Q1 2026 Fund Commentary

Commentary and opinions are provided by Aristotle Capital Management.

Market commentary

U.S. equity markets declined during the first quarter of 2026, with value stocks outperforming growth stocks by a wide margin. Four of eleven sectors finished the quarter in negative territory, with financials, consumer discretionary and communication services among the weakest performers. Energy, materials and real estate were the strongest-performing sectors. Economic growth slowed during the quarter, while inflation remained above the 2% target. The U.S. Federal Reserve Board maintained interest rates at current levels throughout the quarter.

Geopolitical tensions escalated in late February when conflict broke out in the Middle East, disrupting energy supply through the Strait of Hormuz and pushing oil prices sharply higher. Corporate earnings remained broadly resilient, marking the fifth consecutive quarter of double-digit earnings growth. Software stocks came under particular pressure as investors reassessed competitive dynamics related to artificial intelligence (AI).

Performance

An overweight allocation to the materials sector, an underweight allocation to the information technology sector and selection within the communication services sector contributed to performance during the quarter.

TotalEnergies SE contributed to performance because of the rise in oil prices driven by the Middle East conflict. The sub-advisor notes that the company's upstream production continues to grow, its LNG operations in Angola are ramping and its renewables joint venture with Masdar and solar power purchase agreement with Google demonstrate disciplined capital allocation across the energy transition.

Selection within the information technology and consumer staples sectors and an overweight allocation to the financials sector detracted from performance during the quarter.

Microsoft Corp. detracted from performance because of the broad software sell-off and concerns that AI could disrupt existing software business models. The sub-advisor believes these concerns may be overstated, noting that Azure cloud revenue grew 39%, Microsoft 365 Copilot adoption remained strong and the company continues to generate robust free cash flow.

Portfolio activity

The sub-advisor added Chevron Corp. because of the company's integrated energy operations, Permian Basin assets, Guyana/Hess acquisition and disciplined capital allocation. The sub-advisor also added McCormick & Company Inc. because the global spices and seasonings leader may benefit from Flavor Solutions margin expansion, growth in its heat portfolio, consolidation of McCormick de Mexico and the announced Unilever Foods acquisition. Motorola Solutions Inc. was added because of the company's mission-critical communications platform, land mobile radio networks, video security offerings and strong government customer base.

The sub-advisor sold Constellation Brands Inc. and Coterra Energy Inc. during the quarter. The sub-advisor also reduced Atmos Energy Corp. and Parker Hannifin Corp.

Outlook

The sub-advisor continues to focus on long-term business fundamentals and disciplined value investing. In the sub-advisor's view, recent drawdowns in software, housing and alternative asset management names have created attractive entry points for patient, long-term investors. The sub-advisor believes the Fund's portfolio of high-quality businesses purchased at reasonable valuations may provide resilience across a range of market environments. The sub-advisor remains focused on finding companies with strong competitive advantages, durable earnings power and responsible capital allocation, and believes this approach may reward patient investors over full market cycles.