Ivor Schucking Managing Director, Head of Credit Research
Jeff Klingelhofer Managing Director, Portfolio Manager
NEWPORT BEACH, CALIF., December 19, 2024 — Aristotle Pacific Capital, a registered investment adviser specializing in credit, has strengthened its deep investment team with the recent additions of Ivor Schucking and Jeff Klingelhofer.
Ivor Schucking, a 32-year veteran in the asset-management industry, has been brought on as managing director and head of credit research. Schucking most recently spent 14 years as a senior research analyst and global head of financials credit research at Western Asset Management. Prior to Western Asset, Schucking spent over 12 years at PIMCO as a credit analyst and head of Global Credit Research and four years at Strong Capital Management as director of Credit Research. He holds a bachelor’s degree from New York University and an MBA from New York University Stern School of Business.
“It is exciting to join a highly respected credit manager with a pristine track record, great people and a bright future,” Schucking said.
Jeff Klingelhofer has also joined Aristotle Pacific as a managing director and portfolio manager. Prior to joining Aristotle Pacific, he was co-head of Investments and a portfolio manager at Thornburg Investment Management, where he oversaw all fixed-income strategies and led the firm’s securitized investment initiatives. He played a key role in shaping the firm’s investment processes and represented the team in various external business channels. Prior to Thornburg, Klingelhofer was with PIMCO in its Newport Beach, Tokyo, and London offices. With over 20 years of experience in the investment industry, he holds a bachelor’s degree from UC Irvine and an MBA from the University of Chicago Booth School of Business.
“I am excited to join the team at Aristotle Pacific and contribute to the firm’s continued excellence in fixed income,” Klingelhofer said.
As part of his role, Klingelhofer has been named a portfolio manager on Aristotle Pacific’s newly launched Credit Opportunities strategy alongside three firm veteran portfolio managers. The Credit Opportunities strategy is a multi-sector strategy focused on higher-spread credit and securitized investments, including bank loans, high-yield bonds, CLO tranches, and securitized assets.
“We feel very fortunate to add these talented, experienced and respected financial professionals to our team,” said Aristotle Pacific CEO Dominic Nolan. “These additions provide increased depth, leadership, and enhance our potential investment alpha while adding broader familiarity to the organization.”
Since the start of 2024, Aristotle Pacific’s assets under management have increased over 21% and stand at a company-record $29.86 billion (as of Nov. 30, 2024). Founded in 2010, Aristotle, with equity and fixed income capabilities, currently manages approximately $104 billion firmwide.
About Aristotle Pacific Aristotle Pacific Capital is a Newport Beach, Calif.-based registered investment adviser that actively invests in credit securities on the basis of fundamental credit analysis with the objective of identifying and realizing relative value. The firm manages credit strategies across floating-rate loans, CLOs, multi-sector, high-yield, investment-grade, and short-duration bonds.
About Aristotle Aristotle Capital Management, LLC and its affiliates, collectively known as “Aristotle,” represent a group of independent investment advisers that provide equity and fixed-income management solutions across a unified platform. Aristotle’s clients include corporate and public pension plans, supranational organizations, financial institutions, insurance companies, endowments and foundations, as well as financial advisors and high-net-worth individuals. Aristotle has a global client base spanning North America, EMEA, and APAC. Each Aristotle affiliate is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. For market commentary, news and insights from all Aristotle affiliates, please visit www.aristotlecap.com.
Contacts Tricia Ross c/o Aristotle Phone: 310.622.8226 [email protected]
U.S. corporate credit markets delivered strong performance in the third quarter, as U.S. yields declined sharply and corporate credit spreads tightened. The Bloomberg U.S. Aggregate Bond Index returned 5.20% during the quarter, as the year-to-date return climbed into positive territory at 4.45%. Similarly, after underperforming in the first half, investment grade corporate bonds outperformed both high yield bonds and bank loans, as the Bloomberg U.S. Corporate Bond Index returned 5.84% for the quarter and 5.32% for the year-to-date period. The Bloomberg U.S. Corporate High Yield Bond Index added to gains from the first half of the year, with a total return of 5.28% for the quarter and 8.00% for the year-to-date period. After outperforming in the first six months of the year, bank loans trailed with the decline in front-end yields, as the Credit Suisse Leveraged Loan Index gained 2.08% during the quarter and 6.61% in the first nine months of the year.
U.S. equity markets rallied to new all-time highs in the third quarter, with the S&P 500 Index generating a total return of 5.89% during the period, taking the year-to-date total return to 22.08%. The Federal Reserve’s (Fed) dovish pivot in July and subsequent 50-basis-point cut in September, as well as increased expectations for an economic soft-landing, drove strong risk sentiment during the quarter. Additionally, a weaker U.S. dollar and lower crude oil prices were supportive. Nonetheless, the equity rally was not without a few bumps in the road, including a sharp selloff in early August following the Bank of Japan’s decision to hike its policy rate to the highest level in 15 years at 0.25%, which sparked a violent unwind in carry trades. Nonetheless, the selloff quickly reversed in the following days and was fully erased by the end of the month.
U.S. economic data showed continued robust growth, declining inflation and a solid, yet slowing, labor market. Second quarter U.S. GDP surprised to the upside at an annualized rate of 3% driven by strong consumer spending. In slight contrast, U.S. labor market data were mixed. In July and August, non-farm payrolls missed expectations, and the Bureau of Labor Statistics (BLS) revised labor market data for the annual period ending March, which was lower by 818,000 jobs. However, the September payrolls showed the strongest job growth in six months, quelling fears of a rapidly slowing labor market. The unemployment rate also dipped to 4.1% in September after peaking at 4.2% in August. Additionally, the August CPI report revealed the annual inflation rate slowing for the fifth consecutive month to 2.5%, the lowest rate in over three years.
After leaving rates unchanged for the eighth consecutive meeting in July, the Fed announced a 50-basis-point cut in September, taking the benchmark rate to a range of 4.75% to 5.00%, the lowest since May 2023. The combination of slowing labor market data in July and August, as well as the continued decline in the annual inflation rate, prompted the Fed’s decision to begin its long-awaited cutting cycle. While a cut in September was well-signaled, the exact magnitude was uncertain. The larger-than-expected cut helped increase market expectations of a more accommodative Fed going forward. By the end of the quarter, interest rate futures priced in an additional 50 basis points of cuts expected before year-end. However, with the next FOMC meeting occurring the day after the November election, political uncertainty may steal the spotlight before then.
Market Environment
U.S. Treasuries rallied across the board during the quarter, as the Fed’s rate cut led to a sharp bull steepening of the yield curve. The yield on the U.S. 2-year note fell roughly 98 basis points, reaching the lowest in over a year, while the yield on the U.S. 10-year note fell around 42 basis points. With the September rate cut, the spread between the yield on 2-year and 10-year notes reversed its inversion for the first time in over two years, ending the longest period of inversion in history.
Strong technicals continued to drive spread compression during the period. High yield bond spreads tightened roughly 10 basis points, ending the quarter below 300 basis points, as measured by the Bloomberg U.S. Corporate High Yield Bond Index. While spreads narrowed across all rating categories, the most pronounced compression occurred in CCC-rated bonds. Investment grade corporate bond spreads also narrowed further, declining roughly 5 basis points to below 90 basis points by quarter-end, as measured by the Bloomberg U.S. Corporate Bond Index.
Leveraged finance issuers took advantage of favorable market conditions and strong primary markets, as refinancing continued to drive the bulk of issuance. While high yield bond supply was slightly lower than the previous quarter, it topped $74 billion in the third quarter, an increase of nearly 90% compared to the third quarter of 2023. Leveraged loan issuance also continued at a strong pace, with supply topping $205 billion in the quarter, an increase of nearly 70% compared to the same period in 2023. Supply in the investment grade corporate bond issuance also remained robust with third-quarter issuance topping $360 billion, bringing year-to-date issuance above $1 trillion, ahead of 2023’s torrid pace of supply.
High yield bond fund inflows continued at a steady pace during the quarter, while leveraged loan funds experienced outflows ahead of the September rate cut. High yield bond inflows topped $15 billion, the largest quarterly total of the year. Conversely, leveraged loan funds outflows totaled more than $2 billion, driven by an outflow of roughly $5 billion in August.
Within the high yield bond market, lower-quality bonds gained most in the quarter, as CCC-rated bonds (+10.2%) significantly outperformed B’s (+4.5%) and BB’s (+4.3%). From an industry perspective, within the Bloomberg U.S. Corporate High Yield Bond Index, Telecommunications (+13.4%) and Cable & Satellite (+12.0%) outperformed, while Energy (+2.1%), and Automotive & Captive Finance (+2.4%) underperformed but still generated positive total returns. The top-performing sectors during the quarter were the worst-performing sectors in the first half, as sentiment improved, and lower-priced bonds rallied.
Distressed exchanges were the primary driver of default and distressed exchange activity during the quarter. The 12-month trailing, par-weighted U.S. high yield default rate, including distressed exchanges, declined roughly 15 basis points to end the quarter at 1.64% (0.94%, excluding distressed exchanges), around 180 basis points below its long-term historical average. Meanwhile, the loan par-weighted default rate, including distressed exchanges, rose roughly 60 basis points to end September at 3.70% (1.28%, excluding distressed exchanges), approximately 60 basis points above the long-term historical average but nearly 100 basis points below the long-term average excluding distressed exchange
Performance and Attribution Summary
High Yield Bond
The Aristotle High Yield Bond Composite returned 3.59% gross of fees (3.53% net of fees) in the third quarter, underperforming the 4.39% return of the ICE BofA BB-B U.S. Cash Pay High Yield Constrained Index. Security selection was the primary detractor from relative performance. Industry allocation and sector rotation also detracted from relative performance, with no offsetting contributors.
Security selection detracted from relative performance led by holdings in Finance Companies and Transportation. This was partially offset by selection in Energy and Cable & Satellite. Industry allocation also detracted from relative performance led by an overweight in Energy and an underweight in Telecommunications. This was partially offset by an underweight in Technology and an overweight in Utilities. Additionally, sector rotation detracted from relative performance led by the allocation to cash, which was partially offset by the allocation to investment grade corporate bonds.
Top Five Contributors
Top Five Detractors
Charter Communications
United Airlines
New Fortress Energy
JetBlue Airlines
Allegheny Technologies
Air Canada
Walgreens Boots Alliance
Level 3 Financing
O-I Glass
Resolute Investment Managers
*Bold securities held in representative account
Short Duration High Yield Bond
The Aristotle Short Duration High Yield Bond Composite returned 2.66% pure gross of fees (2.53% net of fees) in the third quarter, underperforming the 3.19% return of the ICE BofA 1-3 Year BB-B U.S. Cash Pay Fixed Maturity High Yield Constrained Index. Security selection was the primary detractor from relative performance. Industry allocation and sector rotation also detracted from performance, with no offsetting contributors.
Security selection detracted from relative performance led by holdings in Pharmaceuticals and Chemicals. This was partially offset by selection in Diversified Manufacturing & Construction Machinery and Pipelines & Distributors. Industry allocation also detracted from relative performance led by an overweight in Pipelines & Distributors and an underweight in Media & Entertainment. This was partially offset by overweights in Pharmaceuticals and Real Estate Investment Trusts (REITs) & Real Estate-Related. Additionally, sector rotation detracted marginally from performance led by the allocation to cash, with no offsetting contributors.
Top Five Contributors
Top Five Detractors
New Fortress Energy
Bausch Health
Albertsons
Zayo Capital
American Airlines
Navient
Tri Point Group
E.W. Scripps
Griffon Corp
Community Health Systems
*Bold securities held in representative account
Outlook
We maintain a positive outlook for U.S. corporate credit markets, which we believe will continue to benefit from strong fundamentals, supportive technicals, a resilient U.S. economy and lower interest rates. We believe the current risk-on environment could extend through year-end, as all-in yields remain relatively attractive compared to historical levels. As we move into the final quarter of the year, our focus continues to be on higher-quality credits in sectors we believe will benefit from strong tailwinds.
From a macroeconomic standpoint, divergence remains the key theme, with the U.S. outperforming on a relative basis due to robust growth and a resilient labor market. Despite fears of an economic slowdown in the U.S., strong earnings and corporate fundamentals continue to bolster investor confidence. In contrast, Europe and China continue to underperform due to structural challenges. China’s recent stimulus measures have sparked a rally in local equity markets, but the country’s economic recovery remains hindered by the ongoing real estate debt overhang, a structural issue that will likely persist. In Europe, growth continues to disappoint, and the economies of the continent are seeing diverging fortunes, with France showing relative resilience and Germany potentially slipping into a technical recession. Given this backdrop, we maintain domestic (U.S.) focus.
The rapid reaction of interest rate markets to the Fed’s dovish pivot saw markets get ahead of the September rate cut. With 2-year yields historically leading the Fed, we would not be surprised to see two additional 25-basis-point cuts before year-end. But given this scenario is largely priced in, yields may be rangebound over the next few months, barring any major downside surprises in the labor market that accelerate the Fed’s cutting cycle. Furthermore, longer-end rates bottomed out during the week before the September Fed meeting and continued to rise through quarter-end. We believe the price action reflects longer-term concerns over U.S. deficits, as well as the possibility that rate cuts could reignite inflationary pressures or the risk of rising geopolitical tensions, which could disrupt supply chains once again.
Even if the Fed moves slower than expected, we believe high yield bond markets should continue to benefit from strong fundamentals and favorable technical conditions. Second-quarter earnings for high yield issuers showed strong quarter-over-quarter EBITDA growth with only marginal increases in leverage, which we believe gave investors confidence to add risk in high yield. We did not anticipate the extent of the rebound in lower-quality and lower-dollar-priced bonds, particularly in distressed and special situations, which we believe was driven primarily by strong technical factors. Additionally, the high yield bond universe continues to shrink as companies pay down liabilities or refinance into private debt, which should continue to limit supply and market growth. While primary markets remain open, inflows from retail and institutional funds also continue to offset new supply.
For higher-quality high yield bonds, much of the duration tailwind from lower rates may have passed for the year. However, we believe attractive all-in yields, along with a positive economic backdrop, will remain supportive. However, potential downside risks include heightened geopolitical tensions, a resurgence in inflationary pressures, downside labor market surprises and sector-specific regulatory challenges after the election. As always, we remain committed to a disciplined, active investment approach, focusing on rigorous fundamental credit analysis to navigate the evolving credit market landscape and seeking to generate consistent, attractive risk-adjusted returns over the long-run.
High Yield Bond Positioning
In our high yield bond portfolios, we continue to focus on higher-quality credits in the short-to-intermediate part of the curve. Our average credit quality remains aligned with the benchmark, and our duration exposure relative to the benchmark remains largely unchanged. We continue to focus on sectors with strong fundamentals and issuers we believe should benefit from specific tailwinds, allowing resilience throughout the economic cycle.
During the quarter we reduced exposure to BBB-rated corporate bonds as longer duration securities rallied, focusing on our core allocations to BB and B-rated credits. As technicals, rather than fundamental credit analysis, drive price action and spreads sit at historically tight levels, we expect a more pronounced differentiation between higher and lower quality credits in the coming year, as current valuations in the lower-quality space appear stretched. While lower rates and strong fundamentals should underpin markets more broadly, we remain cautious on some of the lower-quality credits in industries facing secular decline that outperformed in the third quarter, especially given current valuations. Additionally, while many lower-quality companies with more floating rate debt in their capital structure should benefit from lower benchmark rates, we expect liability-management exercises (LME’s) will continue to be a major theme, as issuers attempt to use strong sentiment to resolve some of the thornier debt burdens, adding complexity to investing in this segment of the market.
From a credit selection and industry perspective, we remain focused on companies we believe will benefit from longer-term secular tailwinds. During the quarter, we reduced our underweight in Cable & Satellite, driven by positive credit-specific developments. We maintained an underweight in Telecommunications and added an underweight in Healthcare, where we see potential regulatory headwinds in the coming year. We maintained our overweights in Retailers & Restaurants and Transportation, targeting companies we believe can benefit from a resilient U.S. consumer. Additionally, we reduced our overweight in Energy, focusing on credits we believe can benefit from rising demand for data center power, driven by Artificial Intelligence (AI). At the end of the quarter, we held overweights in Energy, Transportation and Retailers & Restaurants alongside underweights in Technology, Telecommunications and Healthcare.
Disclosures
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. There are risks specifically associated with fixed income investments such as interest rate risk and credit risk. Bond values fluctuate in price in response to market conditions. Typically, when interest rates rise, there is a corresponding decline in bond values. This risk may be more pronounced for bonds with longer-term maturities. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. High yield securities are generally rated lower than investment grade securities and may be subject to greater market fluctuations, increased price volatility, risk of issuer default, less liquidity, or loss of income and principal compared to investment grade securities.
The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Credit does not guarantee the accuracy, adequacy or completeness of such information.
The opinions expressed herein are those of Aristotle Credit Partners, LLC (Aristotle Credit) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to buy or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report are or will be profitable, or that recommendations Aristotle Credit makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Credit High Yield Bond strategy and the Aristotle Credit Short Duration High Yield Bond strategy. Not every client’s account will have these characteristics. Aristotle Credit reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. For a full list of all recommendations made by Aristotle Credit during the last 12 months, please contact us at (949) 681-2100. This is not a recommendation to buy or sell a particular security.
Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Composite returns are preliminary pending final account reconciliation.
High Yield Bond Returns: Composite and benchmark returns reflect the reinvestment of income. 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.
Short Duration High Yield Bond Returns – Pure Gross: Pure gross returns do not reflect the deduction of any trading costs, fees or expenses. Pure gross returns prior to September 2017 reflect the deduction of transaction costs. Model Net Performance: Starting from September 2017, composite returns are presented pure gross and net of the highest wrap fee stated. Performance for periods prior to September 2017 are presented pure gross and net of actual investment advisory fees.
Aristotle Credit Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Credit, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACP-2410-1
Performance Disclosures
Sources: SS&C Advent; ICE BofA
*Composite returns are preliminary pending final account reconciliation.
**2014 is a partial-year period of nine months, representing data from April 1, 2014 to December 31, 2014.
***2009 is a partial-year period of ten months, representing data from March 1, 2009 to December 31, 2009.
Past performance is not indicative of future results. 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. The Aristotle High Yield Bond strategy has an inception date of April 1, 2014; however, the strategy initially began at Douglas Lopez’s predecessor firm. A supplemental performance track record from March 1, 2009 to December 31, 2013 (Mr. Lopez’s departure from the firm) is provided. The returns are based on a separate account from the strategy while it was being managed at Doug Lopez’s predecessor firm and performance results are based on custodian data. During this time, Mr. Lopez had primary responsibility for managing the account. Please refer to disclosures at the end of this document.
Sources: SS&C Advent; ICE BofA
*Composite returns are preliminary pending final account reconciliation.
**2014 is a partial-year period of nine months, representing data from April 1, 2014 to December 31, 2014.
Past performance is not indicative of future results. Composite and benchmark returns reflect the reinvestment of income. Pure Gross: Pure gross returns do not reflect the deduction of any trading costs, fees or expenses. Pure gross returns prior to September 2017 reflect the deduction of transaction costs. Model Net Performance: Starting from September 2017, composite returns are presented pure gross and net of the highest wrap fee stated. Performance for periods prior to September 2017 are presented pure gross and net of actual investment advisory fees. Please refer to disclosures at the end of this document.
Index Disclosures
The Bloomberg U.S. Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. The Index is frequently used as a stand-in for measuring the performance of the U.S. bond market. In addition to investment grade corporate debt, the Index tracks government debt, mortgage-backed securities (MBS) and asset-backed securities (ABS) to simulate the universe of investable bonds that meet certain criteria. In order to be included in the Index, bonds must be of investment grade or higher, have an outstanding par value of at least $100 million and have at least one year until maturity. The Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers that are all U.S. dollar denominated. The Bloomberg U.S. Corporate Bond Index is a component of the Bloomberg U.S. Credit Bond Index. The Bloomberg U.S. Corporate High Yield Bond Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded. The S&P 500 Index is the Standard & Poor’s Composite Index and is a widely recognized, unmanaged index of common stock prices. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization. The ICE Bank of America (ICE BofA) BB-B U.S. Cash Pay High Yield Constrained Index measures the performance of the U.S. dollar-denominated BB-rated and B-rated corporate debt issued in the U.S. domestic market, a fixed coupon schedule and a minimum amount outstanding of $100 million, issued publicly. Allocations to an individual issuer in the Index will not exceed 2%. The Credit Suisse Leveraged Loan Index is a market-weighted index designed to track the performance of the investable universe of the U.S. dollar-denominated leveraged loan market. The ICE Bank of America (ICE BofA) 1-3 Year BB-B U.S. Cash Pay Fixed Maturity High Yield Constrained Index tracks the performance of the U.S. dollar-denominated below investment grade corporate debt, currently in a coupon paying period, that is publicly issued in the U.S. domestic market; including 144A securities, both with and without registration rights. Qualifying securities must have risk exposure to countries are members of the FX-G10, Western Europe, or territories of the United States and Western Europe. The FX-G10 includes all Euro members: the United States, Japan, the United Kingdom, Canada, Australia, New Zealand, Switzerland, Norway and Sweden. Qualifying securities include only those rated BB1 through B3. Perpetual securities are not included as all securities must have a fixed final maturity date. All final maturity dates must range between one and three years. It is a capitalization-weighted index, constrained to 2% maximum weighting per issuer. The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The volatility (beta) of the Composites may be greater or less than the indices. It is not possible to invest directly in these indices. Composite and index returns reflect the reinvestment of income.
The U.S. equity market continued its ascent to new record highs, with the S&P 500 Index increasing 5.89% during the period. However, unlike last quarter, the market showed broader gains, with the S&P 500 Equal Weight Index outperforming the cap-weighted S&P 500 Index by 3.71%. Concurrently, the Bloomberg U.S. Aggregate Bond Index rose 5.20% for the quarter as interest rates declined. In terms of style, the Russell 1000 Value Index outperformed its growth counterpart by 6.24%.
On a sector basis, gains were made from ten of the eleven sectors within the S&P 500 Index, led by Utilities and Real Estate. The worst-performing sectors were Energy and Information Technology.
Sources: CAPS CompositeHubTM, 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.
After slowing down for two consecutive quarters, U.S. economic growth accelerated to an annualized rate of 3.0%, as consumer spending and private inventory investments increased. Additionally, inflation inched closer to the Federal Reserve’s 2.0% target, with the CPI increasing at an annualized rate of 2.5% in August and 2.9% in July. Meanwhile, the U.S. labor market cooled slightly, with unemployment at 4.2% and nominal wage growth moderating during the period.
Given the ongoing progress toward target inflation and a softening labor market, the Federal Reserve lowered the target range of the federal funds rate by 50 basis points to 4.75% to 5.00%. Fed Chair Powell acknowledged that loosening policy restraint too quickly could undo progress on inflation, whereas moving too slowly could undermine economic activity and weaken employment. Therefore, Powell stressed the importance of monitoring economic data before making further adjustments to monetary policy.
Corporate earnings remained strong, with S&P 500 companies reporting earnings growth of 11.3%, the highest year-over-year improvement since 2021. Furthermore, only 67 S&P 500 companies issued negative EPS guidance, and about 80% exceeded estimates. Reflecting the general trend of disinflation and a resilient domestic economy, fewer companies mentioned topics like “inflation” and “recession” during earnings calls.
In political news, President Biden announced he would not seek re-election. Vice President Kamala Harris was subsequently named the official Democratic presidential nominee for the 2024 election. In geopolitics, tensions in the Middle East escalated as clashes between Israeli forces and Hezbollah fighters intensified. In response, the U.S. announced the urgent deployment of additional troops to the region in case of a wider regional conflict, while simultaneously mediating a potential ceasefire between the groups.
Performance and Attribution Summary
For the third quarter of 2024, Aristotle Atlantic’s Core Equity Composite posted a total return of 3.19% gross of fees (3.09% net of fees), underperforming the S&P 500 Index, which recorded a total return of 5.89%.
Performance (%)
3Q24
1 Year
3 Years
5 Years
10 Years
Since Inception*
Core Equity Composite (gross)
3.19
37.86
9.30
15.37
13.71
14.26
Core Equity Composite (net)
3.09
37.37
8.86
14.90
13.22
13.75
S&P 500 Index
5.89
36.35
11.91
15.98
13.38
13.73
*The Core Equity Composite has an inception date of August 1, 2013. 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.
Source: FactSet Past performance is not indicative of future results. Attribution results are based on sector returns which are gross of investment advisory fees. Attribution is based on performance that is gross of investment advisory fees and includes the reinvestment of income. Please see important disclosures at the end of this document.
During the third quarter, the portfolio’s underperformance relative to the S&P 500 Index was due to security selection. Security selection in Industrials and Consumer Discretionary detracted the most from relative performance. Conversely, security selection in Utilities and Health Care detracted the least from relative performance.
Contributors and Detractors for 3Q 2024
Relative Contributors
Relative Detractors
Trane Technologies
Applied Materials
Intercontinental Exchange
Halliburton
Norfolk Southern
Alphabet
NextEra Energy
Antero Resources
Home Depot
Guardant Health
Contributors
Trane Technologies
Trane Technologies contributed to performance in the third quarter. After reporting second quarter earnings and revenue that exceeded consensus estimates in early August, the company’s management appeared at multiple investor events in September where they spoke about opportunities for the HVAC market. There is strength in the commercial business related to improving energy efficiency demand broadly and additional cooling opportunities in data centers. The residential business is beginning to recover after a period of weakness.
Intercontinental Exchange
Intercontinental Exchange contributed to portfolio performance in the third quarter, driven by continued strength in the company’s Exchanges segment and expectations that the Mortgage Technology segment’s revenues have troughed ahead of an eventual recovery in U.S. housing market activity. Exchanges’ revenues continue to be driven by growth in energy and interest rate futures trading volumes, with energy trading activity expected to remain elevated, primarily bolstered by increasing data center-driven electricity demand.
Detractors
Applied Materials
Applied Materials detracted from performance in the third quarter as the stock was part of the general investor pullback in AI-related semiconductor names due to concerns about overall AI market growth in the near-term and profitability of the massive capex investments being made in AI infrastructure. The company delivered an inline quarter with solid execution and it continues to benefit from a secular shift to highly complex semiconductors design and manufacturing, but there continue to be pockets of weakness and concerns that include weaker NAND manufacturing and potential for further trade restrictions on Chinese equipment purchases.
Halliburton
Halliburton detracted from performance in the third quarter, as oil prices pulled back on increasing concerns about a slowdown in the U.S. and the global economy and continued headwinds from lower-than-expected growth in the Chinese economy. Halliburton reported second quarter earnings that indicated a weakening North American market for its services, and this was reflected in the company’s guide for the second half of the year, which showed the slower North American market continuing through the end of the year. We believe that 2024 will mark the trough for Halliburton’s North American market and that it should benefit from improving demand from a strengthening natural gas price and newly consolidated customers seeking to use the company’s high-quality product offerings. We are also anticipating better-than-expected growth from its international markets, including offshore. We believe that the current valuation continues to reflect a significantly more negative outlook for the North American market than we view for 2025.
Recent Portfolio Activity
The table below shows all buys and sells completed during the quarter, followed by a brief rationale.
Buys
Sells
None
Estée Lauder
Buys
None
Sells
Estée Lauder Inc.
We sold Estée Lauder, as Chinese consumer headwinds continue to present an unpredictable pace of recovery. And while Estée has taken action to reduce costs and drive a profit recovery plan, it is apparent that a certain level of volume will be necessary to make that plan successful, and that is difficult to predict with a high degree of certainty. China-driven travel retail business continues to be slower than anticipated, pushing out the expected timing of a recovery. Despite the weakness in share price, Estée continues to trade at a premium multiple, and consensus estimates may prove aggressive should Chinese consumer weakness linger. Lastly, with a pending transition in both the CFO and CEO roles, we see the potential for another reset as the new management team takes over.
Outlook
The equity markets in the third quarter posted positive returns, led by the interest rate sensitive sectors of Utilities and Real Estate. The sector performance reflected a sizable decline in interest rates with the 10-year U.S. Treasury yield down by about 70 basis points for the quarter. Economic activity continued to show signs of moderating with the ISM Manufacturing Index remaining in contraction territory and employment statistics slowing. Equity valuation levels remain elevated compared to historical levels, leaving little room for a sizable multiple expansion. There has been no improvement in the geopolitical situation and the US Presidential election remains a toss-up. The market has become more sensitive to a potential recession and declining earnings and less focused on inflation. Although the upside is more muted given the elevated valuation levels, the backdrop of lower interest rates and moderate earnings growth should support equity markets. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.
Disclosures
The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Atlantic makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Core Equity strategy. Not every client’s account will have these characteristics. Aristotle Atlantic reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Atlantic’s Core Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.
The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Atlantic does not guarantee the accuracy, adequacy or completeness of such information.
Aristotle Atlantic Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. AAP-2410-21.
Performance Disclosures
Sources: CAPS Composite Hub, Russell Investments
Composite returns for all periods ended September 30, 2024 are preliminary pending final account reconciliation.
The Aristotle Core Equity Composite has an inception date of August 1, 2013 at a predecessor firm. During this time, Mr. Fitzpatrick had primary responsibility for managing the strategy. Performance starting November 1, 2016 was achieved at Aristotle Atlantic.
Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
Index Disclosures
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index has been selected as the benchmark and is used for comparison purposes only. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies. The Index covers all industries except transportation and utilities. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite includes over 3,000 companies, more than most other stock market indices. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index of domestic investment grade bonds, including corporate, government and mortgage-backed securities. The WTI Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for oil consumed in the United States. The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The 3-Month U.S. Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of three months. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest directly in these indices.
The U.S. equity market continued its ascent to new record highs, with the S&P 500 Index increasing 5.89% during the period. However, unlike last quarter, the market showed broader gains, with the S&P 500 Equal Weight Index outperforming the cap-weighted S&P 500 Index by 3.71%. Concurrently, the Bloomberg U.S. Aggregate Bond Index rose 5.20% for the quarter as interest rates declined. In terms of style, the Russell 1000 Value Index outperformed its growth counterpart by 6.24%.
Sources: CAPS CompositeHubTM, 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 all eleven sectors within the Russell 1000 Growth Index, led by Utilities and Real Estate. The worst-performing sectors were Communication Services and Health Care.
After slowing down for two consecutive quarters, U.S. economic growth accelerated to an annualized rate of 3.0%, as consumer spending and private inventory investments increased. Additionally, inflation inched closer to the Federal Reserve’s 2.0% target, with the CPI increasing at an annualized rate of 2.5% in August and 2.9% in July. Meanwhile, the U.S. labor market cooled slightly, with unemployment at 4.2% and nominal wage growth moderating during the period.
Given the ongoing progress toward target inflation and a softening labor market, the Federal Reserve lowered the target range of the federal funds rate by 50 basis points to 4.75% to 5.00%. Fed Chair Powell acknowledged that loosening policy restraint too quickly could undo progress on inflation, whereas moving too slowly could undermine economic activity and weaken employment. Therefore, Powell stressed the importance of monitoring economic data before making further adjustments to monetary policy.
Corporate earnings remained strong, with S&P 500 companies reporting earnings growth of 11.3%, the highest year-over-year improvement since 2021. Furthermore, only 67 S&P 500 companies issued negative EPS guidance, and about 80% exceeded estimates. Reflecting the general trend of disinflation and a resilient domestic economy, fewer companies mentioned topics like “inflation” and “recession” during earnings calls.
In political news, President Biden announced he would not seek re-election. Vice President Kamala Harris was subsequently named the official Democratic presidential nominee for the 2024 election. In geopolitics, tensions in the Middle East escalated as clashes between Israeli forces and Hezbollah fighters intensified. In response, the U.S. announced the urgent deployment of additional troops to the region in case of a wider regional conflict, while simultaneously mediating a potential ceasefire between the groups.
Performance and Attribution Summary
For the third quarter of 2024, Aristotle Atlantic’s Focus Growth Composite posted a total return of 2.84% gross of fees (2.82% net of fees), underperforming the 3.19% total return of the Russell 1000 Growth Index.
Performance (%)
3Q24
1 Year
3 Years
5 Years
Since Inception*
Focus Growth Composite (gross)
2.84
42.00
6.78
16.04
14.63
Focus Growth Composite (net)
2.82
41.86
6.67
15.91
14.39
Russell 1000 Growth Index
3.19
42.19
12.02
19.74
17.35
*The Focus Growth Composite has an inception date of March 1, 2018. 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.
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 third quarter, the portfolio’s underperformance relative to the Russell 1000 Growth Index was primarily due to security selection. Security selection in Information Technology and Health Care detracted the most from relative performance. Conversely, security selection in Industrials and Consumer Discretionary contributed to relative performance.
Contributors and Detractors for 3Q 2024
Relative Contributors
Relative Detractors
Trane Technologies
Dexcom
S&P Global
Synopsys
Expedia Group
Guardant Health
Home Depot
KLA Corporation
ServiceNow
Datadog
Contributors
Trane Technologies
Trane Technologies contributed to performance in the third quarter. After reporting second quarter earnings and revenue that exceeded consensus estimates in early August, the company’s management appeared at multiple investor events in September where they spoke about opportunities for the HVAC market. There is strength in the commercial business related to improving energy efficiency demand broadly and additional cooling opportunities in data centers. The residential business is beginning to recover after a period of weakness.
S&P Global
S&P Global contributed to portfolio performance in the third quarter, driven by growth in corporate bond issuance and refinancing activity, with expectations for further acceleration if interest rates decline. The company has also achieved better-than-expected expense and revenue synergies from its acquisition of IHS Markit.
Detractors
Dexcom
Dexcom detracted from performance in the third quarter following an uncharacteristic earnings miss, which manifested late in the quarter. The miss was attributed to share loss in the durable medical equipment (DME) channel, reaching a full rebate threshold with insurance companies sooner than expected and a recent salesforce realignment that resulted in slower new patient starts. Management was clear that these are Dexcom specific issues around execution and that they were taking action to remediate those effects. The company stood by their long-range plan which calls for 15%-plus topline growth. We believe Dexcom now trades at a relatively attractive valuation given the strong long-term growth profile.
Synopsys
Synopsys detracted from performance in the third quarter as the stock was part of the general investor pullback in AI-related semiconductor names due to concerns about overall AI market growth in the near-term and profitability of the massive capex investments being made in AI infrastructure. The company continues to execute well on its AI-enhanced product suite and Synopsys IP and Tools continue to be an integral part of the semiconductor design and manufacturing supply chain. As semiconductor companies and enterprises continue to rely on increasingly complex semiconductors in their technology stack, we see Synopsys as a key beneficiary of the increased design and manufacturing spend.
Recent Portfolio Activity
The table below shows all buys and sells completed during the quarter, followed by a brief rationale.
Buys
Sells
Linde
IDEXX Laboratories
Thermo Fisher Scientific
Buys
Linde
Linde is the largest industrial gas company worldwide and a major technological innovator in the industry. The company produces atmospheric gases like oxygen, nitrogen, argon, and rare gases through air separation processes, with cryogenic air separation being the most prevalent. They also have technologies to produce blue and green hydrogen, which are considered clean energy. Linde uses three basic distribution methods for industrial gases: on-site or tonnage, merchant or bulk liquid, and packaged or cylinder gases. These methods are often integrated, with products from all three supply modes coming from the same plant. The method of supply is determined by the lowest cost means of meeting the customer’s needs.
Linde holds a leading market share in a consolidated industry, with expected revenues of approximately $34 billion in 2024. The company has consistently grown its earnings throughout economic cycles due to its exposure to both cyclical end markets and is secured by long-term supply agreements of at least three years, providing defensive characteristics to its operating model. We see a robust backlog and pipeline driven by attractive growth end markets and significant decarbonization opportunities with operational discipline from management.
Sells
IDEXX Laboratories, Inc.
We sold IDEXX Laboratories on concerns that the cumulative effects of past pricing power and subdued volume growth will begin to impact sales growth as pricing power subsides. Furthermore, signs point to a slowing consumer, which could soften demand for vet services and thus adversely affect testing volumes. IDEXX trades at a premium multiple, and we have seen signs of slowing growth having outsized impacts on stock prices in the most recent earnings period.
Thermo Fisher Scientific Inc.
We sold Thermo Fisher Scientific due to the reduction in the Health Care weighting in the Russell 1000 Growth benchmark as a result of the annual rebalance. Furthermore, we believe that Thermo is trading at a full valuation based on its expected earnings growth and the softness in some life science-related end markets.
Outlook
The equity markets in the third quarter posted positive returns, led by the interest rate sensitive sectors of Utilities and Real Estate. The sector performance reflected a sizable decline in interest rates with the 10-year U.S. Treasury yield down by about 70 basis points for the quarter. Economic activity continued to show signs of moderating with the ISM Manufacturing Index remaining in contraction territory and employment statistics slowing. Equity valuation levels remain elevated compared to historical levels, leaving little room for a sizable multiple expansion. There has been no improvement in the geopolitical situation and the US Presidential election remains a toss-up. The market has become more sensitive to a potential recession and declining earnings and less focused on inflation. Although the upside is more muted given the elevated valuation levels, the backdrop of lower interest rates and moderate earnings growth should support equity markets. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.
Disclosures
The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Atlantic makes in the future will be profitable or equal the performance of the listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Focus Growth strategy. Not every client’s account will have these characteristics. Aristotle Atlantic reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Atlantic’s Focus Growth Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.
The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Atlantic does not guarantee the accuracy, adequacy or completeness of such information.
Aristotle Atlantic Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. AAP-2410-22.
Performance Disclosures
Sources: CAPS CompositeHubTM, Russell Investments
Composite returns for all periods ended September 30, 2024 are preliminary pending final account reconciliation.
Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
Index Disclosures
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index has been selected as the benchmark and is used for comparison purposes only. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies. The Index covers all industries except transportation and utilities. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite includes over 3,000 companies, more than most other stock market indices. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index of domestic investment grade bonds, including corporate, government and mortgage-backed securities. The WTI Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for oil consumed in the United States. The 3-Month U.S. Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of three months. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest directly in these indices.
The U.S. equity market continued its ascent to new record highs, with the S&P 500 Index increasing 5.89% during the period. However, unlike last quarter, the market showed broader gains, with the S&P 500 Equal Weight Index outperforming the cap-weighted S&P 500 Index by 3.71%. Concurrently, the Bloomberg U.S. Aggregate Bond Index rose 5.20% for the quarter as interest rates declined. In terms of style, the Russell 1000 Value Index outperformed its growth counterpart by 6.24%.
On a sector basis, gains were made from all eleven sectors within the Russell 1000 Growth Index, led by Utilities and Real Estate. The worst-performing sectors were Communication Services and Health Care.
Sources: CAPS CompositeHubTM, 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.
After slowing down for two consecutive quarters, U.S. economic growth accelerated to an annualized rate of 3.0%, as consumer spending and private inventory investments increased. Additionally, inflation inched closer to the Federal Reserve’s 2.0% target, with the CPI increasing at an annualized rate of 2.5% in August and 2.9% in July. Meanwhile, the U.S. labor market cooled slightly, with unemployment at 4.2% and nominal wage growth moderating during the period.
Given the ongoing progress toward target inflation and a softening labor market, the Federal Reserve lowered the target range of the federal funds rate by 50 basis points to 4.75% to 5.00%. Fed Chair Powell acknowledged that loosening policy restraint too quickly could undo progress on inflation, whereas moving too slowly could undermine economic activity and weaken employment. Therefore, Powell stressed the importance of monitoring economic data before making further adjustments to monetary policy.
Corporate earnings remained strong, with S&P 500 companies reporting earnings growth of 11.3%, the highest year-over-year improvement since 2021. Furthermore, only 67 S&P 500 companies issued negative EPS guidance, and about 80% exceeded estimates. Reflecting the general trend of disinflation and a resilient domestic economy, fewer companies mentioned topics like “inflation” and “recession” during earnings calls.
In political news, President Biden announced he would not seek re-election. Vice President Kamala Harris was subsequently named the official Democratic presidential nominee for the 2024 election. In geopolitics, tensions in the Middle East escalated as clashes between Israeli forces and Hezbollah fighters intensified. In response, the U.S. announced the urgent deployment of additional troops to the region in case of a wider regional conflict, while simultaneously mediating a potential ceasefire between the groups.
Performance and Attribution Summary
For the third quarter of 2024, Aristotle Atlantic’s Large Cap Growth Composite posted a total return of 1.26% gross of fees (1.11% net of fees), underperforming the 3.19% return of the Russell 1000 Growth Index.
Performance (%)
3Q24
1 Year
3 Years
5 Years
Since Inception*
Large Cap Growth Composite (gross)
1.26
37.33
7.13
16.40
17.62
Large Cap Growth Composite (net)
1.11
36.65
6.67
15.92
17.14
Russell 1000 Growth Index
3.19
42.19
12.02
19.74
19.24
*The Large Cap Growth Composite has an inception date of November 1, 2016. Past performance is not indicative of future results. Aristotle Atlantic Large Cap Growth 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.
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 third quarter, the portfolio’s underperformance relative to the Russell 1000 Growth Index was primarily due to security selection. Security selection in Information Technology and Health Care detracted the most from relative performance. Conversely, security selection in Consumer Discretionary and Real Estate detracted the least.
Contributors and Detractors for 3Q 2024
Relative Contributors
Relative Detractors
Expedia Group
Dexcom
ServiceNow
Synopsys
Home Depot
Tesla
Adaptive Biotechnologies
Guardant Health
UnitedHealth Group
KLA Corporation
Detractors
Dexcom
Dexcom detracted from performance in the third quarter following an uncharacteristic earnings miss, which manifested late in the quarter. The miss was attributed to share loss in the durable medical equipment (DME) channel, reaching a full rebate threshold with insurance companies sooner than expected, and a recent salesforce realignment that resulted in slower new patient starts. Management was clear that these are Dexcom-specific issues around execution and that they were taking action to remediate those effects. The company stood by its long-range plan, which calls for 15%-plus top-line growth. We believe Dexcom now trades at a relatively attractive valuation given the strong long-term growth profile.
Synopsys
Synopsys detracted from performance in the third quarter. The stock was part of the general investor pullback in AI-related semiconductor names due to concerns about overall AI market growth in the near term and profitability of the massive capex investments being made in AI infrastructure. The company continues to execute well on its AI-enhanced product suite, and Synopsys IP and tools continue to be an integral part of the semiconductor design and manufacturing supply chain. As semiconductor companies and enterprises continue to rely on increasingly complex semiconductors in their technology stack, we see Synopsys as a key beneficiary of the increased design and manufacturing spend.
Contributors
Expedia Group
Expedia contributed to performance in the third quarter. The company reported better-than-expected second quarter earnings in August. The outlook for the year was reduced; however, the stock was trading at under 10x earnings at the time of the outlook reduction. The vacation home rental business Vrbo returned to growth. The significant return of capital continues with the share count having been reduced over the past year.
ServiceNow
ServiceNow contributed to performance in the third quarter, as the company reported what we consider to be solid second quarter earnings results that continue to highlight ongoing traction of its company’s product platform and improving momentum for the GenAI product lines. The company’s guidance for third quarter current remaining performance obligations (cRPO) was also ahead of consensus, which supports the strength of the company’s product platform in a software spending environment that continues to see headwinds from macroeconomic factors and budgets shifting to GenAI products.
Recent Portfolio Activity
The table below shows all buys and sells completed during the quarter, followed by a brief rationale.
Buys
Sells
Eli Lilly
BioMarin Pharmaceutical
Linde
Estée Lauder
IDEXX Laboratories
Thermo Fisher Scientific
Buys
Eli Lilly and Company
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 mentioned above of heart disease, sleep apnea, fatty liver disease and chronic kidney disease. We believe the premium valuation is supported by this outsized growth profile.
Linde
Linde is the largest industrial gas company worldwide and a major technological innovator in the industry. The company produces atmospheric gases like oxygen, nitrogen, argon and rare gases through air separation processes, with cryogenic air separation being the most prevalent. It also has technologies to produce blue and green hydrogen, which are considered clean energy. Linde uses three basic distribution methods for industrial gases: on-site or tonnage, merchant or bulk liquid, and packaged or cylinder gases. These methods are often integrated, with products from all three supply modes coming from the same plant. The method of supply is determined by the lowest cost means of meeting the customer’s needs.
Linde holds a leading market share in a consolidated industry, with expected revenues of approximately $34 billion in 2024. The company has consistently grown its earnings throughout economic cycles due to its exposure to both cyclical and defensive end markets. The operating model also benefits from defensive characteristics that include long-term supply agreements signed with customers, with over 70% of the business has contracts of at least 3 years, providing defensive characteristics to its operating model. We see a robust backlog and pipeline driven by attractive growth end markets and significant decarbonization opportunities with operational discipline from management.
Sells
BioMarin Pharmaceutical Inc.
We sold BioMarin Pharmaceutical following better-than-expected competitive data from Ascendis Pharma for the treatment of achondroplasia. Given that BioMarin has anchored future growth expectations around its achondroplasia drug Voxzogo, this competitive threat adds a new dimension to the story. While there were nuances between the study design of the two drugs, we believe this will be an overhang on BioMarin shares for the foreseeable future.
Estée Lauder Inc.
We sold Estée Lauder, as Chinese consumer headwinds continue to present an unpredictable pace of recovery. And while Estée has taken action to reduce costs and drive a profit recovery plan, it is apparent that a certain level of volume will be necessary to make that plan successful, and that is difficult to predict with a high degree of certainty. China-driven travel retail business continues to be slower than anticipated, pushing out the expected timing of a recovery. Despite the weakness in share price, Estée continues to trade at a premium multiple, and consensus estimates may prove aggressive should Chinese consumer weakness linger. Lastly, with a pending transition in both the CFO and CEO roles, we see the potential for another reset as the new management team takes over.
IDEXX Laboratories, Inc.
We sold IDEXX Laboratories on concerns that the cumulative effects of past pricing power and subdued volume growth will begin to impact sales growth as pricing power subsides. Furthermore, signs point to a slowing consumer, which could soften demand for vet services and thus adversely affect testing volumes. IDEXX trades at a premium multiple, and we have seen signs of slowing growth having outsized impacts on stock prices in the most recent earnings period.
Thermo Fisher Scientific Inc.
We sold Thermo Fisher Scientific due to the reduction in the Health Care weighting in the Russell 1000 Growth benchmark due to the annual rebalance. Furthermore, we believe that Thermo is trading at a full valuation based on its expected earnings growth and the softness in some life science-related end markets.
Outlook
The equity markets in the third quarter posted positive returns, led by the interest rate sensitive Utilities and Real Estate sectors. The sector performance reflected a sizable decline in interest rates, with the 10-year U.S. Treasury yield down about 70 basis points for the quarter. Economic activity continued to show signs of moderating, with the ISM Manufacturing Index remaining in contraction territory and employment statistics slowing. Equity valuation levels remain elevated compared to historical levels, leaving little room for sizable multiple expansion. There has been no improvement in the geopolitical situation, and the U.S. presidential election remains a toss-up. The market has become more sensitive to a potential recession and declining earnings and less focused on inflation. Although the upside is more muted given the elevated valuation levels, the backdrop of lower interest rates and moderate earnings growth should support equity markets. Our focus will continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles.
Disclosures
The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Atlantic makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Large Cap Growth strategy. Not every client’s account will have these characteristics. Aristotle Atlantic reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Atlantic’s Large Cap Growth Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.
The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Atlantic does not guarantee the accuracy, adequacy or completeness of such information.
Aristotle Atlantic Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. AAP-2410-20
Performance Disclosure
Sources: CAPS CompositeHubTM
Composite returns for all periods ended September 30, 2024 are preliminary pending final account reconciliation.
Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
Index Disclosure
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index has been selected as the benchmark and is used for comparison purposes only. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies. The Index covers all industries except transportation and utilities. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite includes over 3,000 companies, more than most other stock market indices. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index of domestic investment grade bonds, including corporate, government and mortgage-backed securities. The WTI Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for oil consumed in the United States. The 3-Month U.S. Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of three months. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest directly in these indices.
SMID caps enjoyed strong gains in the third quarter with the Russell 2500 index delivering a total return of 8.75% but the performance belies the volatile path taken during the period. Equities rallied in July as a below consensus CPI print lent credence to the soft-landing narrative. However, the risk on environment was punctuated in early August as an interest rate hike by the Bank of Japan and the resulting unwind of the levered Yen carry trade rattled global markets. The second half of the quarter was influenced by softening economic data and the Federal Reserve (Fed). Following comments made at the August Jackson Hole economic symposium that the time had come for policy to adjust, the Federal Reserve voted to cut the Fed Funds by 50 basis points (bps). Markets embraced the decision, ending the inversion of the U.S. Treasury yield curve, and the front end is now pricing in roughly 100 bps of easing in 2024.
Stylistically, value stocks outperformed their growth counterparts during the quarter as evidenced by the Russell 2500 Value Index returning 9.63% compared to 6.99% for the Russell 2500 Growth Index. Energy was a negative sector in both indices with much of the relative outperformance of the value index coming from interest rate-sensitive sectors such as Financials and Real Estate. Looking under the hood, the knock-on effects of lower interest rates could be seen in the value index, as two of the top five performers during the quarter were housing related. While AI enthusiasm has subsided in the second half of 2024, pockets can still be seen in parts of the SMID cap market. Lumen Technologies, a languishing communications company, rallied in August and was the top third-quarter performer in the Russell 2500 index when the company announced $5 billion in new business to provide private networks for AI scalers along with the potential for increased customer demand.
At the sector level, ten of the eleven sectors in the Russell 2500 Index recorded positive returns during the third quarter, led by the Real Estate (+17.76%), Utilities (+14.23%), and Communication Services (+14.00%) sectors. Conversely, Energy (-7.61%), Consumer Staples (+2.62%), and Information Technology (+3.11%) all 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 Cap Equity Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.
Performance Review
For the third quarter of 2024, the Aristotle Small/Mid Cap Equity Composite generated a total return of 9.48% net of fees (9.66% gross of fees), outperforming the 8.75% total return of the Russell 2500 Index. Outperformance was primarily driven by security selection while allocation effects detracted. Overall, security selection was strongest in the Information Technology, Financials, and Materials sectors and weakest in Industrials, Utilities, and Heath Care. From an allocation perspective, the portfolio benefited from an underweight in Consumer Staples and an overweight in Industrials, however, this was offset by an underweight in Real Estate and an overweight in Information Technology.
Relative Contributors
Relative Detractors
Baldwin Insurance Group
Acadia Healthcare
ACI Worldwide
Range Resources
Cohen & Steers
MACOM Technology Solutions
Alamos Gold
Advanced Energy Industries
Belden
Permian Resources
CONTRIBUTORS
Baldwin Insurance Group (BWIN), a Florida-based insurance company operating in the advisory, underwriting, and Mainstreet (consumer/small business) segments, built on second-quarter momentum with above consensus earnings on account of business line growth and margin improvement. We believe the company is starting to benefit from investments in talent made over the past year as well as the launch of new products. We maintain a position as we believe the company should continue to benefit from a positive inflection in free cash flow, improving margins, and deleveraging.
ACI Worldwide (ACIW), a provider of software solutions to facilitate payment transactions for financial institutions, retailers, and payment processors around the world, benefited from strong second-quarter results largely driven by growth in the bank segment along with the announcement of a $400 million stock buyback program. We maintain our investment as we believe the company is executing its strategy to maintain a strong market position in the payments software niche while upgrading its technology in select areas. With ongoing cost controls and high incremental margins on new revenue, we expect the company can drive additional growth with continued debt reduction and share repurchases.
DETRACTORS
Acadia Healthcare (ACHC), a behavioral healthcare and substance abuse treatment services company, declined in late September as a result of two negative 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.
Range Resources (RRC), a natural gas focused exploration and production company with operations in the Appalachian Basin, declined amid a weak commodity price backdrop for energy related companies. We maintain a position, as we believe the company’s low-cost acreage allows it to translate the healthy price environment into earnings and cash flow that is being used to reduce financial leverage, which can accrue additional value to equity shareholders in periods to come.
Recent Portfolio Activity
Buys/Acquisitions
Sells/Liquidations
Amentum Holdings
Diamondback Energy
First Interstate BancSystem
Enviri
Permian Resources
PetIQ
BUYS/ACQUISITIONS
Amentum Holdings (AMTM), a mission critical IT and engineering services company, was spun out of AECOM in 2020 and merged with the military contracting business of current holding, Jacobs Solutions, in September 2024. The portfolio received shares of Amentum Holdings as part of the corporate action.
First Interstate BancSystem (FIBK), a financial holding company, provides community banking solutions to individuals, businesses, and municipalities. The company is selling at attractive valuations as we believe company specific self-help initiatives such as repositioning their balance sheet to take advantage of the Fed’s forward curve are underappreciated by the market and not reflected in the current valuation.
Permian Resources (PR) is a Texas-based oil & gas exploration & production company with a large acreage position and deep inventory of high return potential drilling locations in the core of the Permian Basin. We expect management to continue to execute on its strategy of optimizing returns, diligently allocating capital to new opportunities, and returning excess capital to shareholders.
SELLS/LIQUIDATIONS
Diamondback Energy (FANG), an independent oil and natural gas company, was sold due to its market cap increasing materially above the market cap range of the Russell 2500 Index after its Endeavor Energy Resources acquisition.
Enviri (NVRI), an industrial services provider, was sold due to a change in our thesis arising from the company’s inability to de-lever its balance sheet leading to muted forward growth projections.
PetIQ (PETQ), a manufacturer and distributor of pet health and wellness products, was sold as the stock had appreciated, causing its reward-to-risk profile to compress as it reached our valuation target.
Outlook
We continue to remain optimistic about the long-term potential for the SMID-cap segment of the U.S. market as valuations and potential tailwinds bode well for the asset class. As we look out to the final months of 2024, we are cautiously constructive as encouraging signs of economic stability are balanced by now consensus expectations of a soft landing scenario and risk pricing. While rate-cutting cycles have historically been constructive for smaller companies, there remains a long list of items creating uncertainty that could lead to greater volatility in the final months of the year. This includes but is not limited to, the reignition of inflationary pressures, labor strikes in key industries and ports, geopolitical tensions, U.S. equity index concentration issues, ongoing commercial real estate and regional banking concerns, and the looming presidential election. We are aware that most of these issues are well known, but the timing and magnitude of the impact of any and all of these issues remains unpredictable. Therefore, as we always have, we will continue to avoid the temptation to forecast their outcome in favor of assessing the potential impact from a range of potential outcomes within our company‐specific, bottom-up analysis, and quality focus.
From an asset class perspective, valuations of SMID versus large continue to remain near multi-decade lows, which we believe suggests a more favorable setup for SMID caps relative to large caps in the periods to come (17.7x P/E for the Russell 2500 Index vs. 25.8x P/E for the Russell 1000 Index). Against a backdrop of disinflation, normalized interest rates, and a still growing U.S. economy, it looks to us that the SMID cap’s stretch of underperformance has the potential to end. If the economy continues to stabilize, our view is that valuations are likely to rise for those businesses that have largely sat out the mega-cap performance regime. Lastly, we believe SMID caps remain better positioned to benefit from the reshoring of U.S. manufacturing, a pickup in M&A activity, fiscal policy bills passed in the last few years such as the IRA and Jobs Act, and several infrastructure projects on the horizon.
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.
Disclosures
The opinions expressed herein are those of Aristotle Capital Boston, LLC (Aristotle Boston) and are subject to change without notice.
Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Boston’s Small/Mid Cap Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Aristotle Boston makes in the future will be profitable or equal the performance of the securities discussed herein. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
As of December 31, 2014, there were no non-fee-paying accounts in the Composite.
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs.
These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks.
The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments.
The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass.
Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACB-2410-20
Performance Disclosures
Sources: CAPS Composite Hub, Russell Investments
Composite returns for periods ended September 30, 2024, are preliminary pending final account reconciliation.
*The Aristotle Small/Mid Cap Equity Composite has an inception date of January 1, 2008, at a predecessor firm. During this time, Jack McPherson and Dave Adams had primary responsibility for managing the strategy. Performance starting January 1, 2015, was achieved at Aristotle Boston.
As of December 31, 2014, there were no non-fee-paying accounts in the Composite. Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Please see important disclosures enclosed within this document.
Index Disclosures
The Russell 2500 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2500 Growth® Index measures the performance of the small/mid cap companies located in the United States that also exhibit a growth probability. The Russell 2500 Value® Index measures the performance of the small/mid cap companies located in the United States that also exhibit a value probability. The Russell 1000 Index is a subset of the Russell 3000® Index, representing approximately 90% of the total market capitalization of that index. It includes approximately 1,000 of the largest securities based on a combination of their market capitalization and current index membership. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The volatility (beta) of the composite may be greater or less than the benchmarks. It is not possible to invest directly in these indices.
