reducing policy restraint too rapidly could hinder progress on inflation, while acting too slowly could weaken economic activity and the labor market. Still, he indicated that both the economy and monetary policy are on solid footing.

Corporate earnings also showed strength, as S&P 500 companies reported 5.8% earnings growth, marking the fifth consecutive quarter of positive results. A majority of companies exceeded EPS expectations, with only 61 companies issuing negative EPS guidance—the lowest figure since the fourth quarter of 2021. Looking ahead to 2025, consensus estimates project earnings growth of 14.8% for the calendar year, signaling optimism among analysts.

On the political front, Donald Trump was elected as the 47th president of the United States, becoming the first Republican to win the popular vote since 2004. The Republican Party also won the Senate and kept control of the House of Representatives, though with narrow majorities.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Atlantic’s Core Equity Composite posted a total return of 4.11% gross of fees (4.00% net of fees), outperforming the S&P 500 Index, which recorded a total return of 2.41%.

Performance (%)	4Q24	1 Year	3 Years	5 Years	10 Years	Since Inception*
Core Equity Composite (gross)	4.11	27.08	7.25	14.36	13.70	14.33
Core Equity Composite (net)	4.00	26.63	6.83	13.91	13.21	13.82
S&P 500 Index	2.41	25.02	8.94	14.53	13.10	13.65

Source: FactSet
Past performance is not indicative of future results. Sector attribution shows how much of a portfolio’s overall return is directly attributable to stock selection and asset allocation decisions within the portfolio, highlighting which sectors contributed or detracted to the total return. Attribution includes the reinvestment of income. Please see important disclosures at the end of this document.

During the fourth quarter, the portfolio’s outperformance relative to the S&P 500 Index was due to a mix of security selection and allocation effects. Security selection in Information Technology and Industrials contributed the most to relative performance. Conversely, security selection in Utilities and Consumer Discretionary detracted the most from relative performance.

Contributors and Detractors for 4Q 2024

Relative Contributors	Relative Detractors
Broadcom	Cigna
Chart Industries	Avery Dennison
ServiceNow	NextEra Energy
Expedia	Darling Ingredients
Ameriprise Financial	Zoetis

Detractors

Cigna

Cigna detracted from performance in the fourth quarter following the tragic shooting of the CEO of UnitedHealthcare and increased focus on insurance industry practices. A bipartisan bill was introduced that could force companies that own pharmacy benefit managers to divest their pharmacy operations, which would impact Cigna’s Evernorth unit.

Avery Dennison

Avery Dennison detracted from performance in the fourth quarter following the company’s third quarter earnings results, which highlighted slower-than-expected growth of the company’s Intelligent Label business unit. In addition, the threat of tariffs from the incoming Trump administration could affect global apparel sales, impacting Avery Dennison’s volumes and earnings growth.

Contributors

Broadcom

Broadcom contributed to performance in the fourth quarter as the company’s third quarter results demonstrated continuing strength for its AI networking and custom accelerator semiconductor business. The company also gave long-term guidance for the service addressable market (SAM) opportunity for its AI-related business, indicating a market opportunity of $60 billion to $90 billion, which only includes contributions from its current three customers. This long-term outlook for AI semiconductor content exceeded investor expectations. Broadcom’s quarterly results also showed the company is ahead on its VMware integration timeline to achieve $8.5 billion in EBITDA, which will support long-term gross and operating margin expansion for the company.

Chart Industries

Chart Industries contributed to performance in the fourth quarter of 2024. Although the company missed consensus estimates for both revenue and earnings when it reported third quarter earnings in early November, the preliminary guidance for 2025 was in line with consensus estimates, and it implies 39% EPS growth. In addition, the company hosted a capital markets day on November 12, where management provided strong medium-term outlooks for most of the company’s end markets. Chart Industries is making progress toward reducing its balance sheet leverage and achieving its 2026 financial targets that were first given back in 2023.

Recent Portfolio Activity

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

Buys	Sells
GE Aerospace	Spirit AeroSystems Holdings
CrowdStrike Holdings	Microchip Technology

Buys

GE Aerospace

GE Aerospace designs and produces commercial and defense aircraft engines, integrated engine components, electric power, and mechanical aircraft systems. The industry has high entry barriers and is concentrated among few players. Despite its cyclical nature, the demand for travel is driven by global middle-class growth. Boeing and Airbus have long order books, ensuring steady demand for engines and spare parts. The company also benefits from high-margin services for existing aircraft fleets, with services accounting for 70% of its commercial engine business. GE Aerospace serves customers worldwide.

We see GE Aerospace making significant strides in its commercial engine business, which is expected to boost future services revenue growth. Over the past five years, the company has undergone substantial restructuring and simplification, including divesting its healthcare and energy businesses. The company now operates in three segments: Commercial Engines & Services (CES), Defense & Propulsion Technologies (DPT) and Insurance. Long-term revenue guidance is for high single-digit growth, and management has a goal of $10 billion in annual operating profit by 2028, with an expected 20% annual earnings growth. Following years of restructuring, we see GE Aerospace now positioned to return capital to shareholders through dividends and share repurchases.

CrowdStrike Holdings

CrowdStrike provides cybersecurity products and services that offer endpoint protection and threat intelligence solutions, enabling customers to prevent damage from targeted attacks, detect advanced malware and search all endpoints. The company’s open cloud architecture enables it and third-party partners to rapidly innovate, build and deploy new cloud modules that can provide customers with enhanced functionality across a myriad of use cases.

We see the cloud cybersecurity market as positioned to experience strong growth over the next few years, driven by continued migration from on-premises to cloud-based architecture. We believe CrowdStrike can benefit from this trend due to its early-mover advantage, multiple product offerings and native integrations with leading cloud platforms. The increasing threats from state-sanctioned cybercriminals using high-performance computing and AI necessitate higher spending on advanced cybersecurity products. The total addressable market (TAM) is projected to grow significantly over the next four calendar years. Additionally, CrowdStrike’s cloud-native architecture and unified platform approach provide competitive advantages, resulting in high customer retention and widespread adoption of multiple modules.

Sells

Spirit AeroSystems Holdings

We sold Spirit AeroSystems following the disclosure that the company reported in its 10-Q that there is a “growing concern risk” that has been driven by the disruption from the Boeing machinists’ strike. Although the strike has been settled, it will be several months before production returns to normal. We are also concerned that Boeing’s agreement to acquire Spirit could be renegotiated at a lower price. Finally, in the unlikely event of a disapproval of the Spirit acquisition by regulators, the shares may be subject to a significant decline.

Microchip Technology

We sold Microchip and see the recovery in industrial and automotive microcontroller and analog semiconductors taking longer to materialize than we expected. The slower recovery has seen multiple cuts in earnings estimates. While the whole semiconductor space is seeing an impact from lower end-market demand for products, we are concerned by the magnitude of revenue and earnings cuts relative to peers. We thus believe there may be market share and pricing headwinds in the longer term and view Microchip’s lack of exposure to high-growth AI datacenter as a competitive disadvantage.

Outlook

The equity markets in the fourth quarter moved higher as investors anticipated a market benefit from a full sweep by Republicans in the November election. Interest rates for the quarter were little changed but did move sharply intraquarter due to a shift in the Fed away from a more accommodative policy. Expectations for 2025 include a couple of further rate reductions by the Fed and earnings increasing over 10% for the year. The markets will track closely the new administration’s stance on certain policies, along with the pace and level of reductions in regulations. Tariffs will be a focal point, as any action could add to concerns for higher inflation. Valuation levels remain elevated, and equity price appreciation will largely be dependent on earnings growth for the year. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.

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

Markets Review

In the Middle East, a tenuous ceasefire was made between Israel and Hezbollah, as well as seeming progress toward a ceasefire between Israel and Hamas. However, tensions also escalated as Israel, in response to an Iranian missile attack, conducted a precision strike on military targets in Iran. Concerns over a regional conflict have intensified, as the two countries have drawn closer to a potentially more forceful direct encounter. The Middle East also experienced a shock in politics, as the Islamist militant group Hayat Tahrir al-Sham overthrew the Iranian and Russian-backed dictator Bashar al-Assad in Syria. Europe and Asia were not immune to instability, as the French parliament passed a vote of no confidence against Prime Minister Michel Barnier, and the South Korean National Assembly voted to impeach President Yoon Suk Yeol after he declared martial law.

Even with the continued uncertainty stoked by geopolitical conflicts and political regime changes across the globe, the IMF projects global economic growth to hold steady at 3.2% for 2024 and 2025. Additionally, global inflation continues to decline, resulting in global headline inflation projections of 3.5% for 2025 – below the 2000-2019 average of 3.6%. As western countries continue to target a 2% annual rate of inflation, the Federal Reserve, European Central Bank and Bank of England all cut key interest rates during the period. In Asia, Japan’s index of service-sector inflation hit its highest level since 1995, as rising wages have caused companies to pass on higher costs. Though the Bank of Japan did not raise rates at its most recent meeting, Governor Kazuo Ueda has indicated that the central bank would continue to raise rates if inflation sustainably hit a 2% annual rate. Meanwhile, China announced a $1.4 trillion stimulus package to address local government debt issues and support its economy. The Chinese government hopes to repair municipal balance sheets rather than directly injecting money into the economy (which it has done in the past).

Annual Markets Review

Global equity markets continued climbing in 2024 following a strong year in 2023, as the MSCI ACWI posted a full-year return of 17.49%. Additionally, growth outperformed value, as the MSCI ACWI Growth Index outperformed the MSCI ACWI Value Index by 13.46% in 2024. Meanwhile, fixed income markets lagged, as the Bloomberg Global Aggregate Bond Index fell by 1.69%.

Although the equity market remained strong in 2024 amid resilient global growth, uncertainty heading into 2025 is high, as geopolitical conflicts remain unsolved, central bank policy effects have yet to fully play out and countries’ governments are changing leadership.

Therefore, rather than trying to predict the unpredictable, we choose to focus on individual businesses and their long-term prospects. We believe by focusing on what is analyzable in the long run, we will be able to weather short-term volatility and provide attractive returns over the long term for our clients.

Performance and Attribution Summary

For the fourth quarter of 2024, Aristotle Capital’s International Equity Composite posted a total return of -6.91% gross of fees (-7.02% net of fees), outperforming the MSCI EAFE Index, which returned -8.11%, and the MSCI ACWI ex USA Index, which returned -7.60%. Please refer to the table below for detailed performance.

Performance (%)	4Q24	1 Year	3 Years	5 Years	10 Years	Since Inception*
International Equity Composite (gross)	-6.91	6.24	0.05	5.31	6.34	5.67
International Equity Composite (net)	-7.02	5.76	-0.42	4.82	5.83	5.17
MSCI EAFE Index (net)	-8.11	3.82	1.65	4.73	5.20	2.83
MSCI ACWI ex USA Index (net)	-7.60	5.53	0.82	4.10	4.80	2.53

Cameco, one of the world’s largest uranium producers, was a major contributor during the period. With the continued focus on artificial intelligence and clean energy, the demand for nuclear energy remained robust. Some of the largest companies in the world, such as Amazon, Google and Meta, announced nuclear power agreements in the quarter. Given Cameco’s tier-one assets in reliable jurisdictions, proven operating experience and strong reputation, we believe the company is in a unique position to benefit as various industries and governments pursue clean, reliable and scalable sources of energy. Correspondingly, Cameco increased its production outlook, having already secured commitments that net an average of 29 million pounds per year over the next four years. We believe Cameco’s continued ability to efficiently increase production while securing long-term contracts will lead to sustainably higher levels of normalized FREE cash flow. While its Canada-based mines and Westinghouse unit are executing well, production was recently suspended at Cameco’s Inkai joint venture in Kazakhstan. We believe production will restart soon and note that Cameco’s share of Inkai’s production amounts to less than 10% of total Cameco volumes, a figure that can be offset with increased production at the company’s MacArthur River and Key Lake mines in Canada.

Sony, the global provider of videogames and consoles, image sensors, music, and movies, was a top contributor for the period. The company reported strong results driven by third-party gaming revenue and record PlayStation 5 console profitability. This was achieved despite lower console sales, which, in our view, exemplifies the strength of PlayStation’s network effects. PlayStation is the world’s largest gaming platform with 116 million monthly active users, making it an attractive market for game developers and allowing users to play the most advanced games at lower costs than PCs. In its Pictures segment, Crunchyroll (the anime business Sony acquired from AT&T in 2020) signed a distribution agreement with YouTube Primetime Channels, the market share leader in streaming services, which we believe will increase Crunchyroll’s subscriber base. Though a singular example, it illustrates management’s ability to better execute and further improve the segment’s profitability, a catalyst we previously identified. In addition, Sony reported improved sales of image sensors for mobile products as the global smartphone market continued its gradual recovery. Sony’s image sensor business has the largest global market share, and we believe, longer term, it is uniquely positioned to benefit from increasing demand for both autonomous driving technology in vehicles and improved image quality in smartphone cameras. As such, we continue to admire Sony’s capacity to build on its industry leadership and optimize its operations, which includes its plan for a partial spinoff of its Financial Services segment in October 2025.

Ashtead Group, a U.K.-headquartered equipment rental company, was the leading detractor for the quarter. Though rental revenues grew 2% year-over-year, shares declined as weaker local commercial construction markets weighed on growth and fleet utilization. In December, Ashtead also announced its intention to move to a U.S. primary listing (while retaining a U.K. listing), a reflection of the company’s large U.S. footprint. This process will take time, as management intends to first discuss the proposal with shareholders before putting forward a formal resolution. Despite the cyclical nature of the construction industry, which can impact short-term results, we believe Ashtead will continue to gain market share in North America as more customers choose to rent rather than purchase equipment. We estimate rental penetration in the U.S. (~90% of EBITDA) is roughly 55% compared to 75% in the U.K., which provides ample runway. During our nearly four years as shareholders, Ashtead has further consolidated the rental industry, which we believe should result in a more disciplined and attractive market. The company also continues to make progress on the catalyst of growing its higher-margin specialty business, which includes HVAC equipment and scaffolding. Moreover, we believe Ashtead will be able to further utilize its national footprint and procurement power to increase its market share and enhance its FREE cash flow (of which it plans to return up to $1.5 billion to shareholders via buybacks over the next 18 months).

DSM-Firmenich (DSM), the Dutch-Swiss nutrition, health and bioscience company, was one of the largest detractors. Despite a decline in share price, the company continued to increase its sales across segments following customer destocking in 2023. Within its largest segment – Perfumery & Beauty – we believe DSM will uniquely benefit, as customers look to differentiate their products and increase fragrance dosage levels. The company has also made progress on the integration of its 2023 merger with Firmenich, a catalyst we previously identified, which we expect to create further sales and product development synergies. With low leverage, the company is in a strong position to pursue additional bolt-on acquisitions and return cash to shareholders, all while it executes on shedding lower-margin segments. As such, during the quarter, the company completed the sale of its yeast extracts and marine lipid business and remains on track with plans to divest its Animal Nutrition & Health segment. We believe this should enhance overall profitability, as DSM’s global scale, close relationships with customers and ability to innovate allow the company to continue to gain global market share across the businesses it operates.

Recent Portfolio Activity

Buys	Sells
None	None

Consistent with our long-term horizon and low turnover, there were no new purchases or sales completed during the quarter.

Conclusion

While investment managers are typically judged by their performance, we often remind our clients and prospects that performance is an outcome of an investment process. Short-term performance, in particular, can be fleeting.  We are proud to report that our strategy outperformed its benchmarks in 2024; however, we highlight that this is a result of our focus on the inputs of our time-tested investment process, not a focus on performance. Our process involves identifying what we believe to be high-quality businesses that are trading at a discount to their intrinsic value. While there are myriad variables – both micro and macro – that influence stock prices on a short-term basis, we believe the ultimate worth of a business is determined by company specific fundamentals. As such, regardless of short-term market influences or performance outcomes, we will remain true to our investment process.  

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

The volatility observed throughout 2024, continued into the fourth quarter. SMID caps posted mild gains in the fourth quarter with the Russell 2500 index delivering a total return of 0.62%, bringing its year-to-date total return to 11.99%. After a sluggish start to the quarter, November was a standout month for SMID cap stocks following the U.S. elections, as the Russell 2500 Index rallied 9.84% driven by expectations of pro-business policies under the incoming Trump administration. However, these gains were largely erased in December, as the Index declined -7.54%, reflecting renewed concerns over geopolitical tensions and uncertainty around the incoming administration’s policies, such as tariffs and immigration, as well as the impact of sharply higher U.S. yields. Furthermore, continued strong economic growth, a stable labor market and firmer inflation data all pushed the Federal Reserve (Fed) in a more hawkish direction in December. After consecutive 25 basis point rate cuts at the November and December meetings, Chairman Powell indicated the Fed is likely to take a more measured approach going forward and the committee updated their projections to forecast only two rate cuts in 2025.

Stylistically, value stocks underperformed their growth counterparts during the quarter as evidenced by the Russell 2500 Value Index returning -0.26% compared to 2.43% for the Russell 2500 Growth Index. This widened the gap between value and growth for the year, as the Russell 2500 Growth Index gained 13.90% in 2024 versus the 10.98% return for the Russell 2500 Value Index.

From a factor performance perspective, the quarter saw continued market preference for higher-growth companies, supported by declining interest rates and improving sentiment. Non-earners outperformed profitable companies by 325bps and the factors that led the way were highest forward sales growth, lowest share price, highest short interest, highest momentum, and lowest ROIC.

At the sector level, six of the eleven sectors in the Russell 2500 Index recorded positive returns during the fourth quarter, led by the Information Technology (+6.85%), Financials (+6.57%), and Energy (+4.92%) sectors. Conversely, Health Care (-6.34%), Materials (-6.01%), and Real Estate (-5.65%) all underperformed. For the full year, all eleven sectors ended in positive territory. Utilities (+29.48), Financials (+20.98), and Information Technology (+16.21) led performance, while Materials (+1.29), Health Care (+2.55), and Energy (+5.55) lagged.

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

Performance Review

For the fourth quarter, the Aristotle Small/Mid Cap Equity Composite generated a total return of -0.45% net of fees (-0.37% gross of fees), underperforming the 0.62% total return of the Russell 2500 Index. Underperformance was primarily driven by security selection. Overall, security selection in the Financials, Information Technology and Industrials sectors detracted the most. This was partially offset by an overweight in Information Technology, an underweight in Real Estate coupled with strong security selection in Materials.  

Relative Contributors	Relative Detractors
Chart Industries	Acadia Healthcare
Summit Materials	Catalent
MACOM Technology Solutions	Carlisle Cos
Ciena	KB Home
Wolverine World Wide	HA Sustainable Infrastructure Capital

CONTRIBUTORS

Chart Industries (GTLS), a company specializing in the design and manufacturing of highly engineered equipment for the industrial gas, energy, and biomedical industries, reported record high orders, a substantial increase in sales, and a strong backlog, driven by surging demand for its cryogenic equipment used in the clean energy sector, coupled with a changing positive sentiment around LNG by the new administration.

Summit Materials (SUM), a North American supplier of aggregates, cement, and ready-mix concrete for the construction industry, announced in November a definitive agreement to be acquired by Quikrete Holdings, Inc. totaling approximately $11.5 billion, including debt at a 30% premium with an expected close date within the first quarter of 2025.

DETRACTORS

Acadia Healthcare (ACHC), a behavioral healthcare and substance abuse treatment services company, continues to be impacted by the negative sentiment surrounding the news headlines related to patient care and questions about billing practices. While we take these developments seriously, we believe investors’ reaction to the news has been more severe than warranted. Industry peers have faced similar levels of scrutiny in the past with limited fundamental impact, and unless additional information is uncovered, we believe the current scrutiny will be resolved without much of an impact on their business. We continue to believe the company is well positioned to be an important part of the solution to an unfortunately growing need for behavioral health services.

Catalent (CTLT), is a global contract development and manufacturing organization that provides advanced delivery technologies and development solutions for drugs, biologics, and consumer health products. Novo Holdings completed its $16.5 billion all-cash acquisition of Catalent, converting it into a private company and delisting it from the New York Stock Exchange.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Americold Realty Trust	Aspen Technology
Axalta Coating System	Catalent
Columbus McKinnon	Infinera
Healthpeak Properties
Hexcel
Insight Enterprises

BUYS/ACQUISITIONS

Americold Realty Trust (COLD), a global leader in temperature-controlled logistics, offering innovative technology-oriented supply chain and cold storage solutions to food producers, processors, distributors, and retailers was added to the portfolio. We believe that company-specific productivity initiatives coupled with strong industry dynamics are underappreciated by the market and not reflected in our estimate of the current valuation.

Axalta Coating System (AXTA), is a global manufacturer, marketer and distributor of high-performance liquid and powder coating solutions for commercial and light vehicle, industrial and aftermarket refinishing. In addition to an expected cyclical rebound in demand for the company’s products, self-help initiatives implemented by a new management team will likely drive stronger revenue and earnings growth over the next several years.

Columbus McKinnon (CMCO), isa designer and manufacturer of a variety of material handling products and industrial lifts. The company is expected to benefit from a cyclical rebound in demand following a period of subdued performance as well as the harvesting of investments they’ve made over the past several years in faster growing, higher margin intelligent motion solutions (conveyance and automation).

Healthpeak Properties (DOC), is a healthcare-focused real estate investment trust (REIT) that develops, owns and manages medical office buildings, senior housing assets and life science facilities. Following an industry-wide life sciences building boom that created a supply/demand imbalance, DOC is poised to benefit from improved lease rates with its properties as excess industry capacity is absorbed. A solid fundamental backdrop for the demographically driven senior housing portfolio and stability within its medical office building portfolio should allow the company to produce improved financial performance over the next several years.

Hexcel (HXL), develops and manufactures structural materials for use in commercial aerospace, space and defense, and industrial applications. As a leading supplier of carbon fiber, honeycomb and other composite materials for the aerospace industry the company’s financial performance has been negatively impacted by Covid-era disruptions and Boeing’s company-specific manufacturing problems. We believe the combination of company-specific self-help initiatives and an improving outlook for commercial aircraft build rates bodes well for improved financial performance from HXL.

Insights Enterprises (NSIT), is a global technology “solutions integrator” specializing in designing, building and managing complex IT solutions for businesses of various size and scale. Areas of expertise include data center, cloud, security, and AI. Over the next several years, NSIT is poised to benefit from increased demand from an increasing complex technology landscape, the continued transition of enterprise business to the cloud and the emergence of AI as a must have IT tool. They are also expected to realize improved financial performance over the next several years as the benefits of strategic investments that have expanded the company’s portfolio of IT solutions are realized as well as from the integration/cross-selling of acquisitions completed over the past couple of years.

SELLS/LIQUIDATIONS

Aspen Technology (AZPN), is an industrial software company that provides software solutions that optimize asset performance and operational efficiency for industries such as energy, chemicals, and manufacturing. The company was sold as the stock price appreciated after Emerson Electric proposed to buy the 42.6% of Aspen’s outstanding shares it currently does not own, causing the reward/risk ratio to compress. 

Catalent (CTLT), is a global contract development and manufacturing organization that provides advanced delivery technologies and development solutions for drugs, biologics, and consumer health products. Novo Holdings completed its $16.5 billion all-cash acquisition of Catalent, converting it into a private company and delisting it from the New York Stock Exchange.

Infinera (INFN), a global provider of advanced optical networking solutions for service providers, cloud operators, and enterprises, was acquired by Nokia at a 28% premium for both stock and cash. The position was sold as Nokia’s market cap is too large for the small/mid cap strategy.

Outlook

We remain optimistic about the long-term potential for the SMID-cap segment of the U.S. market. Valuations in SMID-caps continue to be attractive relative to large caps, with the Russell 2500 Index trading near the lower end of its historical range. Potential tailwinds, including deregulation, increased M&A activity, the continued decline in interest rates, continued reshoring of U.S. manufacturing, and infrastructure-related spending, could provide additional support for SMID-cap stocks. Nonetheless, we remain mindful of risks such as a potential reacceleration in inflation, geopolitical tensions, and ongoing pressures in commercial real estate and regional banking.

Positioning

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. We also continue to be underweight in Real Estate as a result of structural challenges for various end markets within the sector. Given our focus on long-term business fundamentals, patient investment approach and low portfolio turnover, the strategy’s sector positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.

ARISTOTLE CAPITAL BOSTON, LLC

Markets Review

The volatility observed throughout 2024, continued into the fourth quarter. The Russell 2000 Index posted a modest gain of 0.33% for the quarter, bringing its year-to-date total return to 11.54%. After a sluggish start to the quarter, November was a standout month for small cap stocks following the U.S. elections, as the Russell 2000 Index rallied 10.97% driven by expectations of pro-business policies under the incoming Trump administration. However, these gains were largely erased in December, as the Index declined -8.26%, reflecting renewed concerns over geopolitical tensions and uncertainty around the incoming administration’s policies, such as tariffs and immigration, as well as the impact of sharply higher U.S. yields. Furthermore, continued strong economic growth, a stable labor market and firmer inflation data all pushed the Federal Reserve (Fed) in a more hawkish direction in December. After consecutive 25 basis point rate cuts at the November and December meetings, Chairman Powell indicated the Fed is likely to take a more measured approach going forward and the committee updated their projections to forecast only two rate cuts in 2025.

Stylistically, value stocks underperformed their growth counterparts during the quarter as the Russell 2000 Value Index returned -1.06% compared to the 1.70% return of the Russell 2000 Growth index. This widened the gap between value and growth for the year, as the Russell 2000 Growth Index gained 15.15% versus the 8.06% return for the Russell 2000 Value Index.

From a factor performance perspective, the quarter saw continued market preference for higher-growth companies, supported by declining interest rates and improving sentiment. Non-earners outperformed profitable companies by 325bps and the factors that led the way were highest forward sales growth, lowest share price, highest short interest, highest momentum, and lowest ROIC.

At the sector level, five of the eleven sectors in the Russell 2000 Index recorded positive returns during the quarter, led by Information Technology (+9.69%), Consumer Staples (+5.62%) and Industrials (+4.05%). Conversely, Health Care (-7.58%), Real Estate (-5.97%) and Materials (-4.69%) all underperformed. For the full year, ten of the eleven sectors contributed to performance, led by Information Technology (+25.20), Consumer Staples (+24.56), and Industrials (+17.69). Energy (-3.07) was the lone sector to finish in negative territory, while Health Care (+1.65) and Materials (+2.50) lagged in positive territory.

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

Performance Review

For the fourth quarter of 2024, the Aristotle Small Cap Equity Composite posted a total return of -0.46% net of fees (-0.31% gross of fees), trailing the 0.33% total return of the Russell 2000 Index. Underperformance was driven by security selection. Overall, security selection in the Information Technology, Energy and Financials sectors detracted. This was partially offset by strong selection in the Health Care, Materials and Communication Services sectors coupled with an overweight allocation to the Information Technology sector and an underweight allocation to the Health Care sector.

Relative Contributors	Relative Detractors
Chart Industries	Acadia Healthcare
Summit Materials	Ardmore Shipping
MACOM Technology Solutions	KB Home
Huron Consulting Group	HA Sustainable Infrastructure Capital
Liquidity Services	Dycom Industries

CONTRIBUTORS

Chart Industries (GTLS), a company specializing in the design and manufacturing of highly engineered equipment for the industrial gas, energy, and biomedical industries, reported record high orders, a substantial increase in sales, and a strong backlog, driven by surging demand for its cryogenic equipment used in the clean energy sector, coupled with a changing positive sentiment around LNG by the new administration.

Summit Materials (SUM), a North American supplier of aggregates, cement, and ready-mix concrete for the construction industry, announced in November a definitive agreement to be acquired by Quikrete Holdings, Inc. totaling approximately $11.5 billion, including debt at a 30% premium with an expected close date within the first quarter of 2025.

DETRACTORS

Acadia Healthcare (ACHC), a behavioral healthcare and substance abuse treatment services company, continues to be impacted by the negative sentiment surrounding the news headlines related to patient care and questions about billing practices. While we take these developments seriously, we believe investors’ reaction to the news has been more severe than warranted. Industry peers have faced similar levels of scrutiny in the past with limited fundamental impact, and unless additional information is uncovered, we believe the current scrutiny will be resolved without much of an impact on their business. We continue to believe the company is well positioned to be an important part of the solution to an unfortunately growing need for behavioral health services.

Ardmore Shipping (ASC), a product and chemical transportation company focused on modern mid-sized vessels, experienced headwinds due to a combination of factors including a weakening tanker market with lower spot rates, potential concerns about geopolitical instability impacting shipping routes, and a general market downturn affecting the shipping industry. 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.

Recent Portfolio Activity

Buys/Acquisitions	Sells/Liquidations
Amentum Holdings	Aspen Technology
Americold Realty Trust	Infinera
Axalta Coating Systems
Hexcel
Tronox

BUYS/ACQUISITIONS

Amentum Holdings (AMTM), is a global engineering and technology solutions provider serving the US government agencies as well as international government agencies from allied nations.  The company was formed by spin-off and merger of Jacobs Solutions’ (J) Critical Mission Solutions (CMS) and Cyber & Intelligence (CI) businesses with Amentum Holdings (private).  As a result, existing J shareholders received shares of the newly formed combined company (AMTM).  We maintained our position in AMTM as we believe the company is well positioned to benefit from government spending on digital modernization, cybersecurity and next generation technologies.  The combination of the two companies exposes AMTM to new end market and geographic opportunities as well as operating scale efficiencies to drive incremental shareholder value.

Americold Realty Trust (COLD), a global leader in temperature-controlled logistics, offering innovative technology-oriented supply chain and cold storage solutions to food producers, processors, distributors, and retailers was added to the portfolio. We believe that company-specific productivity initiatives coupled with strong industry dynamics are underappreciated by the market and not reflected in our estimate of the current valuation.

Axalta Coating System (AXTA), a global manufacturer, marketer and distributor of high-performance liquid and powder coating solutions for commercial and light vehicle, industrial and aftermarket refinishing. In addition to an expected cyclical rebound in demand for the company’s products, self-help initiatives implemented by a new management team will likely drive stronger revenue and earnings growth over the next several years.

Hexcel (HXL), develops and manufactures structural materials for use in commercial aerospace, space and defense, and industrial applications. As a leading supplier of carbon fiber, honeycomb and other composite materials for the aerospace industry the company’s financial performance has been negatively impacted by Covid-era disruptions and Boeing’s company-specific manufacturing problems. We believe the combination of company-specific self-help initiatives and an improving outlook for commercial aircraft build rates bodes well for improved financial performance from HXL.

Tronox (TROX), a leading global manufacturer of titanium dioxide pigment, a key ingredient in paint, plastics and a variety of other industrial applications, was added to the portfolio. Expectations for a cyclical recovery in demand combined with a changing competitive backdrop plus the benefit of cost savings initiatives should allow TROX to produce improved financial performance over the next several years.

SELLS/LIQUIDATIONS

Aspen Technology (AZPN), is an industrial software company that provides software solutions that optimize asset performance and operational efficiency for industries such as energy, chemicals, and manufacturing. The company was sold as the stock price appreciated after Emerson Electric proposed to buy the 42.6% of Aspen’s outstanding shares it currently does not own, causing the reward/risk ratio to compress.  

Infinera (INFN), a global provider of advanced optical networking solutions for service providers, cloud operators, and enterprises, was acquired by Nokia at a 28% premium for both stock and cash. The position was sold as Nokia’s market cap is too large for the small cap strategy.

Outlook

We continue to remain optimistic about the long-term potential for the small-cap segment of the U.S. market. Valuations within the small-cap segment remain compelling relative to large caps, with the Russell 2000 Index trading near multi-decade lows on a relative basis. Potential tailwinds, including deregulation, increased M&A activity, the continued decline in interest rates, continued reshoring of U.S. manufacturing, and infrastructure-related spending, could provide additional support for small-cap stocks. Nonetheless, we remain mindful of risks such as a potential reacceleration in inflation, geopolitical tensions, and ongoing pressures in commercial real estate and regional banking.

Positioning

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.

Perhaps it was because the penning of this edition of The Essence began on “The Most Dreaded Day” of crafting its subject (refer to our January 2013 edition); perhaps it was because we just came through a U.S. election season whereby nary a positive word was spoken; perhaps because most financial journalists always see the “glass as half empty” (shouldn’t pay attention to them anyway!); perhaps because there’s extensive focus on the U.S. Federal Reserve’s (Fed’s) actions on short-term interest rates; or, just because many of the very best holiday movies start out with a depressing tale:

> “It’s a Wonderful Life” – George Bailey (played by actor Jimmy Stewart) runs a Savings & Loan.  Then there was a run on the bank caused by a misunderstanding of George’s uncle. “I wish I’d never been born!”  exclaims George. Poof!, an angel (Henry Travers) is sent to earth to make George’s wish come true. One sad tale after another is told about how the world (or at least Bedford Falls) would have evolved for the worse without George Bailey. It was heartbreaking.

> “The Wizard of Oz” – “Somewhere Over the Rainbow” is sung by Dorothy (played by Judy Garland – the mother of Liza Minnelli, in case you didn’t know) about a place much better than her home in Kansas. Poof! and Dorothy gets transported (via her flying house) to the land of Oz. “Now I know we’re not in Kansas anymore, Toto,” she exclaimed as one bad adventure follows another. Some scarier than others, “oh, my!”

> As defined by the Cambridge Dictionary, “Bah Humbug” is “…an expression used when someone does not approve of or enjoy something that other people enjoy …The expression was used [extensively] by the character Ebenezer Scrooge in the story ‘A Christmas Carol’ by Charles Dickens.” 

Mr. Scrooge epitomizes how we felt. Even with the joy-filled holiday season upon us, with all the above, it was hard not to be in a Bah Humbug mood at the time of this writing.

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