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Commentary iMGP Global Select Fund Fourth Quarter 2023 Attribution

During the fourth quarter, the fund’s 11.03% gain narrowly trailed the MSCI World Index return of 11.42%, but outpaced the Morningstar Global Large-Stock Blend category return of 10.54. The MSCI ACWI Index, which includes emerging-markets, gained 11.03% in the fourth 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

The largest change to the portfolio during the quarter was within the health care sector. While we are still overweight the sector, we lowered our exposure and reallocated our positioning within the sector. Within the sector, we have reduced our overweight position within the health care equipment sub-industry due to competitive uncertainty, and we exited names like Smith & Nephew and Medtronic. We added to our positions in the life sciences tools and services sub-industry, where we believe there is more competitive certainty. We see broad underearning based on a combination of excess capacity being built out combined with a below normal funding environment for biotechnology customers, in our opinion. These included names like Qiagen, Waters Corporation, and Illumina.

In the consumer staples sector, our exposure remains mostly unchanged, and we remain overweight relative to the index. We are continuing to see input cost inflation-related underearning in a number of leaders across the household products sub-industry. 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. We are also finding what we believe to be select opportunities within the packaged foods and meats, as well as the distillers and vintners sub-industry. Lastly, we initiated a position within the consumer staples merchandise retail sub-industry and added Target Corporation to the portfolio.

We added to our positioning within the utilities sector and remain overweight relative to the index. Our overweight exposure 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.

Damon Ficklin and Bryan Power, Polen Capital, Global Larger-Cap Growth

As we enter 2024, market sentiment has markedly improved, with consensus now expecting a soft landing and stabilization of the interest rate environment. Only a few months ago, consensus expectations called for rates to remain “higher for longer” and expectations for imminent recession were not uncommon. Regardless of the near-term direction of the global economy, our Portfolio companies are performing well, and we expect them to continue to perform well through the cycle. We believe the Portfolio’s valuation is currently fair for what we consider to be a collection of some world class companies. We believe these companies are well-positioned to deliver mid-teens underlying earnings per share growth, in the aggregate, for many years.

Rayna Lesser Hannaway & Team, Polen Capital, Global SMID-Cap Growth

Equity markets were boosted by optimism that cooling inflation would remove the prospect of further interest rate increases into the new year. We continue to stay focused on the long-term value propositions, competitive advantages, ongoing initiatives, growth opportunities, and potential earnings power of our iMGP Global Select (“Portfolio”) companies. While the market remains dynamic, we are confident that the portfolio is well positioned to continue to deliver robust EPS growth into 2024 and beyond.

During the quarter, we restructured the Polen Global SMID Company Growth Strategy, departing from a sole portfolio manager approach, to one that will be managed by a team of portfolio managers, capitalizing on Polen’s expanded global footprint, and complemented by the firm’s enhanced portfolio construction expertise. We believe the new structure allows us to cover this large and complex universe more efficiently and with greater depth. This restructuring has led to some portfolio changes, which will continue into the new year.

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

The Magnificent 7 tech-related growth stocks roared in 2023, delivering a median return of 81% and accounting for the majority of index returns. The P/E spread between growth and value stocks returned to historical highs after the Russell 1000 Growth index returned 42.68% vs. 11.46% for Russell 1000 Value index.

In December, it was the revenge of the average stock, the “The Boring 493”. The S&P 500 Equal Weight index outperformed the median Magnificent 7 stock, 6.86% vs. 4.00%, delivering more than half of its 13.46% calendar return in a single month.

Investors are likely too bullish about near-term earnings given slowing global ISM figures, near term guidance and lowered EPS estimates and all-time high 2024 margin assumptions vs. continued wage pressures, geo-political risk and demographics and recent evidence of consumer demand elasticity. Meanwhile, valuations remain especially rich in Information Technology as the sector now represents nearly 30% of the S&P 500 and trades at a 24x P/E, 33% above its 20-year average.

P/E dispersion, on par with levels last seen during the 2000 tech bubble, presents a compelling investment opportunity for value stocks. Meanwhile, quality value (low EPS volatility) should mitigate the risk of traditional value stocks’ (e.g. energy, financials, materials) high operating leverage in a slowing global economy.

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 fourth quarter. Positions within the health care sector detracted the most from relative gains during the quarter. No exposure to the best performing sector in the quarter (energy) hurt from a sector allocation standpoint.

Five Below (Rayna Lesser Hannaway & Team, Polen Capital)

Discount retailer Five Below recovered from third quarter weakness after it reported a better than expected fourth quarter. The company reported 14% year-on-year revenue growth and raised its full-year earnings and revenue guidance. As had been previously communicated by the company, profits have declined amid higher expenses, but the discount retailer continues to outperform its peers and is well positioned to capitalize on the holiday season and deliver on their goals for the year. Amidst a challenging macro backdrop, the company has executed well and benefits from consumers looking to stretch their dollar further. Looking ahead, we believe the company can compound its value at a high-teens rate over the next five years, driven by a combination of mid-teens new store expansion, mid- to low-single digit comparable store growth, and modest margin expansion.

Assa Abloy (Scharf Investments)

Assa Abloy is the market leader within its primary markets with industry revenue growth supported by secular growth drivers including increased need for security, sustainability, and growing automation in both home (smart home) and office/industrial markets. Trends like connectivity, Internet of Things (IoT), Touchless, Biometrics & Mobile all support the company’s product and service offering.

The company supplements its organic growth with a bolt-on M&A strategy, generally adding 2-4 points of growth. Acquisitions are a tool that allows the company to enter new markets that would otherwise be too complex due to local regulations as well as take advantage of new technologies through acquisition. Acquisitions opportunities are often associated with a family business going through a generational change and therefore don’t typically end up being price wars. We believe that a long runway still remains for acquisition targets. Historically, Assa Abloy has successfully executed on M&A with a consolidated company ROIC of 11% 2013 through 2022, and 12% 2017 to 2022 (including goodwill, per Morgan Stanley).

Assa Abloy has had above sector average top-line and margin resilience during periods of economic recession thanks to diversified geographic exposure, larger small-ticket items business relative to broader industrials, and two-thirds of sales from after-market sales. This is evidenced by prior downside capture of 91%.

Henkel AG & Co. (Nuance Investments)

Henkel is a leading global producer of adhesives for a variety of applications, and a producer of household products, including the Persil®, All® and Snuggle® brands. The company holds a number one or number two market share position in most of its product categories and has exhibited stable to gaining market share over time. Additionally, Henkel’s balance sheet has only modest amounts of financial leverage and has an ‘A’ S&P Credit Rating.

We believe Henkel is currently underearning its long-term potential as raw material inflation from key inputs such as resins and other petrochemicals has taken margin levels and earnings below their history and what we would consider normal. These falling earnings have caused the stock price to trend down as well, and according to our internal research, the stock is trading at around 11x our estimate of normalized earnings. Additionally, we have been studying a sum of the parts framework for the company for quite some time and believe that at the current stock price, we are paying around 7x our estimate of normalized earnings for Henkel’s consumer products business, which is at a discount when compared to global peers. We believe Henkel’s market share position, inexpensive valuation, and solid balance sheet create a situation that could position us for a win with this stock in multiple ways over time.

Workday (Damon Ficklin and Bryan Power, Polen Capital)

Workday’s stock price was weak coming into the quarter. At the company’s investor day in late September, management provided medium-term annual revenue guidance of 17-19%. Many investors were likely expecting annual revenue guidance of 20%+, so the 17-19% guidance may have been viewed as a tad disappointing. Following the investor day, Workday’s stock price rose significantly during the fourth quarter, buoyed by the company’s fiscal Q3 2024 earnings report, which was better than anticipated and included management raising revenue guidance for their fiscal 2024. We view the long-term guidance provided at the investor day as likely to be conservative, with ample room for Workday to continue taking share in the $100bn+ global HCM (human capital management) market. We remain confident in Workday’s ability to generate 20%+ annualized earnings growth over the next three to five years.

Edited Commentary from the Respective Managers on Selected Detractors

Oracle (Scharf Investments)

Oracle’s stock sold off after the November-ending quarter offered lesser cloud growth than consensus had expected. Despite this, the thesis remains intact. Oracle has a large, sticky, and recurring legacy business with roughly 7,500 legacy ERP customers—of which only about 1,000 have made the transition to cloud. This presents a significant growth runway over the medium- to long-term. In addition, Oracle has historically maintained very high client retention rates of +98% driven by high customer switching costs from deep levels of integration and customization within client IT environments.

Management estimates a 3x-plus sales lift in cloud compared to on-premise as a result of bundling hardware, software, and labor costs offerings into a single subscription. In a legacy, on-premise environment, these functions would generally be divided among different companies, e.g., hardware from IBM, software from Oracle, and labor from Accenture. Oracle believes their cloud ERP business can grow +30% annually to ~$20 billion in revenue in the next five years. At their recent Investor Day, management disclosed they are currently seeing a 3-4x subscription-to-support revenue uplift in applications and 4-5x uplift in infrastructure.

The sustained cloud transition momentum is driving accelerating revenue and expanding margins for durable, double-digit EPS growth over the market cycle. As a result, Oracle should experience a positive re-rating. Using consensus pro-forma EPS, the stock looks relatively cheaper than many cloud plays.

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

Paycom Software sold off at the end of October as the market reacted negatively to the short-term negative impact on margins from continued investments in its platform and its “BETI” product. BETI is Paycom’s self-service software that allows employees to input their own payroll data. The company has demonstrated that the use of BETI can significantly improve return on investment and has made its adoption a priority for its salesforce. While there is no immediate revenue uptick from BETI adoption, the long-term view is that it improves the return on investment of Paycom’s offering and increases client retention.

We maintain that Paycom is a high quality, high-growth leader in human capital management and payroll software and should continue to take market share from long-standing incumbents. While we are still assessing the BETI adoption in more detail, as long-term investors we can look through the short-term noise and assess the opportunity over our multi-year investment horizon.

Aon (Damon Ficklin and Bryan Power, Polen Capital)

Aon’sstock price underperformed this past quarter following the announcement of the company’s acquisition of NFP, a middle market insurance broker, for $13 billion. Though the deal complements Aon’s current business, it is expected to be dilutive to earnings in the near term, prompting a sell-off in the shares. We will continue to assess the merits of the NFP transaction, but it does not currently change our long-term view of Aon, which we view as a steady, durable, low-teens earnings compounder.

iMGP Global Select Equity Fund Region and Sector Allocations as of December 31, 2023

By Sector
Consumer Discretionary8.4%
Information Technology15.9%
Communication Services5.5%
Health Care & Pharmaceuticals22.2%
Consumer Staples8.1%
Real Estate2.1%
By Region
North America 67.4%
Asia ex-Japan 2.5%
Latin America0.0%
Australia/New Zealand0.0%
Middle East0.0%
Other Countries0.0%
* Cash is excluded from calculation.
By Market Cap
Small Cap10.2%
Mid Cap36.8%
Large Cap53.0%
By Region
US Equities59.9%
Developed International Equities37.6%
Emerging Market Equities2.5%

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