During the quarter, we added to and diversified the portfolio's positions in high-quality software names, taking advantage of broader pullbacks driven by macro developments and company-specific weakness. At the same time, we adjusted the portfolio's positioning in semiconductors, paring holdings with less valuation support and more exposure to China and/or cyclical end markets. Within this subsector, we also rotated into ideas that we believe offered favorable risk/reward profiles. For example, we believe leading memory chipmakers trade at undemanding valuations that provide some support on the downside and offer significant upside potential when customer work through their excess inventories and the supply/demand balance improves. We maintained the portfolio's meaningful overweight in the internet subsector, though we refined the portfolio's positioning. We continue to monitor regulatory developments in the U.S. and acknowledge the potential for increased volatility in shares of the large U.S. internet companies.

Software

The portfolio ended the quarter significantly overweight software, with an emphasis on high-quality names that we believe stand to benefit from the wave of digital transformations underway at enterprises of all sizes and across virtually every industry. Given the efficiencies associated with these digital investments and their importance to enterprises maintaining a competitive edge, we view these growth stories as relatively resilient. Unfortunately, valuations in this space generally appear more demanding and require discipline with regards to entry points. However, the combination of elevated valuations and macro uncertainties can create investment opportunities. High bars of expectations mean that hiccups during earnings season can tilt the risk/reward profile in our favor. In the second quarter, reports that U.S. regulators had taken steps that could set the stage for antitrust inquiries into the dominant U.S. online platforms sparked a sell-off that extended to software-as-a-service stocks, in part because of the group's elevated valuations. We took advantage of this pullback to establish or add to positions in higher-quality names that we believe offered favorable risk/reward profiles.

• We increased the portfolio's position in Salesforce.com, a leader in enterprise software for customer relationship management. These purchases took advantage of the stock's pullback after Salesforce.com announced the proposed purchase of Tableau Software, another holding in the portfolio. In our view, the market's negative reaction to the deal overlooks Salesforce.com's execution on previous high-profile acquisitions and does not appreciate Tableau Software's leverage to the accelerating digital transformations underway at enterprises of all sizes and across industries. We also like the potential revenue uplift from cross-selling Tableau Software's highly flexible analytics and visualization solutions to Salesforce.com's extensive customer base. This deal reinforces our belief that Salesforce.com continues to build an impressive end-to-end platform for the sales process at a time when larger enterprises are increasingly adopting high-quality, cloud-based software to control spending on IT infrastructure while improving productivity.

• We established a position in New Relic, a software company that specializes in application monitoring solutions designed to help developer and IT operations teams to identify and address performance issues in a timely manner. In our view, the company should be able to grow its core business at a sustainable rate as its cloud-based solutions take market share from legacy products. We also appreciate management's commitment to innovation, ongoing investments to improve the user experience, and slate of forthcoming product launches that should expand its addressable market and extend its growth runway.
• We initiated a position in Twilio, a leader in cloud-based tools that enable enterprises to embed voice, video, and chat communications into their applications. Not only do we like the company's leverage to digital transformations underway across industries and throughout the economy, but we also like the breadth of its opportunity set and investments in potentially high-impact product initiatives. In our view, the company's rapid growth should have a long runway.
• We increased the portfolio's position in Synopsys, a global leader in electronic design automation (EDA) software and associated intellectual property that semiconductor companies use to design and test chips. The stock sold off on fears that the U.S. ban on technology sales to Chinese telecom equipment company Huawei could weigh on Synopsys' growth prospects. However, Synopsys posted solid quarterly results in a difficult environment and raised its revenue guidance despite removing Huawei from its projections. In our view, the market does not fully appreciate the recurring nature of the company's revenue and the favorable demand backdrop as semiconductor designs become more complex and chips proliferate in nontraditional end markets. We also believe that the trade spat with the U.S. could prompt China to prioritize building domestic capabilities in semiconductors, which would drive demand growth for EDA software.
• We exited Ultimate Software Group, which received a takeover offer from a consortium of private-equity firms in February.
• We eliminated Take-Two Interactive Software in favor of other investment ideas.

Internet

The portfolio's significant overweight in the internet subsector remained in place at the end of June. We acknowledge the risk of increased volatility and remain attuned to the potential for stepped-up regulation of Amazon.com, Facebook, and Alphabet, Google's parent company. Anticipation of a protracted legal battle and increased public scrutiny of their business practices could also be a distraction and/or lead to additional capital expenditures.� However, we also strive to take a balanced view and not lose sight of these companies' competitive advantages and long-term prospects. For one, the extent to which these businesses are embedded in our everyday lives means that users have largely shrugged off the stream of negative headlines. By virtue of their scale and penetration rates, we also believe the dominant internet players are best-positioned to leverage their popular platforms to pursue adjacent growth opportunities while monetizing their robust troves of data on users and their behavior. To varying degrees, we think strong balance sheets, internal talent, superior computing infrastructure, and valuable data position these companies to drive future innovation. Finally, whereas these internet giants are better positioned to cope with an increased regulatory burden, smaller companies and potential disruptors would feel the pain even more.

• Further escalation in the trade dispute between the U.S. and China pressured Chinese equities, including shares of internet giants Alibaba Group Holdings and Tencent Holdings. We added to these positions on weakness. We expect Alibaba Group Holding's investments in its cloud business and offline retail to pay off over the long term by expanding the company's total addressable market. The company's rich data on user behavior across its different services also create ample opportunity for monetization, while its leadership in online retail offers exposure to rising household incomes in China and other emerging markets. �In our view, Tencent Holdings is one of the China's best-positioned mobile internet companies and that its popular social and gaming platforms have significant potential for further monetization. In the coming quarters, the company's video game revenue should also receive a lift as regulators continue to approve new titles. Finally, we appreciate the optionality embedded in Tencent Holdings' ancillary business lines, including online payments, internet finance, and cloud services.
• We initiated a position in Sea, a Singapore-based internet platform company that has found success with its Free Fire online video game. The title has grown its user base rapidly in Sea's core markets of Greater Southeast Asia and was a surprise hit in Latin America. We like how Sea's video game business balances published and self-developed titles, while its focus on underserved markets in Southeast Asia limits risk relative to China and other countries where consumers place a premium on innovation. In our view, Sea's e-commerce platform also shows promise and should have a long growth runway.
• We trimmed the portfolio's positions in Alphabet, Amazon.com, and Facebook. We still value these large U.S. internet companies for their scale advantages, exposure to secular growth trends, and the many levers they can pull to unlock value for shareholders. We will continue to monitor the latest regulatory developments surrounding the tech giants and how they may affect the risk/reward profiles embedded in their stocks.
• We exited Booking Holdings, a global provider of online travel services. The stock came under pressure from first-quarter results that showed signs of softness in the company's core European market, reinforcing concerns about intensifying competition and the uncertain macro outlook's implications for travel demand.

Semiconductors

The portfolio's allocation to semiconductors (an inherently cyclical industry) has the most exposure to macro conditions, developments in the U.S.-China trade spat, and the U.S. ban on technology shipments to Huawei. These conditions create uncertainty regarding the timing and magnitude of a potential recovery in various semiconductor end markets. �In our view, the U.S. push to limit technology-related security concerns and curb the transfer of key intellectual property to China likely will motivate the Chinese leadership to place even more of an emphasis on developing the country's domestic technology ecosystem. Over the long term, this could be a tailwind for companies that sell the digital equivalent of picks and shovels. However, this dynamic also creates a tail risk for companies that specialize in commoditized products where it would be easier for China to develop competing capacity. In the second quarter, we refined our positioning in this subsector, paring holdings with less valuation support and more exposure to China and/or cyclical end markets. At the same time, we rotated into ideas that we believe offered favorable risk/reward profiles.

• We initiated a position in Micron Technology, one of the world's largest producers of memory chips. In our view, bearish investor sentiment and the prospect of large customers eventually working through their excess memory inventories create a compelling risk/reward equation. Over the long term, we expect Micron Technology to benefit from industry consolidation and robust demand related to the growing importance of big data and AI in a wide range of industries.
• We established a position in Qualcomm after the stock surged on the announcement of a royalty agreement with Apple. We believe the stock has not fully priced in the potential for significant content gains associated with the 5G rollout and an improved industry structure after Intel announced it would halt its push into this area. Though not a foundational pillar for our investment thesis, we note that Qualcomm does not sell chips to Huawei and might experience a bump in revenue if Huawei's Chinese competitors eventually take share because of the U.S. restrictions on shipping critical components to the company. At the same time, the reaction in Qualcomm's stock suggests that the market has reset its expectations for a potential Huawei licensing deal and continues to worry that the Trump administration could impose similar restrictions on exports to other Chinese handset makers.
• We reduced the portfolio's position in Microchip Technology to reflect the company's leverage and exposure to developments in U.S.-China trade relations.
• We believe NXP Semiconductors should benefit from its strong leverage to secular content gains in automobiles and the internet of things over the long haul. However, at these levels and in the current macro environment, we think the stock's risk/reward profile is not as appealing because of the company's exposure to slowdowns in China and the auto market. We continued to pare the portfolio's stake in this holding.

Hardware

The portfolio finished the quarter underweight the subsector, reflecting our belief that many of these businesses must contend with maturing product lines, the threat of commodification, and pricing pressures related to the transition to cloud computing. That said, the cyclical nature of some hardware industries can create opportunities. We look for instances where negative sentiment and undemanding valuations create a favorable risk/reward setup in shares of low-cost producers that should benefit the most when conditions improve, and the cycle eventually turns. We also gravitate toward names where we believe innovation has the potential to drive differentiated financial results and market share gains.

• We took advantage of weakness to add to Samsung Electronics, a leading producer of memory chips, smartphones, and consumer electronics. We believe bearish sentiment toward the stock and the prospect of large customers eventually working through their excess memory inventories create a compelling risk/reward profile even if the recovery does not occur on the same time line as in our base scenario. Over the longer term, we expect Samsung Electronics to benefit from a consolidated DRAM industry and a favorable demand outlook, with growth driven by cloud computing, AI, video games, streaming video, and other opportunities.

IT Services

This subsector includes many traditional technology companies that we believe are poorly positioned as customers increasingly migrate to cloud-based solutions. However, within this industry, we like select payments companies that operate strong business models and offer exposure to appealing secular growth trends.

• We trimmed the portfolio's positions in Visa and MasterCard. We like these companies' leverage to the transition away from cash to electronic payments, as well as the business model's pricing power and capacity to generate free cash flow.
• We initiated a position in PayPal Holdings, a leader in digital payments. We like the company's strong balance sheet, its leverage to growth in e-commerce, impressive technology stack, and the potential monetization of its person-to-person mobile payments application, Venmo.

Telecom Equipment

We tend to find fewer opportunities in telecom equipment, as intense competition, commodified product lines, and the drag from maturing business lines make this subsector a less-fertile hunting ground for businesses that are on the right side of innovation.

• Hexagon, a global leader in metrology, specializes in precision measurement and visualization technologies as well as 3D design software. We exited Hexagon in favor of other opportunities.
• Motorola Solutions is a dominant player in emergency communications solutions and infrastructure that has limited exposure to the Chinese market. We like the defensive characteristics of Motorola Solutions' core business and believe the market does not fully appreciate the company's potential to increase its proportion of recurring revenue and drive top-line growth by pushing into adjacent products, such as video surveillance and public safety-related software and analytics.