Portfolio Positioning and Activity

Global equity markets experienced an acute, near-indiscriminate selloff during the quarter as investors began to price in the possibility of a recession and concerns that central banks would not be able to create a "soft landing" in their efforts to tame inflation. As always, we remain focused on maintaining a broadly balanced portfolio with sector exposures that are relatively neutral to our core benchmark. We are cognizant of building the portfolio for tomorrow, rather than owning what has worked in the recent past. Despite the challenges of 2022, we have high conviction in our current positions with a strong enduring bias toward companies in highly attractive industries where dynamics such as low penetration and long runways will lead to high and sustained levels of growth. Extending our return horizon and thinking beyond the short-term market narrative have allowed us to be contrarian in the past and have contributed to our longer-term outperformance.

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Sector-wise, we favor the consumer discretionary and information technology sectors as we believe there are strong secular tailwinds in key areas that should benefit over the long term. We find fewer opportunities in areas like energy and consumer staples, though recent market movements have created opportunities for us to add selectively to those areas. Regionally, we continue to favor fast-growing emerging market countries that have low debt-to-gross domestic product ratios and attractive demographic growth, such as India, Indonesia, Vietnam, and the Philippines. Despite near-term challenges, we are also finding opportunities in China, with an emphasis on domestic exposure to areas like information technology and health care, where we believe there is a lot of innovation and the government is focused on building vibrant domestic industries.

Consumer Discretionary

We are focused on leaders within the global online retail and consumer services ecosystems. COVID-19 has pulled forward years of e-commerce share gains, and we have an expanded and diverse set of names levered to that trend. We continue to think the market is severely underestimating the profound effect the pandemic has had on the consumer landscape. It is now vital for companies to view their businesses through an omnichannel lens, and it is no longer an option for businesses to ignore the need for an online presence.

• We sold shares of Amazon.com to manage our position size. We continue to have a favorable view of the company's cloud business and think its advertising business should continue to grow nicely as well. However, results over the next couple of quarters are likely to be somewhat challenged in a weaker consumer and economic environment, and we chose to scale back the magnitude of our bet.
• We sold shares of European fashion retailer ASOS. The company faces a challenging macroeconomic backdrop as European consumers wrestle with rising inflation and slowing growth, made more acute due to its proximity to the Russia-Ukraine conflict. As such we chose to reallocate to names where we have higher conviction.

Materials

We favor the materials sector. Within the sector, we have largely neutralized exposure to metals and mining and have maintained a diversified approach that includes positions in chemicals, where the Russia-Ukraine conflict has contributed to increased demand and tightening supply, and packaging, where there are multi-year secular tailwinds. We see the materials sector as an opportunity to own companies that will have a positive impact on sustainability and the environment, but also recognize that we could be in a prolonged period of higher commodity prices due to the situation in Ukraine.

• We purchased shares of BHP, which provides exposure to a portfolio of some of the highest-quality mining assets in the industry, mainly focused on iron ore, copper, and metallurgical coal. The company has a solid management team that we believe is executing well. The company recently spun out its petroleum business and prior to Russia's invasion of Ukraine had intensified its focus on potash. The company generates substantial cash and is one of the biggest dividend payers globally.
• We purchased shares of Sweden-based mining and smelting company Boliden. We think Boliden is one of the highest-quality names in the metals and mining space, with a thoughtful yet opportunistic management team that has a history of creating value for shareholders by investing countercyclically, keeping leverage low, lowering costs through efficiencies and technology, and dampening volatility with its smelting business.

Energy

We started positions in several of the platform's highest-conviction ideas within the sector during the most recent quarter, skewing towards those aiding energy transition in Europe that are relatively cleaner from an ESG perspective. While we continue to expect a normalization of energy prices as exogenous factors reverse and productivity continues to improve, we recognize that we cannot know exactly how the Ukraine crisis will unfold going forward, exacerbating the high level of uncertainty around the timing and path of normalization.

• We purchased shares of Baker Hughes, one of the world's largest oil field services companies. With the ongoing conflict in Ukraine, the global energy supply chain will need to be retooled, and we think Baker Hughes will be a beneficiary of a multiyear runway of increased capital expenditures to help with that retooling, particularly on the natural gas and liquefied natural gas side.
• We bought shares of European oil and gas exploration and production firm Galp Energia. We think Galp Energia offers unique and high-quality exposure to European energy, with a diversified asset base and good balance sheet. In particular, we think the company's Brazilian pre-salt and Mozambique liquid natural gas assets offer a long runway for growth.

Health Care

The long-term secular tailwinds for the health care sector remain in place. Within the sector, we have meaningful exposure to life sciences tools and services companies making biologics or facilitating research and development efforts for companies in the biopharma space, as well as equipment and supplies companies focused on medical diagnostics and testing. Within pharmaceuticals, we continue to invest in highly innovative companies with diverse product portfolios and promising pipeline assets. We also own companies tied to the ongoing secular trend of robotic surgery and have exposure to U.S. managed care where fundamentals remain strong, and valuations are attractive.

• We sold shares of Argenx, an antibody platform company developing novel therapies in autoimmune diseases and cancer, on strength. The company's therapy Vyvgart has a best-in-class profile with a first-mover advantage across several indications, and we think some earlier stage programs such as ARGX-117, which is a novel complement (C2) inhibitor, could be sources of long-term value creation for the company.