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Commentary iMGP Global Select Fund First Quarter 2024 Attribution

During the first quarter, the Fund’s 3.07% gain trailed the MSCI World Index return of 8.88% and the Morningstar Global Large-Stock Blend category return of 6.94%. The MSCI ACWI Index, which includes emerging-markets, gained 8.20% in the first 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, 2025. 

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Quarterly Portfolio Commentary from Managers

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

Our largest overweight positions, relative to the MSCI World Value Index, remain the consumer staples, health care, and utilities sectors. In the consumer staples sector, our exposure remains mostly unchanged, but we were able to initiate several new positions in what we view as select leaders like Kenvue, Unilever, and McCormick & Company. Our primary exposure in the sector remains within the household products sub-industry as we are continuing to see input cost inflation-related under-earning across a number of leaders like Henkel AG & Co. and Kimberly-Clark. Our view is that earnings in this sub-industry 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.

Within the health care sector, our largest exposure is within the health care supplies and life sciences tools & services sub-industries. We are seeing several opportunities across the life sciences tools & services sub-industry as we believe a combination of excess capacity being built out combined with a below normal funding environment for biotechnology has created select opportunities across the sub-industry. These include names like Qiagen, Thermo Fisher Scientific, and Illumina. We also added to our position in Henry Shein, leading global distributor of supplies and equipment for the dental market, as the stock underperformed during the quarter making the risk reward more attractive in our view.

Our overweight exposure within the utilities sector continues to be made up of companies in the water utilities industry. We believe these companies are under-earning as the prolonged period of low interest rates over the last decade has resulted in historically low allowed returns on equity and regulatory lag, which has been exacerbated by the recent inflationary environment. We believe these lower returns on equity will reset higher as utility regulators incorporate a more normal cost of capital environment. Our top positions in the industry remain United Utilities Group and Severn Trent.

Polen Capital, Global Larger-Cap Growth and Global SMID-Cap Growth

In many ways, the first quarter marked a continuation of the market dynamics already in place at the end of last year.  Markets staged a strong two-month rally into the end of the year on optimism that the Fed would achieve an elusive soft landing and would taper interest rates in the early part of 2024.  This rally continued unabated into the first quarter, with much of the same high momentum, highly cyclical leadership we saw last year.  Consider some of the top performing sectors: Technology, Financials, Industrials, and Energy.  And even within technology it’s really a story of a smaller subset of semiconductor companies benefitting from the growing frenzy around AI, with NVIDIA being the poster child. 

The latest set of earnings results reinforce the stability and resilience of the businesses we own, which by and large continue to meet—if not exceed—our earnings growth expectations.  Even in some segments (such as IT services and retail) where we have seen economic softening drive near term weakness in fundamentals, we think it’s prudent of management teams to set conservative expectations reflective of an uncertain macro environment with the long term in mind.

While extreme optimism seems to be the dominant feature in parts of the market of late, it has no influence on our long-term approach to investing centered on being long-term owners of some of the highest quality businesses in the world supported by durable competitive advantages, strong balance sheets, and secular growth tailwinds.  In remaining disciplined in our approach, we believe our businesses are as well positioned as any to deliver above-average earnings growth, with below-average risk, in good times and bad. 

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

Markets accelerated over stronger economic data with the S&P 500 returning an infrequent 10%-plus return in the first quarter. The S&P 500 Momentum Factor shined, outperforming the S&P 500 by ~12%, while the Value and Low Volatility Factors lagged by ~2% and ~5%, respectively. The Russell 1000 Value Dynamic (read: cyclicals) outperformed the Russell 1000 Defensive index 10.16% vs. 7.72%. The US and Japanese markets continued their 2023 outperformance in first quarter. 

Given a 21x forward market P/E and imminent rate reductions off the table, investors are betting earnings growth will accelerate from an anemic 0.9% growth rate in 2023. If this does not occur, first quarter cyclical sector return leaders, energy, financials, and materials, up 14.43%, 12.98% and 7.79%, respectively, are the most at risk. Currently, consensus 2024 EPS growth estimates for the sectors are -2.6%, 11.4%, and 1.9%, respectively. Analysts reduced consensus estimates for all three during the quarter.

In addition to optimistic 2024 margins and earnings, valuations remain especially rich in information technology as the sector is now ~30% of the S&P 500 and trades at a 28x P/E, >50% above its 20-year average. The sector grew revenues just 2% in 2023. AI development is not increasing aggregate IT spend in the short term, so actual profitable consumer and corporate adoption would better come sooner than later to justify sector valuations.

Edited Commentary from the Respective Managers on Selected Contributors

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 and sector allocation detracted value during the first quarter. The former was the main detractor. Positions within the technology sector detracted the most from relative gains during the quarter. Stock selection in the health care sector was also a meaningful drag on returns.

SAP (Damon Ficklin and Bryan Power, Polen Capital)

After delivering a strong fourth quarter, SAP’s stock price again rose significantly in 1Q on solid 4Q23 earnings and full year guidance that was revised modestly higher. Importantly, SAP’s transition to the cloud (a core part of our thesis on the business) continues at pace and the company is seeing both robust cloud revenue growth and expanding cloud gross margins. Management is guiding cloud sales growth through 2025 in the mid-20% range, which we view as both reasonable and attractive. We view SAP as one of the more resilient software business models as it is an essential part of their customers’ day-to-day operations and cannot easily be turned off or scaled back. Additionally, we think CEO Christian Klein is honest, competent, and long-term minded— traits we value highly in leadership.

Revolve (Rayna Lesser Hannaway & Team, Polen Capital)

Revolve Group is a next-generation online retailer that has established itself as a leading premium fashion destination for Millennial and Generation Z female customers. Revolve has been a tough one for us over the past couple of years, as it has not been immune to macro pressures as a consumer facing business. During the quarter, however, the stock was up more than 20% on earnings, having delivered better than expected top and bottom-line results despite a challenging backdrop for apparel retailers.  Revolve has made progress on several fronts, including rebalancing inventory, international growth turning back positive, and solid growth in adjacent categories such as beauty and men’s. Encouragingly, they are seeing less discounting as a percentage of overall sales, and gross margins continue to trend up.

Knorr-Bremse (Nuance Investments)

Knorr-Bremse is a global leader in braking systems and other safety critical sub-systems for commercial vehicles and passenger rail vehicles. According to our research, the company’s products have high R&D requirements, need to be certified on multiple global and local safety standards, and must be replaced on specified intervals resulting in a high amount of aftermarket sales. We believe that the company is underearning its normal return on capital for two transitory reasons. First, passenger rail traffic declined as a result of COVID-19 and was below normal levels in some geographies, which has extended service intervals of trains (impacting aftermarket sales) and caused orders to get pushed out for new equipment. We continue to believe rail remains a core mode of passenger transport in many countries around the world and has taken share from other modes over time due to its energy efficiency and environmental advantages. Secondly, Knorr-Bremse was facing cost inflation on key purchased goods including steel and electronic components and because they often deliver their equipment as part of large multi-year rail projects it takes time for their pricing actions to be realized resulting in temporarily lower margins. In our opinion, this underearning caused the company to post earnings per share (EPS) of approximately $0.83 in 2022. Our internal estimates had normal EPS closer to $1.10, creating what we believed is an attractive risk reward relative to other opportunities. As earnings have moved closer to our view of normal, the stock has outperformed over the last quarter, we have reduced our position, but we still believe the company offers an attractive risk reward compared to other opportunities we are finding. 

Edited Commentary from the Respective Managers on Selected Detractors

Paycom Software (Rayna Lesser Hannaway & Team, Polen Capital)

Shift, a Japanese technology company that specializes in software testing, pulled back after a strong fourth quarter. The company saw quarterly revenue growth slow in the first quarter and margins compressed over the period due to a supply/demand gap resulting from lost opportunities on upstream projects. The outsourced software testing market is vast and an estimated 98% of the workload is handled in-house today, even though companies like Shift can deliver this service materially cheaper and more efficiently. In our view, the company has a strong track record of hiring, training, and retaining talented engineers and we expect the company to continue to deliver strong organic revenue growth for the foreseeable future.

Adobe (Damon Ficklin and Bryan Power, Polen Capital)

Adobe, the leader in cloud-based creative digital media, had been among the strongest performing holdings over the past year. After some initial misgivings in the early part of 2023 around generative AI’s impact, the market quickly embraced Adobe as an AI beneficiary following the roll out of its Firefly product, sending the stock up 84% from mid-May through the end of January. Following its latest earnings release, the stock sold off on slightly weaker than expected 2Q24 guidance and some renewed skepticism around effectively monetizing AI within its creative suite. From our perspective, the recent share price moves are more reflective of changes in near-term expectations and sentiment than any fundamental change in Adobe’s business. While we acknowledge that AI developments, like OpenAI’s new text-to-video creation tool called Sora, might be seen as an emerging competitive threat, we believe that Adobe is well positioned to leverage new AI capabilities to its advantage as well and we remain confident in the company’s position.

HealthCare Reality Trust (Nuance Investments)

HealthCare Realty Trust is the leading medical office building REIT within the Health Care REIT sub-industry with 40 million square feet of buildings. Medical office REITs own medical office buildings, primarily on hospital systems’ campuses, that house all the medical specialty practices that service the hospital system. As the largest medical office REIT in the nation, HealthCare Reality has relationships with leading hospital systems in the majority of large metro areas and is oftentimes the preferred developer for these hospital systems if they want to expand their real estate footprint. The company is currently under-earning its long-term potential due to lower-than normal occupancy levels of around 87.5%, in our opinion. HealthCare Reality’s leasing progress has been slower than expected, which has caused the stock to underperform the market so far this year. At recent prices, we believe the company looked under-valued based on our internal estimates of fair value and still believe they can reach our estimate of normalized earnings and cash flow during the next 12 to 24 month period. While we still believe the stock offers an attractive risk reward, we have reduced our position as we have seen other opportunities that our team believes are more attractive from a risk reward basis.

iMGP Global Select Equity Fund Region and Sector Allocations as of March 31, 2024

By Sector
Consumer Discretionary8.2%
Information Technology16.7%
Communication Services6.2%
Health Care & Pharmaceuticals22.5%
Consumer Staples9.5%
Real Estate2.4%
By Region
North America 68.1%
Asia ex-Japan 2.6%
Latin America0.0%
Australia/New Zealand0.0%
Middle East0.0%
Other Countries0.0%
* Cash is excluded from calculation.
By Market Cap
Small Cap14.5%
Mid Cap32.7%
Large Cap52.9%
By Region
US Equities63.9%
Developed International Equities33.5%
Emerging Market Equities2.6%

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