Global equity markets experienced an acute, near-indiscriminate sell-off 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. We view this type of environment as one where good active managers can take advantage of market dislocations and pick up high-conviction names where we have an insight into improving returns in the future at what we view as attractive valuations. We believe inflation may be peaking, which would be a major key to seeing accelerating returns for our existing positions.

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Sector-wise, we favor the consumer discretionary and industrials and business services sectors, as we believe there are key areas in these sectors that should benefit as economic conditions normalize. We are more selective in areas like consumer staples, energy, and information technology, as we believe that these sectors are either overcrowded or that we have a more subdued long-term outlook. Our regional weights are mostly driven by bottom-up, idiosyncratic investing. For instance, our exposure in Europe is idiosyncratic as the majority of our holdings have significant business exposure outside of Europe and thus are not levered solely to European economies. We also have found compelling investments in emerging markets, where we think near-term headwinds are creating opportunities for active managers to buy high-quality assets at attractive valuations, especially in China.

Consumer Discretionary

We significantly reduced our exposure to the consumer discretionary sector, which has become increasingly challenging for stock pickers as market disruption, driven in part by rapid changes in consumer behavior and e-commerce, has led to a more dramatic demarcation between winners and losers. Given the polarized structure of the sector, we are focused on high-quality names that we believe are on the right side of change and have dominant market positions while maintaining discipline around valuations. We find that companies with strong omnichannel infrastructure, efficient distribution, and quality offerings that keep them connected with their customer base should benefit from strong fundamentals in the future. We also have exposure to select travel-related stocks that we believe are well positioned as economic conditions normalize.

• We sold shares of athletic sportswear brand Nike. While we continue to believe the company is a high-quality growth opportunity, we think the outlook for the firm's business in China is more unpredictable going forward, so we chose to exit our position in favor of names where we have higher conviction.
• We sold shares of online travel agency Expedia to manage our position size. We think Expedia stands to benefit from pent-up travel demand as the pandemic wanes. We also believe that the market underappreciates the company's in-house vacation rental business, Vrbo, which has been resilient during the pandemic and stands to benefit further from normalization in travel. Further, Expedia's ongoing overhaul of its cost structure should boost profitability on the other side of the pandemic.

Industrials and Business Services

We favor the industrials and business services sector but managed position sizes in some areas amid growing fears of an impending recession. However, we still believe our exposure within the sector is poised to capture the tailwinds of accelerating fundamentals as economic conditions largely normalize and the world continually learns to live with COVID-19. Our exposure is focused on long-cycle industrials and commercial services companies that should emerge from the pandemic in a stronger competitive position, as well as aerospace-related names that have a significant backlog and pent-up demand that should be released as economic conditions normalize and travel volumes improve.

• We sold shares of GE to manage our position size. We continue to think fundamentals, particularly free cash flow, are troughing, and we believe the firm's core businesses in aviation, health care, and renewables are well positioned for a better-than-expected recovery over the next few years, which should drive accelerating returns.
• We bought shares in U.S. domestic airline Southwest Airlines. We think Southwest's high-quality network and organization, balance sheet strength, and strong industry position should help drive accelerating growth and return on capital as travel demand normalizes.

Energy

The energy sector cooled during the quarter, but as the war in Ukraine persisted and fears of slowing economic growth emerged, supply remained tight and prices remained elevated. We think tight supply and higher prices could persist in the near term, and as a result, we hold select, high-quality energy names in order to capture these tailwinds. However, we still have a subdued long-term outlook on the energy sector given the disruptive impact of U.S. shale production and the growing emphasis on clean energy and ESG-friendly alternatives.

• We bought shares of global oil and gas exploration and production firm Hess, which has valuable assets in the Bakken formation, Guyana, the Gulf of Mexico, and Asia. We like Hess's diverse asset base and highly competitive oil price breakeven, and we think Hess is well positioned for free cash flow growth acceleration as additional production capacity comes online, particularly in Guyana.

Information Technology

As a result of the behavioral changes that emerged from the pandemic and accelerated demand for technology, pockets of the sector clearly became crowded and overbought. However, the steep market decline has created opportunities to buy stocks with compelling long-term growth potential that are now trading at much more reasonable valuations. Ultimately, we believe that the powerful long-run trends that should drive value creation within the technology sector remain and, in some cases, were accelerated by the pandemic. We think we are well positioned to take advantage of the diverse nature of the technology landscape, with a balance between mega-cap tech names as well as smaller and more innovative software, e-commerce, and payment companies that are on the cutting edge in their industries and have transformative offerings. We also have exposure to semiconductor stocks that we anticipate should benefit from content growth in automotive and industrial end markets as well as investment in data centers and artificial intelligence.

• We bought shares of software-as-a-service sales platform Salesforce. We think Salesforce is an outstanding business, with strong leadership in its customer relationship management platform and ecosystem capabilities. The company boasts a highly recurring revenue subscription business model, and we think its quality and growth runway are underappreciated by the market. Over the near term, we think the firm is well positioned for accelerating returns as margins improve and the business continues to grow. In our view, the stock has been oversold amid broader negative sentiment in technology names, which created an attractive entry point.
• We purchased shares of MasterCard on weakness. We continue to like MasterCard's focus on technology and planned expansion into China and believe the company is well positioned for strong growth once the world learns to live with COVID-19 and cross-border travel resumes.