Insights

In the commentary, the Portfolio Managers discuss the Fund’s current positioning, the attractiveness of mid-cap companies, and how the new presidential administration’s policies could impact certain industries.

Following the 2023-2024 performance dominance of the “Magnificent Seven,” how is the Fund positioned?

Over the past two years, the “Magnificent Seven” companies—Apple, Amazon, Alphabet (Google), Meta, Microsoft, NVIDIA, and Tesla—have provided a bulk of the entire return of the S&P 500 Index. In addition, broad equity market performance became more narrowly driven as we ended 2024. Anecdotally, from election day in November to the end of 2024, Tesla stock price increased approximately 50% driven by investor optimism.

This trend will not persist indefinitely, and often, reversals happen quickly. Therefore, we are seeking a more conservative stance in the event of increased volatility. Current portfolio positioning includes the following:

• For the long book, we have decreased the Fund’s exposure of the “Magnificent Seven” stocks. We are also finding more compelling opportunities in mid-cap companies.
• For the short portfolio, we have incrementally increased the Fund’s short positions over the past quarter. The weighting of our short positions as of the end of 2024 was 13%, a slight 1% increase than the summer of 2024. This weighting is at the mid-range level, as short positions generally fluctuate between 10% and 30% of net assets.

What do you find attractive about mid-cap companies?

Compared to larger peers, mid-cap companies generally appear inexpensively priced. Along with the recent outperformance of large-caps, many mid-caps tend to be overlooked due to less Wall Street research coverage. Mid-sized businesses generally have less complex balance sheets than large-caps. With some of the policies and tariff changes that may occur under a new presidential administration, mid-cap companies tend to be more domestically focused. Lastly, mid-caps have historically offered an attractive risk/return profile.

With respect to the Fund’s portfolio, we are making gradual shifts, as appropriate, in the portfolio from large-caps to select mid-cap companies.

How could the new presidential administration affect stocks going forward?

Notably, we believe the potential deregulation and reduction in corporate taxes have already been priced into the market following the election. The new adminstration appears to be focused on gaining efficiencies throughout the government, and any shift from government spending to the private sector could be positive for many public companies.

Conversely, some companies with a large percentage of government revenues in their business lines could be hurt. Due to the headline noise, we largely exited companies that are government service providers.

With respect to Trump’s proposed tariff plan, companies in the Industrial and Materials sector could see an initial spike in orders before the tariffs go into effect, with a decline thereafter. As a result, we are looking for indicators on how businesses and consumers could be affected.

Fewer regulations should help mid-cap companies by providing a better merger and acquisition (M&A) environment. In a slowing economic environment, large-cap companies often look for new areas of growth and M&A provides a potential solution. Historically, the companies we seek—well-run businesses with strong balance sheets and solid free cash flow management—tend to be acquisition targets as these features are attractive to strategic buyers.

Would you discuss a newer long position or two in the Fund?

Given potential deregulation and loosening regulatory requirements, we believe select regional banks present a compelling opportunity. In the fourth quarter, we added M&T Bank Corp. and East West Bancorp to the long portfolio. We believe these two banks have high-quality management teams, proven profitability, established operating structures, solid efficiency ratios, and a diversified loan portfolio. Both firms traded at an attractive approximate 20% valuation to their historical tangible book values as of the end of 2024.

With M&T, we believe investors are overlooking the value of its higher-margin, growing trust and wealth management business. As it relates to East West, the bank is focused on the Asian American demographic in the coastal areas of the U.S. This consumer segment has upward mobility, providing a potential tailwind to the business