Insights

In the commentary, the Portfolio Managers discuss the Fund’s current positioning, where they are finding long opportunities, and how the portfolio has embraced a lower-risk approach.

How is the Fund currently positioned as we head into the end of 2024?

Currently, the long portfolio is comprised of 80 mid- and large-cap companies well diversified across every sector; the short portfolio holds 51 stocks. Generally, the Fund’s long positions range between 80% and 100% of net assets while the short positions comprise approximately 20% of net assets. As of September 30, 2024, the net long position was 85%.

Compared to the end of the second quarter, the Fund currently holds more short positions. With the market hitting new highs in the third quarter along with elevated prices in some areas of the market, we felt comfortable increasing the number of short positions in companies that we believe have stock specific shortcomings such as poor management, weak earnings, or high valuations. Typically, the average weight in a short position is 25 or 30 basis points and is equally weighted among the short component of the portfolio.

The Fund’s weighted average market cap is currently slightly lower than the Russell 1000 Index.

With the Fund’s ability to invest in mid- and large-cap companies, where are you finding your long opportunities?

For the long book, we are finding more valuation discrepancies, and therefore more opportunities, in the mid-cap area of the market. In addition, with the Federal Reserve’s planned interest rate cuts, smaller-cap companies should benefit relative to larger companies as rates come down

For the Fund’s long positions, we seek businesses with high levels of free cash flow, a strong competitive position, an improvement potential in utilizing their assets, and experienced, shareholder-friendly management teams.

An example of a recent purchase is Thermo Fisher Scientific, a life sciences tool company that makes and supplies pharmaceutical and biotechnology components needed to make drugs. We believe the company has a strong management team with a solid capital allocation history. Since its products are generally a small portion of manufacturing drug costs, Thermo Fisher has pricing power, yet the stock has been cyclically depressed in the post-COVID era with increasing inventories. Heading into 2025, there should be a reacceleration of the business and above average appreciation potential.

How has the portfolio embraced a lower-risk investment approach?

Our goal is to provide investors with consistent attractive returns over time while minimizing risk. To take advantage of valuation discrepancies in the market, the portfolio tends to have a value tilt. We favor higher-quality companies with ample free cash flow and pricing power that we believe can perform well in different economic environments.

Over the third quarter of 2024, we believe the portfolio has helped minimize downside risk. The annualized standard deviation of the portfolio was 11.63% compared to the Russell 1000 Index, which had a standard deviation of 14.20%. Also, there were 7 days that the Russell 1000 returns fell more than 1%. On 6 of those days, the portfolio outperformed its benchmark by experiencing a lower relative loss for the day. While a quarterly time frame is short, we believe the portfolio will continue to have a compelling risk profile over longer periods going forward.