Webinars and video updates

ECB Q3 update script
Introduction (30 seconds):

Hello, I am Anton Dombrovskiy, a FI Portfolio Specialist at T. Rowe Price in London. Welcome to our Q3 update on the TRP Funds SICAV - Euro Corporate Bond Fund where I will touch on the market overview, discuss fund performance and positioning, and share our outlook from here.

2. Market Overview (1 minute):

Over the quarter, Euro Investment Grade spreads tightened by 13 basis points, ending the period at 78 basis points. Interestingly, the highest spreads of the quarter occurred right at the start, on the first day of July.

Later in the quarter, in late August, spreads widened by about 10 basis points. However, this was short-lived, and spreads reversed by quarter end.

Several trade deals in July, including agreements between the US and EU, helped boost risk sentiment and ease some tail risks in the market. Then, in August, political headlines out of France initially caused spreads to widen, but investors saw this as a buying opportunity, quickly stepping in.

As expected, bond supply was limited over most of the summer. But in September, we saw a healthy new issue pipeline, which was met with strong demand. Issuers continue to enjoy rarely had to offer significant concessions, indicating a strong technical backdrop.

Yield on euro corporate bonds remained relatively stable over the quarter as spread reaction to bouts of (mostly politics induced) uncertainty has been offset by favorable government bond yield moves. By the end of the quarter, the yield were down by 1 basis point, finishing at 3.06%. This yield remains attractive compared to long-term averages and continues to draw capital into the asset class.

3. Positioning and performance (2 minutes):

The Fund performance continued to be strong both on absolute and relative basis. The Fund outperformed its benchmark this quarter and YTD. Longer term the Fund remains among the top performing funds in its peer group.

In terms of performance attribution, security selection was the key driver of positive alpha.

We saw particularly strong performance of our picks in Communications and Banking. SES, a satellite operator, was a standout positive contributor for a second consecutive quarter, following the completion of its Intelsat acquisition in July. Large banking names like Citigroup and Deutsche Bank also delivered solid performance after reporting strong results.

Overall, security selection was positive across all sectors, except for a small negative impact in Insurance.

On the allocation side, results were slightly negative. This was mainly due to our overall beta management, including defensive credit hedges that we build in combination with higher beta bond positions to manage the downside risk in periods of volatility. Elsewhere, our overweight position in Insurance and underweight in Consumer Non-Cyclical sectors contributed positively at the margin.

In terms of positioning, we maintained a moderately overweight overall position in credit risk throughout the quarter. Our view on the market is positive even if we acknowledge the historically tight level of spreads.

We continue to overweight Financials compared to Industrials, driven by attractive spread pickup, supportive technical and strong fundamentals of European banks. This overweight is focused on sectors that are less exposed to tariff threats, such as Banking, Insurance, and REITs. Meanwhile, we remain underweight cyclicals, where we believe valuations don’t fully reflect the risks associated with direct tariff exposure and the secondary impact of growth headwinds.

Trading activity this quarter was mostly limited to rotating our exposure within existing risk positions, primarily through the new issues market. We also actively managed risk in response to heightened volatility driven by political developments in French names.

Furthermore, we took advantage of an opportunity to modestly increase our exposure to Greek banks, supported by healthy macro indicators and strong fundamentals in the banking sector.

4. Future Outlook (1 minute):

Looking ahead, the Goldilocks narrative remains intact. While valuations appear stretched, with spreads back to their year-to-date lows and near 18-year lows overall, we continue to see strong technical demand from yield-focused buyers, supported by solid fundamentals.

Given this backdrop, it’s clear that a significant catalyst would be required for spreads to sustainably break out of their current trading range.

As a result, we expect the market to remain rangebound in the short- to medium-term, despite these tight spreads.

In terms of positioning, we remain marginally overweight credit risk. However, we believe it’s prudent to retain inexpensive hedges, as economic uncertainties — driven for example by tariffs or politics — could resurface and create volatility.

5. Conclusion (15 seconds):

My final three takeaways for the quarter are that

- fundamentals and technical factors for the asset class remain strong,
- yield is still attractive compared to historical averages, and
- the fund is well positioned to continue delivering on its objectives.

Welcome, everybody. This is Jennifer Martin. I'm a global equity portfolio specialist supporting Global Focus Growth. And I've got Dave Eisworth, the portfolio manager of Global Focus Growth, here to talk about the recent period. And just as a reminder for our audience, we were recording this the last week of September. So, Dave, thank you for taking the time to review the portfolio results. And, you know, really, let's start with, you know, where we're going to talk about recapping the environment, our portfolio and discuss the positioning and outlook. So why don't we start with the main forces that are shaping today's global markets for the year and what they imply for the portfolio?

Sure. Hi, Jennifer. Thanks. Thanks for doing this. I mean, we can recap the first half of the year and kind of how it sets us up in the second-half and then going into 2026. I mean, obviously we came into the year with the Trump presidency and then the real big shock early in the year was really around government spending and Doge and then ultimately Liberation Day and the tariffs. And that really put a shock into the U.S. market because it was the threat of the U.S. really slowing spending, raising taxes through tariffs and slowing spending. And that put a real shock in the market and kind of, I think really, to some extent, did some damage to the US economy in the beginning of the year.

We've moved past that. And tariffs, I think, have largely been absorbed and really, they really should be seen as a tax on the economy. And so we've kind of absorbed that tax. The other big change was the one big, beautiful bill, right? And so instead of government spending slowing in the United States, what we really see now is that the U.S. government will continue to expand its deficits and debt, adding, I think, up to $2 trillion by 2030. And so we're back to the US government spending money. And I think, ironically, even you could argue it's not very healthy for the global economy. Ironically, it is spending that's going to happen in the US. And I think that has supported markets to a certain degree. You know, we obviously have continuing geopolitical tensions in Russia and to a lesser extent in Asia. And, you know, that is causing repercussions. So the way the US is dealing with its allies are causing repercussions in those countries, which is leading to more deficit and debt spending in some of those countries and spending on military industrials. And so we have to think about that.

I think we are further along in the interest rate cutting cycle. Whether it's justified or not, I mean, I think pretty clearly the US economy slowed a little bit in the beginning of the year. Again, you could argue that was driven a lot by the tariff volatility, but the Federal Reserve has reacted by beginning the rate cutting cycle. And maybe even bigger picture, I think everyone sees the Trump administration as very much having a Fed put as we go into 2026. So it's very likely that the Trump administration remakes part of the Fed as we move into 2026, and we're likely to be on a continued rate cutting cycle. That's quite bullish for asset prices, obviously, if you're in a rate cutting cycle. And then again, with the one big beautiful bill, we will see some more stimulus happening through taxes, depreciation early in 2026, which again is somewhat bullish. And then obviously we have, the elephant in the room is the AI investment cycle, what's happening around AI investment. And again, kind of a hidden catalyst earlier this year really was the OpenAI O3 model, which accelerated reasoning, caused a lot of response from different players in the market. And so we really, in some sense, have seen a re-acceleration of AI CapEx. And so that's sort of where we sit.

The last thing I would say, just as an environment point for investors to think about and clients to think about is we are going to head into the midterm elections in the second-half of 2026. It gives a lot of incentive for the Trump administration to have a stable economy, a growing economy. And so you can imagine that in the beginning of next year, they're going to be pulling as many levers as they can to have a strong economy and strong asset prices into the second-half.

That's really helpful. I think that will dovetail into a lot of the discussion that we'll have now, which is talking about how the portfolio is positioned towards growth to reflect the opportunity that you're seeing in the next 6 to 9 months. And then also a lot of your energy towards framework-based decisions, really navigating those high-growth areas. So maybe we should continue with AI. I know you and I laughed earlier that I loved JAWS. And one of my titles of a slide is, we need a bigger boat. And that's certainly how it feels like with AI. And maybe you could discuss how you're reorienting the portfolio around the entire value chain of AI. And we've got power generation, we have transmission, there's electrical equipment, there's semis, there's a lot of areas that you are capturing this AI. So maybe you could expand on that for clients.

Yeah, I mean, I think just a bigger picture in the last, you know, 18 months or so, I think I've heard the portfolio's performance a bit by being too broad and really running too balanced the portfolio. I know that sounds funny, but I think given the underlying drivers, you know, we were a little bit too balanced, a little bit too broad in how we were constructed. And that, not only did that create some opportunity cost, but some of those areas, healthcare really stands out, was a really tough pond to be investing in, tough pond to be fishing in, and that hurt some of our performance. So in the last six months or so, I think we really have refocused back on the global focus growth framework, really this idea of stock picking insights about improving returns, you know, going to where returns are most fruitful in our opportunity set. And, you know, AI has been a big part of that.

I mean, I think I've been certainly surprised by just the scale of this cycle. You know, a lot of the things, the idea of contestable markets between monopolies, the idea of a lack of a credit cycle being very fruitful for a lot of investment to happen. All those things I've had in my mind, but in reality, this all is just significantly bigger than I had imagined and more consequential. And I mean, we're seeing monetization accelerate, and then we're seeing this follow on of the acceleration of investment. So we really tried to look for places in the last six months to reorient the portfolio to the best areas of growth across AI, the best areas where the GFG framework really worked. And a lot of those trades have happened in the last six months. And even in the quarter, I think the quarter is really a tale of two parts, right? Sort of the end of the struggle in healthcare that we've had in the portfolio and really the beginning of some really great stock picking across the AI sector and across some other sectors.

Do you want to also expand on some insights you've been sharing with our platform related to the A-plus benchmark and really the necessity to understand how much you should be paying for that future growth algorithm? That's something that you've been kind of testing. I mean, it's maybe explains why we have more exposure to AI, but then also just the broader opportunity set, how you're evaluating that in the portfolio.

Yeah, I mean, the story that I tell is sort of for most of my career, you know, it was sort of a, it was pretty good to be a B plus stock picker against a C plus benchmark. And in today's world, given the concentration of the benchmarks and the quality of the companies that make up that concentration, you're really fighting against an A benchmark today, right? So the hurdle for ideas, the hurdle for how you allocate your capital, the price of opportunity cost of being in the wrong places is just a lot higher. And I think it's raised the bar in terms of how we think about new investments than how we think about allocating our capital. So we really had to push ourselves to identify the best growth opportunities, again, at reasonable valuations, right, at valuations where we can make money, but really looking for those best opportunities and trying to think about focusing the portfolio on those growth ideas that are growing fast enough, have enough of a positive dynamic to beat that really tough benchmark, right, that A benchmark. And again, it's not only in AI, but I think AI offers you sort of exposure to the fastest growth in the economy. And I think that's why the portfolio has shifted a little bit more to there as we've raised that hurdle rate looking for the best ideas.

That's really helpful. And I think maybe the final area when we think about some of the actual insights that you've had, especially year to date, is just taking advantage of the divergence of maybe some of the de-globalization that we're seeing in the market where it's a US growth momentum market and then outside the US, it's international value momentum and how in the portfolio you've taken advantage of owning European banks that have actually outperformed the S&P year to date. So maybe you want to highlight on that and your ability to capture some of those kind of increasing rates of change in the portfolio construction.

Yeah, I mean, that has really highlighted the strength of our framework. our framework, we're not limited by classic categorizations of companies. We're not limited by owning just durable growers across the portfolio, right? What we're really looking for are places where we have insights about improving returns. And so that can be in different sectors. And I think the period between the global financial crisis and COVID was really a period where durable growth was the winner, sort of stable growth, low volatility, compounders, because we had very low inflation and very low interest rates. So those stocks looked good relative to the addressable market.

I think post-COVID, especially and combined with the AI cycle, we have a little bit stickier inflation, a little bit higher rates, and that's opening up different opportunities. And I think internationally, what we're seeing is more ideas around value and cyclical where we have insights about improving returns. I think European financials and banks are a great example of that. defense companies, military, defense, industrial companies outside of the United States. These are companies that really didn't fit in the world where the US was defending everyone, right? And now the world is slightly different. The US is a less reliable partner. And suddenly those businesses have more growth and have better returns. I think in AI as well, in the Asia supply chain, we found a lot of places where we can buy very attractively valued assets that have great exposure to AI, but are not in the same frenzy as maybe some of the US assets. So I think there's a real arbitrage there looking for, you know, extending our insights from US AI companies into Asia. So our framework really comes into play here where we can try to identify those cases of improving returns. And I think the issue is that many investors are still stuck in that same mindset of the GFC to COVID. And you really got to be open. You have to have your mind open to how the world is changing. And I think that's where the opportunities will be.

That's really helpful. It's a great summary of, in this environment, how you're navigating a lot of different areas. I think, because this is a quarterly review, let's move into... really, some of the good stock selection that you've had this quarter in terms of performance across technologies, industrials, and utilities. And then we can also hit on maybe some of the mistakes that we're still metabolizing, whether it's in healthcare or consumer discretionary. And I was thinking about other movies and, you know, we can call it The Good, the Bad, the Ugly, another famous, one of my other favorite movies from Clint Eastwood.

Yeah. I mean, I think this quarter really highlights how we have refocused GFG. So if you look at where we're getting our alpha, it's really from the classic places that we've gotten alpha in the past. You know, technology, industrials, and even utilities, right? And utilities, XL was the utility we owned in the portfolio, and we really owned it around this power theme around AI. And so it was really utilities is a strange sector to be looking as a growth manager, but in that sector, we found some really good ideas that fit our framework. So I think you see the alpha coming from a really framework base, right? It's where I would expect our alpha to come from in GFG.

The detractors continued to be places where we were more broad, right, where we were sort of trying to balance the portfolio. So whether that was healthcare or that was discretionary, healthcare is really the area that's been the biggest drag in the portfolio. And I think to a certain degree, we thought we were being diversified in healthcare. We thought we were balancing the portfolio. But I think we got a little bit away from applying framework there. And it ended up being an opportunity cost and drag in the portfolio. So I'm very optimistic about how I've seen the portfolio shift over time, especially in the last six months. And then I'm very optimistic when I look at this quarter of where our alpha is coming from, where our good ideas are coming from. And so I think I'm, I feel really good about how we're positioned as we move forward. And I think hopefully this will be the last quarter where I argue that balance, you know, is detracting from how we're performing.

Let's spend a little bit of time on a few stocks that did very well. And in some ways, maybe you and I would call them, maybe in the case of App Eleven, you're participating in some extreme outcomes or option value opportunities. That was a name that did very well, as did Shopify. And then you also had some strong contributions from Delta Electronics, AMD, Arista. So there's a very broad base of stocks. Maybe you want to spend a few minutes just on that bucket.

and I love that those stocks are sort of off the beaten path, right? It's showing you that our platform and our framework is able to find these ideas. I mean, AppLovin, I think Extreme Outcome is a good way to describe it. Our analyst, Grant Yuan, really likes that stock. He has a great insight about them moving to a second act in advertising. And we want our clients to be able to participate in that kind of upside, and we want to balance the position size. So, it's sort of an 80 basis point position in the portfolio, which we think represents the right risk return. But AppLovin is an idea. You know, what I think is so interesting about it is it's, again, it's off the beaten path a bit. You really have to understand what's happening. It's an advertising model where they're applying AI to win in a mobile advertising world with an algorithm that can bid, optimize bids for ads, right? And so it's really this very tight and directed application of AI to a vast market. And so they're moving from the advertising for video games to the advertising for e-commerce. And that really creates that second act for them. And so I think that's why the stock has been so good. But it's a great example of an analyst getting in front of a technological change that really transformed business.

Shopify is a great example of, it's almost, it's somewhat similar, right, in the sense that Shopify is really the e-commerce vehicle around Meta's use of AI. So as Meta uses AI, in Instagram and Facebook to accelerate their efficiency. Shopify is really the platform that e-commerce is transacting over Meta, Instagram, and Facebook. So Shopify is getting a boost from Meta's application of AI.

When you talk about Delta and Arista, those are ideas. Delta is a Taiwanese computer kind of computer electronics business. They build power management for server racks. And our analyst just has a really good thesis on why their power management products are going to be more important in building AI racks. Arista is a networking business. And again, the analyst has a thesis about how Arista is going to play an important role in the new architecture of building some of these massive AI data centers. So again, it's insights and improving returns across these different areas. And I think it's a really good application of the platform in our framework.

Maybe just a quick comment on AMD in light of the announcement with Intel earlier this period, I guess it was just a few weeks ago where Nvidia gave Intel a boost of life. Maybe just a comment on that just from the perspective of the environment.

Yeah, I mean, I see that largely as noise, the Nvidia Intel thing. I mean, I think Nvidia is doing that to sort of curry favor with the Trump administration. Obviously, the government has invested in Intel. Intel has a major, major problem to move forward with technology. And right now, AMD is basically eating their lunch across servers and now moving into desktops. And it's not something you can fix in the short term, and it's not something NVIDIA is going to really help Intel fix. So AMD, the near-term thesis on AMD, which I think is underappreciated, is just how strong their CPU business is. So not GPU, right? GPU is how we do AI, but the CPU business is just the compute business, the server business. Now, all these GPUs need CPU connectivity. And so what we're seeing is AMD is just running the table across CPU. So as CPU CapEx rises, AMD is not only participating in that increased business, but they're gaining market share from Intel because Intel's technology is so far behind right now. Now, longer term, there's option value at AMD with their MI400 GPU clusters. Now, that's really a late 2026, 2027 thesis. But it's sort of the stalking horse around some of the other areas of compute where, you know, all these large massive companies, although they rely very much on Nvidia and Nvidia is very well positioned, we still think there's room for AMD to be at #2 in a very big market. And it's just simply not capitalized in the stock's value at this point. So the strong near-term CPU driver and then this option value for GPU long-term.

Maybe spending a quick minute on Caterpillar and Rolls-Royce, which also contributed positively in the period, a little unrelated, but same sector.

Yeah, I mean, they actually both do have power generation inside of them. And Rolls-Royce actually has some SMRs, small modular reactors for nuclear, but I think largely the... The story around Rolls-Royce has been European aerospace, the engines business, but also defense. Rolls-Royce plays a role in defense. And then maybe there's a little bit in there for power and SMR. And so Rolls-Royce, you know, got a management change about two years ago, and a new CEO has really just breathed life into the company, and they're in some very attractive verticals. secular verticals. And again, aerospace is just a, we're in a long positive cycle for aerospace. So that's a good way to play that through Rolls-Royce.

Caterpillar is very interesting idea. Our analysts identified how important power Gen. is for data centers that are not connected to the grid. And so Caterpillar has a significant business in 34 MW power generators. that, either are diesel or natural gas and they attach to a data center. So you do not need grid transmission to get your data center up and running. So whether that's backup power or core power for these data centers, as these guys rush to build data centers, right, there's this natural, you know, demand for power. And if you can't get the power from the grid, you're going to get the power from generators like CAT. So CAT is really getting this sort of, exogenous acceleration and boost in their power generation business, along with what we think is reasonable dynamics around infrastructure building and their core equipment business. So you're getting sort of this interesting double whammy. And I think what raises Caterpillar, the bar for it to meet our threshold is really not so much the infrastructure side, right, which is fine and reasonable, but it's this power side that adds this interesting idea to Caterpillar and makes it qualify for the portfolio.

Maybe let's spend just a few minutes on what detracted. You did mention the sector, healthcare. Maybe a quick thought on our parting with Lilly and our reduction in Sartorius.

Yeah, so, you know, healthcare has just been it's just been a really, really tough sector. I mean, it's been it's been really hard to find Alpha anywhere. You know, Eli Lilly was a great stock for us for several years. And then Really, it's just run into what I would call a leaky bucket situation where there's just a lot of pressures around pricing. Regulation has not worked in their favor. I mean, this compounding or generic GOP-1 problem in the US, we just haven't been able to solve it. And that has just led to sort of a pull forward of how people think about the business. So it's a detractor. Now, we're still exposed, we still really like the oral GLP-1, which Lilly controls. And we're expressing that in the portfolio through Chugai, which is the Japanese company that licensed that drug to Lilly. So we still have that exposure to the oral cycle around GLP-1. We just kind of have decided that the injectable side of GLP-1 is just, it's too much of A leaky bucket for where we are right now. So we exited that position.

Sartorius and Repligen are two names in the portfolio that are around Bioprocess, which we think is a very secular growth driver. So Bioprocess is the building of biologic drugs over time, which we think is very important and very secular. It's just struggled with sort of that idea of they're sort of durable growth businesses. They're sort of not growing as fast as the benchmark. And so they've been a drag. We've kept those stocks because we think ultimately they're going to prove to grow fast enough to qualify for the portfolio and they offer some diversity in the portfolio. So we've kept them in and we're optimistic. It's just taking longer. And we have lowered the weight to a certain degree to lower the drag and sort of avoid some of the opportunity costs where we have better ideas. But hopefully we're going to see those improve in 2026.

The other two sectors that detracted were discretionary, which was kind of a hodgepodge. It was Mercado Libre. Chipotle, which we no longer own. And then financials was, again, a sector that has a lot of different kind of sub-industries in it. So maybe we start with discretionary. I don't know if you want to give a quick comment on that.

Yeah, I think Chipotle, in a sense, was kind of trying to apply the framework to a situation. And it's almost one of those cases where you're like, It was a decent idea, but it didn't meet the bar. And I think so. we bought that position and then we quickly sort of realized that it wasn't up to snuff versus the rest of the portfolio. And so we exited it. Mercado Libre is more of a temporary issue. It's really around what's happening in Argentina. It doesn't affect the business that much, but it's caused some turmoil. They've also they also accelerated same day shipping and free shipping. for many of their, free shipping for many of their customers. And people see that as a drag. But we've seen this pattern before. You accelerate free shipping, which then accelerates volume, and then you sort of catch up to that over time. And so those have been, those are sort of two drags on the cutterly rate, which we think are fine.

I mean, in financials, you know, It's funny, our US financials, our European financials have really been very positive for performance. And then we've sort of, financials is a hodgepodge. And then emerging market banks, BBCA was a particular detractor. Indonesia has just had a lot of macro and political things that caused that investment thesis to deteriorate, and we exited that stock. London Stock Exchange. London Stock Exchange, we were, you know, we, it was a great stock for us. We be, and we, and then we began to exit the stock earlier in the year, and we really began to exit it because we were using it to fund other European financials ideas, banks. And so we were coming out of that stock anyway. And then it really suddenly found itself, at least from the market's perspective, on the wrong side of AI. And that is just, you do not want to be there, right? When the market believes you're on the wrong side of AI, which it's really fascinating. I'm not so convinced that London Stock Exchange is on the wrong side of AI, but luckily for us, we had taken the weight down pretty substantially. And even then, it kind of hurt us a little bit in the quarter. But now it's sort of seen as being on the wrong side of AI. So we're actually in the process of re-examining, whether that's true because the stocks come off dramatically. And then the other one is Adyen, which Adyen, I think, It's a good, it goes back to your example. Audien's a European payments name. It's really a global company. But I think back to your point earlier about Europe being primarily a value market this year, and Audien's really sort of a premier growth name in Europe. So I think to a certain degree, it's just sort of caught up in being out of favor as a factor. And so I'm very optimistic about Audien going into next year.

One area that I know clients are always interested in is just the turnover rate and just maybe commenting on future turnover. To me, it feels like your portfolio was positioned pretty well for the trends next six to nine months, but maybe you want to comment on what to anticipate in the next period related to turnover.

Yeah, I mean, I think unfortunately, in the last 12 months, turnover's been higher than I would like. And really, it's been It's really been that reversal of me moving away from a more balanced portfolio, right, and trying to get us back to the GFG core. And that's caused more volatility and more turnover than I would like. I think we're there now. I think we've gotten ourselves back to what we're really good at. And so I'm very optimistic about that. So hopefully turnover is going to be a bit lower. Now, you never know. You never know what kind of volatility is going to show up. You never know what kind of opportunities are going to present themselves. And we're going to jump on opportunities when we get them. But I think largely the turnover that's been involved in renovating the portfolio or getting us back more towards the GFG core, hopefully a lot of that turnover is behind us.

Perfect. Well, let's spend a few minutes on a few of the more recent trades. There's several in technology that we could address. Maybe you could talk a little bit maybe about Hanhai. You've added to Oracle. You've got Fabrinet. There's a lot of names in tech that we could address. So wherever your energy lands you there, then I can have a few follow-ups.

Yeah, I mean, I think if you talk about Hanhai or Delta, you know, Oracle was a name that we bought earlier in the year. They had sort of an amazing quarter. It's kind of crazy how, it's crazy how we bought the stock based on our framework and thesis and then how much better it was than we even imagined. Some of these things are really surprising. I think AI is really surprising like that. So a lot of the names you talked about are really us trying to, you know, build a basket of good fundamental insights that are levered with a high probability to success as the AI cycle continues. So if you look at something like Hanhai, Hanhai makes 100% of the new NVIDIA servers and 100% of NVIDIA's networking. So we have this strong leverage to them in the new platforms that NVIDIA is rolling out, both Blackwell and Vera Rubin in 2026. As well as Hanhai is obviously levered to iPhone, right? So if there is an iPhone cycle in 2026, So we're trying to put ourselves in a position where we're benefiting. It doesn't really matter whether Oracle wins or Microsoft wins or, right, as long as Nvidia is in a strong CapEx cycle and Hanhai is extremely cheap, like relative again to a lot of these US tech stocks. So we think that offers us a really interesting situation.

Delta, we talked about, Amphenol, Fabrinet. These are all sort of stocks that are levered to the right side of AI, right? Even in software, if you look at Datadog and Snowflake, which are two names we added in the quarter, Those are names that we really feel like are on the right side of traffic growth in AI. Now, it's complicated and there's a lot of positives and negatives that can happen with those stocks. But in general, we feel like that's a better place to be in software than anywhere where AI might be disrupting software, right? So we feel like these are not disrupted software names and they benefit from the volume growth of AI. And so that's sort of how we position those. the last thing I was going to say about security, I mean, I think security is an area that I feel like there is sort of tremendous change in today. So whether it's cyber, who's being acquired by Palo Alto or Zscaler or CrowdStrike, you're really seeing security. Security has to transform the way it thinks about the network, right? Because we're suddenly going to have all these AI AI agents operating on networks with identities, and how do we secure those identities, and how do we defend against AI cyber attacks? How do we build in AI security? So I think AI security platforms is a really interesting place to be, and so we've kind of added those names in the portfolio to get exposure to that.

you've shared in some client interactions with me that we eliminated SAP because it played, our framework, our insight played out. And then you accelerated that and reduced that. And then you also eliminated HubSpot. Well, like LSC, there's a real fear of ending up in a name that gets on the wrong side of how the market views AI. So I think HubSpot and LSC both HubSpot because it's a seat-based model and people start to believe, well, you're going to need fewer seats if you have AI agents that are performing these functions and suddenly you find your business under pressure, right? And so, you know, it's, I don't, and I would be humble upfront to say, I'm not 100% sure I understand the bear cases, but I know that when these stocks fall on the wrong side, I do not want to be in them for the fall, right? And I really then want to re-examine them as they adjust. So I think LSE, SAP, and HubSpot were just three names. We were on our way out, as you described, we were actually on our way out of LSE and SAP. HubSpot was more of observing the pattern and then trying to avoid ending up on the wrong side of AI. But we moved out of those to really avoid the panic that you're seeing in them. And that allows us then to go and revisit them and think about the fundamental thesis and whether this is noise or whether it's real. But you don't want to end up wasting your time fighting battles, that can't easily be resolved. I think that's, I've learned that lesson, many times. So go fight where you think you can get the best, impact for clients.

You're following your mantra, fastest learner wins.

Fastest learner wins, yeah.

So in financial, well, I guess actually before we leave tech or companies enabled by tech, you did add Alphabet. You have made that an act of overweight, maybe a quick comment there. And then I have.

I think we came into the year really underweight Alphabet, and we were really concerned about the disruption around search. And I think that disruption is real. As the year has gone on, we've been more and more impressed with, one, the quality of the Gemini LLM and the products that Google is producing. We think they rival OpenAI, right, in terms of the quality of the products they're producing, or as good or maybe better. And so that's really amazing. But also the tech stack at Google. AI is really about being able to manufacture tokens, right? Manufacture tokens at a low price per watt. And so you want to be able to do a lot of tokens per watt. That's the goal. And that really requires advanced, innovative tech stack. And you have NVIDIA out there that obviously has an incredible tech stack that they're selling to people for really high prices. We can see that in Nvidia stock. Nvidia's monetizing that tech stack. Then you have Google that has really probably a tech stack that rivals Nvidia, whether it's switching or software or the TPU that they've developed. And so I really came as the year progressed, I really came to respect that more and more. And we increased our weight there.

The court case with against the DOJ about Apple and search between Google and Apple, That's an important case because that case saying that Google and Apple can have the relationship they have in search, it leaves open the door for Google and Apple to have that relationship in AI. And Apple is really in trouble in AI, right? Siri is bad. She's not smart, not smart yet. Siri is not smart and they do not have a strategy and they're very far behind. And so I sort of see Google and Apple as an extension of that search relationship as a natural partnership. That's really good for Google, right? If they get that traffic and if they get that architecture, I think it's ultimately very long term, it's bad for Apple. In the short term, it's probably good for Apple. In the long term, it's probably bad because the intelligence of the iPhone is now moving, is going to move more towards Google. And so we'll see what happens there, but I think Google does have a good chance to participate in that.

Perfect. So I want to kind of shift us a little bit to financials where you've made some trims and names like a Schwab. And we talked already about your elimination of London Stock Exchange. But conversely, you're pretty energized maybe about the capital markets frenzy that's going to happen in the next six months. And we've seen you add to KKR, Aries, Robinhood. And so maybe that's, you know, give us a little bit about your expectations about financial deregulation and the activity you might anticipate.

Yeah, I'm bullish. on financials really in Japan, in the US, and in Europe. I mean, in the US, it's just quite simple. It's deregulation, and it's the enablement of M&A. I mean, there's just going to be a lot of M&A and IPOs in the US. And I think the Federal Reserve Board next year is going to be a Trump Federal Reserve Board, right? And I think you're very likely to see banks be deregulated. They'll hold less capital, they'll have higher ROEs, they'll grow their earnings faster. And so to me, that's an insight about improving returns in US financials.

In Europe, it's a little bit different, but it's no longer having negative interest rates, right? And I think there will be sort of a flow through as the US deregulates. I think Europe will regulate less. I think Europe will still be more regulation than the US, but it will regulate less. And it's going to create a lot of competition for European banks and sort of an existential question of how you think about these financials. Now, I think, and I see the European financials returning more capital. I see them holding less capital. It's not so much about loan growth. It's more about just having positive interest rates, having positive spread, and very, very cheap valuations. And so I think that change in regime from zero inflation, negative rates, between the GFC and COVID to positive inflation, positive rates, really just makes them very attractive in terms of earnings growth and ROE expansion.

I mean, Robinhood is a little bit different. I mean, it's a very innovative, it's almost qualifies as an extreme outcome like you're talking about. It's A next-gen tech stack. It's innovative. they're willing to embrace things like crypto, they're willing to embrace blockchain trading of stocks, right? They're pushing a social network. So it's really, they're on the forefront. And that's important in an environment where regulation is going to be a lot less. And I think that's what we see today. And where things like crypto, I mean, the US government is backing crypto. And so if you're a platform that can capitalize on that, you have a chance to grow a lot faster, right? And so Robinhood to me really stands out as sort of the embodiment of that. And I think their ability to be across asset class, so whether it's stocks, ETFs, mutual funds, and also crypto, right? Whereas A name like Coinbase or Circle is really sort of limited to crypto, right? They're not a broad platform. And I think the broad platform idea is actually the more important way to play this. And I think that's why we have Robinhood.

Charles Schwab has been a wonderful stock for us. And the stock has kind of delivered a lot of alpha. And I think we're, you know, we're kind of playing out that improvement of return. And so we sort of harvested some of our Schwab to go into names like Citigroup and Bank of America and Robinhood and some of our European banks, you know, to capture what we think is more alpha going forward.

Perfect. Well, let's conclude, really, and I think you've covered a lot of ground, but where you see the strongest growth opportunities that best fit your framework and where you're most concerned, and whether it's at the company or macro level, given all the issues that you've highlighted already, whether it's inflation, rates, geopolitical uncertainty.

Yeah, I mean, there's always idiosyncratic ideas that we're looking for in the portfolio that we think can do great for us, right? So it's not, I don't want people to think it's always thematic or it's always, you know, macro. It's, I mean, we're always, we're looking at bottom-up at ideas. It's just a lot of times there are big drivers that are leading to the improving returns. I mean, again, I feel very positive. I think from a top-down perspective, as we said in the beginning, we're heading into 2026. The Fed's beginning to cut rates. The one big, beautiful bill is going to introduce some stimulus in the US. There's no credit cycle that I can see. I just think it's a positive backdrop for asset prices. Now, asset prices are not cheap, right? We're not looking at a market and saying it's super cheap. But valuation is not a very good indicator of alpha in the short run. It is in the long run. So I think in the long run, we have to think about how the world could change. But in the short run, I think it's a very positive kind of environment that we're heading into in terms of stock prices. So we're trying to make good decisions about being in the right places with that tailwind.

I do worry, you know, again, from a macro perspective, I do worry as we move into 2026, I worry about the re-acceleration of global growth and what that would mean for inflation and what that would mean for rates. I worry about the independence of the US Fed and how the Fed would respond to a re-acceleration in growth. So those are things, you know, we have to kind of balance in the medium and longer term.

So right now, I think, as we spoke about earlier, I think the AI cycle is very strong and I want to position our clients in names that really benefit from this, you know, general improvement. I want to be careful about making big bets against pairing off the giants, right? Like we own Avago and Nvidia, right? And we own AMD, right? Because we think all three have a tailwind, right? We own Google and we own Meta, right? So we're not making big pair trades in those names because we think they're all sort of benefiting. And on the margin, we're looking for who's getting better and who's getting worse. And that's sort of where we make our bets being over or underweight the mega cap name.

So I think that's very positive. And again, I think capital markets, it's a very positive environment. Again, interest rates are a little bit higher. There's going to be M&A, there's going to be IPOs. So I think that's a very positive kind of environment. And then wherever, you know, Jennifer, wherever we can find companies that are sort of the platforms that benefit from this AI building, build out. So what are the companies that are really going to benefit from all this innovation in AI? And I think that's the part that's sort of a mystery to investors now. We're not really sure who's the winner and who's the loser. We talked about London Stock Exchange a little earlier. So we're really on the lookout for companies that can accelerate growth and lower unit cost by using AI tools in different industries. And frankly, again, I come back to financials, and I think financials are probably a place that's very fruitful. Lots of employees, lots of data, lots of legacy tech stacks, right? And applying AI here could really profoundly change these companies. So we're on the lookout for those kind of ideas as well.

And then the last thing I'd say, I know we talked about how bad healthcare is, and it really has been just really hard. But, our years are open. we're paying attention to what's happening there. We're trying to find ideas that could add idiosyncratic alpha to the portfolio. I mean, I don't want anyone to think that we stop looking, you know, when an area is hard, but we're always on the lookout across these sectors for things that could add value.

That was great, Dave. Thank you very much for taking the time to review the portfolio results and give us an outlook. This will be great.

Great. Thank you, Jennifer. And as I said, I feel like we've really got the portfolio recentered. I'm very optimistic about what we own. I like the last few months and kind of this earnings season and our stock picking. I feel like we're really back in the groove. And so that makes me very optimistic. So thank you for doing this.

Thank you. Very energizing. Talk to you soon. Bye.

Goodbye.

US Smaller Companies Equity Strategy
Comments on the Current Market Environment
With Portfolio Manager Matt Mahon
October 2025

Matt Mahon
Portfolio Manager, US Smaller Companies Equity Strategy

The first thing that's on my mind is that we're living through a unique period in the market. While not unprecedented, we've seen this in the late 1960s and the dotcom bubble we're experiencing is a narrow subset of the market, high growth, highly speculative companies that are going up. While many compounders companies that we think will create value over a multi-year period are derating. This is creating a great opportunity as we look forward three years in these core compounders that are really the core of what T. Rowe Price has done historically.

The second thing that's on my mind is that the US small cap index has diverged materially from the US large cap index, as there's been a great focus on technology and artificial intelligence. As a result, the small cap index remains a broader reflection of the US economy, in contrast to the tech heavy S&P 500. Why that's important is because when you're investing in the S&P 500, you're increasingly investing in AI. In contrast, when you're investing in small caps, you're getting exposure to the broad US consumer broad industrial complex. That where they're where valuations are attractive and where we think there are increasing tailwinds from reshoring and from changes in labour and energy productivity.

The third thing on my mind is the risks to small caps in the US economy. There are many risks and uncertainties today, from slowing job creation to interest rate policy. However, we invest in companies that have durability, that have pricing power, and we invest alongside management teams that we, trust to take advantage of market turmoil to create value over the long term. And so, paradoxically, we think that periods of turmoil can benefit the portfolio because we own companies that will weather the storm well and create value during that storm by setting themselves up to outperform over a multi-year basis.
 

Introduction (30 seconds):

Hello, I’m Ken Orchard, Head of International Fixed Income and Portfolio Manager at T. Rowe Price, and I am joined by Co-Portfolio Manager Vincent Chung. Today, we're excited to give you the latest insights on our T. Rowe Price Funds SICAV – Diversified Income Bond Fund, including an overview of the market landscape, performance and positioning, and the outlook ahead.

2. Market Overview (1 minute):
The first half of 2025 saw government bonds face considerable volatility, driven by tariff uncertainties, Liberation Day, and significant fiscal stimulus initiatives like the US's 'Big Beautiful Bill' and Europe’s increased defense spending plans.

Despite these challenges, bond yields generally trended lower as investors focused on slowing global growth and disinflationary pressures, especially in Europe. This translated to positive total returns for government bonds across most developed markets, despite the sharp volatility spikes witnessed over the period.
Turning to currencies, US exceptionalism dominated discussions at the start of 2025 until Trump's trade policies and tariff announcements upended market sentiment. This rattled the dollar as stagflation fears and questions about Fed Chair Powell's position stirred concerns over US credibility.

The outcome was a stronger performance of currencies against the dollar, notably the euro, supported by a rotation out of US assets and heightened growth expectations from stimulus measures in Germany and the EU.

Throughout this period, risk assets held strong. The Liberation Day sell-off reversed when Trump delayed his tariff threats, avoiding a global trade war. European credit spreads tightened with fiscal policy relaxation, while investors looked passed tariff concerns as US credit also remained well supported. Higher beta segments outperformed as risk sentiment surged through May and June, with investment grade and high yield spreads near multi-year tights, driven by attractive yields and robust earnings.

3. Positioning and performance (2 minutes):
Over the past six months, performance of the fund aligned closely with the global aggregate index, effectively navigating through a volatile landscape of interest rates and credit markets.
Our positive performance was largely driven by our long duration exposures, especially in Australia, where easing inflation and concerns over global growth impacts played to our strengths. Furthermore, our global investment approach saw some of our emerging market exposures perform well, particularly Brazil and Peru. While our US investment-grade allocations faced challenges, we posted gains from our securitised positions and high yield security selections.

In terms of positioning, we had been favouring European credit with better valuations, growth likely lifted by European fiscal spending. Meanwhile, we remain constructive on emerging market credits as a weaker US dollar allows for more monetary policy freedom by EM countries to cut and provide cheaper local funding for corporates and sovereigns. In particular we think that valuations are tight in credit spreads and the lower duration profile of corporate credit means that it will be more resilient in periods of volatility spikes whilst still affording carry. We maintain a constructive view on high-quality asset-backed securities and AAA-rated collateralised loan obligations, offering attractive valuations, defensive carry, and liquidity.

Running duration at the lower end of our historical range, we remain vigilant about US inflation pressures and risks for higher yields. Our strategy includes short positions in Japan and long positions in the UK, as we are seeing signs of a labour market slow down which could bring more total cuts to be priced in.
We continue to identify the emerging market segments which offer compelling risk/return dynamics, enhancing our fund’s yield profile - notably in Peru and Malaysia.
Our Duration Times Spread has increased recently but still below neutral, reflecting the fact that the growth outlook is supportive as we have Central Banks potentially easing and fiscal providing some tail winds into start of 2026 but valuations are close to multi-year tights.

4. Future Outlook (1 minute):

Looking ahead, we’re focused on three key factors shaping the investment landscape:

• Firstly, we are closely monitoring persistent inflation risks in the US. These are driven by tariffs, relaxed fiscal policies, and a weaker dollar, which remains under pressure amid uncertain policymaking and a perceived weakening of American institutions.
• Secondly, the eurozone is actively stimulating its economy, impacting long-term inflation dynamics and increasing fiscal supply. This could lead to higher pressure on longer-dated yields.
• Meanwhile, we exercise caution in the credit markets due to tight valuations, stagflation risks, and softening macroeconomic data, particularly out of the US. However, we see the current credit environment favouring Europe over the US, as growth differentials narrow and European valuations appear more attractive.

5. Conclusion (15 seconds):
In conclusion, we’re cautiously optimistic and prepared to act if new risks arise. We believe it will take a major event to shift the technical landscape significantly.
Thank you for joining and we look forward to speaking with you soon.