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Commentary iMGP Global Select Fund Second Quarter 2023 Attribution

During the second quarter, the iMGP Global Select Fund’s (the “Fund”) 4.54% return trailed the MSCI World Index return of 6.83% and the Morningstar Global Large-Stock Blend category, which gained 4.83%. The MSCI ACWI Index, which includes emerging-markets, gained 6.18% in the second quarter.

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit  The advisor has agreed to waive fees and limit the expenses of the fund through at least April 30, 2024. 

Quarterly Portfolio Commentary from Managers

Scott Moore and Chad Baumler, Nuance Investments, Global Mid-Cap Value

In our opinion, the opportunity set remains narrow as we enter the third quarter of 2023. We continue to find pockets of opportunity within select parts of the economy, which is reflected in our portfolio exposure. Our largest overweight remains the consumer staples sector where we are continuing to see input cost inflation-related underearning in a number of leaders across the household & personal products industry group. Henkel AG & Co, Kimberly-Clark, and Beiersdorf AG continue to make up a meaningful part of our exposure within the sector. Our view is that earnings in this industry group have been negatively impacted by rising raw material costs. We believe these costs can ultimately be mostly offset by price increases, which generally lag the raw material price increases.

While we lowered our position in the health care sector, we remain overweight to the sector, primarily in the health care equipment & supplies industry as we continue to own names like Smith & Nephew, Medtronic Plc, and Dentsply Sirona, Inc. We believe these companies are manufacturing critical, advanced medical products and display the traits we look for in competitively advantaged businesses. They sell into end markets that have been severely disrupted for more than two years as patient visits and procedures of all kinds have run well below normal due to the impacts of COVID-19, including high cancellation rates, procedure delays, and insufficient care provider staffing to meet demand. We believe the magnitude and duration of this disruption has created a large backlog of procedures that will need to be made up over the next one to two years. More recently, we believe raw material availability and input cost inflation in items including resins and metals have also squeezed margins at these companies. Offsetting price actions can take one to two years to implement in this industry, which is prolonging the period of under-earning, in our opinion. Nevertheless, this remains a high conviction, underearning group of excellent businesses, in our view.

Our slight overweight in the utilities sector is made up of exposure to the water utilities industry as we believe these companies are underearning. Our holdings within the industry include names like United Utilities Group PLC and Severn Trent Plc. The prolonged period of historically low interest rates over the last decade has resulted in low allowed returns on equity, which we believe can reset higher as utility regulators incorporate a more normal cost of capital environment.

Damon Ficklin and Jeff Mueller, Polen Capital, Global Larger-Cap Growth

Markets continued to demonstrate strength in the second quarter and are up robustly year to date. The environment remains dynamic, but we’d highlight three factors that we think have supported markets: a pause in rate hikes, an anticipated recession that has not materialized, and the hype around artificial intelligence (AI).

During the quarter, we added a new position in Workday, quickly building it up to a full-sized position, and we added a small new position in Globant.  We trimmed our holdings in Microsoft and Autodesk to help fund these additions.

We are still mindful that rising rates could lead to slower economic growth or even a recession, but also remain confident that our portfolio is well positioned to deliver strong earnings per share growth this year and beyond.  

Rob Forker, Polen Capital, Global SMID-Cap Growth

On the back of a volatile first quarter, volatility dampened in the second. While plenty of uncertainty remains, particularly surrounding economic growth, the trajectory of interest rates, and the subsequent impact on financial markets, global equity markets continued their positive trajectory.

Equity markets were relatively flat through the first half of the quarter, ahead of earnings season. Volatility continued to drop through May, despite impending U.S. debt ceiling negotiations, with fears of a government impasse leading to a potential default on outstanding U.S. Treasuries. Meanwhile, enthusiasm surrounding the explosion in generative AI boosted returns for businesses with exposure to this sector either through hardware or software, giving a boost to growth equities. Lower quality cyclical sectors finished the quarter strongly.

We initiated four new positions and sold out of two holdings, largely due to changes in our risk/reward projections.

We continue to stay focused on the long-term value propositions, competitive advantages, ongoing initiatives, growth opportunities, and potential earnings power of our Portfolio companies. As a reminder, our investment time horizon is five years. This allows us to think and act like owners. We continue to take advantage of unique opportunities in the market, and as we have said in prior commentary, our pipeline of new potential investments remains attractive.

Brian Krawez and Gabe Houston, Scharf Investments, Global Larger-Cap Value

During the second quarter, equity market investors crowded into risky growth, mega cap IT, especially semiconductors, to shrug off rising interest rates, still deteriorating leading economic indicators, an earnings recession, persistent elevated core inflation and the first money supply contraction in seven decades.

The price-to-earnings (P/E) spread between the market-cap and equal-weighted S&P 500 indexes, is now 4x (20x vs. 16x), its highest since the tech bubble in early 2000. The Russell 1000 Growth index has returned 29.0% vs. 5.1% for the Russell 1000 Value year-to-date. The forward P/E spread between the Russell 1000 Growth and Value indexes is now 12.5x turns (27.0x vs. 14.5x, respectively) vs. its long-term average of 6.7x turns (20.8x vs. 14.1x, respectively). Meanwhile, the P/E spread between the S&P 500 and the MSCI ACWI ex-U.S. is currently 6.2x turns, also roughly twice its 20-year average.

It is worth remembering the Fund’s overall positioning is driven by the managers’ stock picking. As a result, stock selection is always the main driver behind the Fund’s absolute and relative performance. Attribution analysis over a given time period may however show other factors also explain relative performance.

Stock selection detracted during the second quarter. Sector allocation did not have a meaningful impact on returns. Positions within the information technology sector detracted the most from relative gains during the quarter. The Fund’s relative return has been hurt by its underweight to the U.S. mega-cap growth stocks that have driven indexes higher so far this year.

Dechra Pharmaceuticals (Rob Forker, Polen Captial)

Animal Health Care business, Dechra Pharmaceuticals, was the strongest performing name over the quarter as it was announced that the company would be taken private by Private Equity group EQT, at an approximately 45% premium to the pre-announcement share price. While it is clearly a good short-term result for shareholders, we think it reflects the attractive unrealized value in the share price and were happy long-term owners before the news.

Smith & Nephew PLC (Nuance Investments)

Smith & Nephew is a leading manufacturer of advanced medical devices. The company holds leading market-share positions in sports medicine, advanced wound care, knee replacement, hip replacement, and trauma devices. We view these as advantaged product categories, with high barriers to entry and a customer base that values quality and innovation, and we believe Smith & Nephew is well positioned to maintain or gain market share across most of these categories. Our research indicates that procedure volumes in these categories have been below normal since the onset of the pandemic, and we believe a large backlog of deferred care has built as a result. Although this dynamic has been a headwind for revenue and earnings for the last three years, we believe it should represent a tailwind for demand in 2023 and beyond as procedures continue to normalize and the backlog is methodically worked down.

Over the last year, the company has also dealt with higher input costs in the form of resins, metals, freight, and semiconductors. Our research suggests that Smith & Nephew is likely to get improved pricing over a period of several years to help offset those higher costs. More recently, we believe input costs and availability have also begun to improve, which should aid margin normalization, in our opinion.  The company is expected to earn around $1.65 per share in 2023 per Wall Street consensus earnings estimates, well below our estimate of normalized mid-cycle earnings power. We also like that Smith & Nephew has a rational and stable balance sheet over time. We believe that should procedure volumes return to normal levels, input costs improve, or the company begin to pass through higher pricing, earnings will progress towards our view of normal.

Smith & Nephew PLC (Scharf Investments)

We believe Smith & Nephew, a leading manufacturer of advanced medical devices, represents a high-quality international value stock that exhibits defensive profits in a slowing economy. Unlike its U.S. peers, the company has a lower valuation. The company’s price-earnings ratio of 18.8x is meaningfully lower than Stryker’s 29.3x.

For many U.S. companies, the pandemic accelerated demand—resulting in high margins, earnings, and valuation multiples. This was not the case for Smith & Nephew—with many elective medical procedures postponed. The demand destruction and deferment of orthopedic surgeries during the pandemic resulted in low margins, earnings, and valuation multiple. We expect post-pandemic profits to recover, mitigating a cyclical earnings slowdown. Smith & Nephew estimated earnings per share growth stands at 14% for 2023.

Adobe (Damon Ficklin and Jeff Mueller, Polen Capital)

While Adobe’s growth has moderated from high teens to low teens during the past couple of years, Adobe continues to deliver solid growth, and management raised its full-year guidance during the most recent quarter. The company also introduced some AI product enhancements, which seem to have helped shift the narrative from “AI is going to be bad for Adobe” to “AI is going to be good.” Finally, the company continues to work towards the Figma acquisition. It’s still uncertain whether antitrust regulators will allow this acquisition to close. That said, the stock seems to have been recovering from the initial reaction that the pricey acquisition indicated something more troubling about Adobe’s growth and competitive position. Solid ongoing fundaments have helped dispel that notion. We think it would be a big positive if the acquisition closes, but we remain confident in Adobe’s business even if it doesn’t. In short, Adobe’s shares have successfully climbed back up the wall of worry this year.

Keywords Studios (Rob Forker, Polen Captial)

Keyword Studios, an outsourced video game production services company, has seen significant selling pressure due to concerns that AI could disrupt their business model. Many of the outsourced services it offers, such as language translation and video game artwork, could perceivably be done in-house using generative AI. Management have addressed these concerns, and while there is still some uncertainty, they are embracing AI and believe it could become more of an opportunity than a threat. Ultimately, while there are still some unknowns, we have conviction in the management team and risk is skewed to the upside given the large correction in the share price.

MillerKnoll (Scharf Investments)

We believe MillerKnoll’s position as the premium high-quality leader in a fragmented market will allow it to gain share over time. Furthermore, the office furniture market is insulated from technological obsolescence and, despite work from home trends, should continue to grow.  In fact, the company believes that a need for a reimagined work environment combined with increased demand for quality home office furniture could expand the market (as opposed to fears that work from home will lead to a contracting market) over the long-term.

In addition, post the merger with Knoll, MillerKnoll is now the largest office furnishing company worldwide with what we believe to be strong brand recognition and an established global distribution network. We believe the acquisition of Knoll will help the company fill out product and geography gaps in its portfolio, increasing scale and increase additional wallet share with existing customers. We expect MillerKnoll to realize $140M in cost synergies by 2025.

High-level, what’s incremental from the recent call is improvement in order trends indicating a bottoming in 1Q24 (the current quarter) vs. our expectation for an elongated bottom throughout 2024.

Altus Group (Rob Forker, Polen Captial)

Altus Group, a real estate software and intelligence company, was also weak after lowering expectations for the year, with margins expected to be impacted by new investments. Despite growing revenues 14% year-over-year, and margins expanding over the quarter, future expectations have been dampened by uncertainty in corporate real estate which has negatively impacted customer decision making. We still have conviction in the name and think the company’s relatively new CEO has delivered and taken great assets with dominant share and built off that strength.

iMGP Equity Fund Region and Sector Allocations as of June 30, 2023

By SectorFund
Consumer Discretionary9.0%
Information Technology18.8%
Communication Services9.4%
Health Care & Pharmaceuticals23.1%
Consumer Staples7.7%
Real Estate2.0%
By RegionFund
North America 61.7%
Asia ex-Japan 5.0%
Latin America0.0%
Australia/New Zealand0.0%
Middle East0.0%
Other Countries0.0%
* Cash is excluded from calculation.
Summary Statistics
Market Cap Median (bn)$31.07
Weighted Average Market Cap$210.24
# of Holdings83
By Market Cap
Small Cap11.5%
Mid Cap37.0%
Large Cap51.5%
By Region
US Equities57.7%
Developed International Equities39.6%
Emerging Market Equities2.7%

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