Insights

Portfolio Managers Quoc Tran and Michael Im, CFA discuss the macro environment, the Fund’s ESG process, how much of the portfolio could benefit from artificial intelligence (AI), and the growth metrics compared to the overall market.

What are your thoughts on the Fed’s recent actions and the economy in the face of higher rates?  

The Federal Reserve’s rapid interest rate tightening to combat inflation was likely the largest factor impacting the market’s return over the past year. Now, after 11 rate hikes in 16 months as of July 2023, we believe the Fed is close to finishing its rate tightening cycle. This pause may bode well for investors: Historically, when the Fed stopped raising rates, the market’s subsequent one-year returns were strong. In most instances, the S&P 500 Index advanced 10% to 30% over the next 12 months.

As it pertains to the U.S. economy, the consumer has proven to be more resilient than many expected a year ago. Inflation has continued to decline. In summer 2022, the Consumer Price Index peaked at over 9% and since then, the rate has been more than cut in half. In addition, M2, a measure of the change in money supply and a leading indicator for inflation, peaked in February 2021 and has declined meaningfully. 

Going forward, we anticipate that fundamental factors including revenue and earnings growth will return to being the main drivers of stock prices.

With an ESG analysis as part of your investment process, how does this filter narrow your universe?

Applying an ESG filter does not necessarily reduce our investment universe. In fact, over the last couple of years, we have noticed more public U.S. companies have been implementing ESG policies and making management decisions to improve their scores. Therefore, our ESG filters and analysis help sharpen our focus on finding companies that fit our risk management and secular growth criteria.

We believe this process leads us to uncover uncommon ESG companies. For example, one long-term holding that fits our growth and ESG criteria is Ball Corp., a leading manufacturer of aluminum cans. While on the surface, it may not sound like an ESG company because of the mining and manufacturing process. However, aluminum cans have two environmental and economic advantages: They are 100% recyclable unlike other containers. In addition, each year aluminum cans have been increasing their market share as compared to water bottles and single-use containers. 

Would you please discuss the effect artificial intelligence (AI) technology may have on the portfolio? 

AI, specifically in generative AI and the predictive capabilities of large language models, has generated significant interest in 2023. Adoption has been rapid. While Netflix took three years to reach 1 million subscribers, ChatGPT reached 1 million subscribers in only five days.

Although it is too early to understand the implications of using large language models or generative AI, we have several positions in our portfolios that have the potential to benefit from this exciting trend, including the following:

• Microsoft, Alphabet, and Amazon, which offer enterprise scale processing power.
• Palo Alto Networks should benefit from increased demand for its solutions, which already apply AI for cyber security orchestration and management.
• Entegris should benefit from increases in semiconductor manufacturing, especially in the most advanced semiconductor chips. In these leading-edge nodes, higher content per wafer and more manufacturing steps means greater need for Entegris’ purity and filtration solutions.

In all, we believe over 25% of our portfolio could see increased demand from AI. An even greater percentage of the portfolio can harness the power of generative AI to improve their products, reduce costs, and enter new markets.

How do the Fund’s growth metrics compare to the overall market?

We are finding many high-quality companies trading at reasonable valuations but anticipated to grow faster than the overall market. As of June 30, 2023, the Fund’s holdings, on average, are expected to grow their earnings nearly 40% while the market’s earnings are projected to decline slightly. In 2024, the portfolios are expected to grow their earnings over twice as fast as the overall market.