Insights

In the following commentary, the Portfolio Managers discuss the return and risk metrics of the Fund compared to its benchmark Index and the overall market, an example of a long and short position, and where they see opportunity ahead.

What is driving the Fund’s year-to-date outperformance over the Russell 1000 Index and peers as of June 30, 2025?

We believe the volatile market environment has been supportive of our investment strategy. In general, quality companies have been rewarded and weaker companies punished when they miss expectations. As a result, the Fund (MFLDX) has outpaced the Russell 1000 Index by 183 basis points and the Morningstar Long-Short Equity category average by 437 basis points over the year-to-date period.

As disciplined investors with a long-term focus, our goal is to provide consistent, outsized returns over time while minimizing risk. On the long side of the portfolio, we seek companies with healthy balance sheets and experienced management teams, and companies where we have a differentiated long-term view. Among several metrics built into our quantitative approach, we emphasize a company’s free cash flow. Our goal is to own quality businesses we believe will compound value over time.

On the short side, it’s the inverse view: We seek companies with deteriorating fundamentals, poor management, or business models we believe are unsustainable. We look for evidence of declining free cash flow, which can indicate deeper problems ahead.

Importantly, risk management is embedded across our investment process as we seek to minimize volatility, particularly in unfavorable markets. We are pleased the Fund had 17% less risk, as measured by standard deviation, over the one-year period compared to its benchmark Index as of June 30, 2025.

Would you provide an example of both a long and short position?

The Fund has shorted Genuine Parts Company (GPC), the parent of NAPA Auto Parts. We see a secular share shift in the auto and industrial parts distribution industry that disadvantages companies that have under-invested, such as GPC. In contrast, larger companies including Applied Industrial Technologies (AIT), which the Fund owns on the long side, has been consistently gaining market share by investing in growth opportunities and focusing on building strong customer relationships. GPC has been losing share to better-managed competitors and has underperformed on a relative basis as a result. This position reflects our approach of investing long in quality businesses while shorting weaker competitors particularly when we believe there is information about the industry that is not fully appreciated.

Would you please provide valuation and growth metrics on the long and short portfolio?

As of the end of the second quarter, the Fund’s long portfolio traded at a lower price-to-earnings multiple while holding a higher quality set of companies compared to the Russell 1000 Index.

Conversely, the return-on-equity for the Fund’s short book was significantly lower than the Russell 1000’s, supporting our shorting of lower-quality companies.

Where do you see opportunity going forward?

We continue to see attractive valuation opportunities in mid-cap companies within the $10-$60 billion market capitalization range. However, it’s important to be selective as not all mid-caps are the same. Approximately 14% of the Russell Midcap Index are unprofitable based on trailing 12-month earnings and there are many in this cohort that have poor capital allocation with weak reinvestment economics to fund growth. As active managers, we seek to identify profitable high-quality businesses with strong fundamentals and sustainable free cash flow.