During the quarter, we added to and diversified the portfolio's positions in high-quality software names, taking advantage of a pullback in momentum stocks and company-specific weakness. At the same time, we reduced the portfolio's allocation to semiconductors, paring holdings with less valuation support and more exposure to China and/or cyclical end markets. We maintained the portfolio's meaningful overweight in internet, though we pared the portfolio's exposure to this subsector slightly. We continue to monitor regulatory developments related to the large U.S. internet companies.

Software

The portfolio remained 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. We tend to regard demand for cloud-based enterprise software are relatively resilient, as these digital investments drive efficiency gains for customers and help them to maintain their competitive edge. Valuations for high-quality software-as-a-service companies generally appear more demanding and require discipline regarding 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 shift the risk/reward profile in our favor, providing appealing entry points. We remain agile and aim to identify and take advantage of these dislocations. During the quarter, we increased the portfolio's exposure to high-quality software-as-a-service stocks on broad-based and company-specific weakness. We also refined our positioning to reflect evolving risk/reward profiles.

• We took advantage of pre-earnings weakness to add to the portfolio's position in Salesforce.com, a leader in cloud-based enterprise software for managing customer relationships. In addition to concerns about the weak macroeconomic environment, the stock came under pressure after the company closed its acquisition of Tableau Software, likely reflecting equity sales by the latter's shareholders and concerns about integration risk. In our view, this weakness overlooked 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. The 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 added to the portfolio's position in ServiceNow on weakness. The stock sold off after the company's guidance for third-quarter subscription billings came in a bit light. Management attributed this hiccup to a temporary delay in renewal deals with the U.S. federal government. We believe the software-as-a-service company should benefit from the growing importance of information technology to workforce productivity within large enterprises. In our view, ServiceNow's highly scalable, customizable, and easy-to-use cloud-based ticketing platform for managing IT service requests and automating a wide range of workflow processes should continue to take market share. We also value ServiceNow's track record of expanding into adjacent product categories and business functions, a strategy that expands its total addressable market and creates a significant opportunity for cross-selling.�
• We bought additional shares of Atlassian. The stock came under pressure during the month on a broader pullback in momentum-driven names and concerns that the company's seasonal price increases could lead to some lumpiness in quarterly results. Atlassian is a leading provider of on-premises and cloud-based workflow and collaboration software for enterprises that has built a strong foothold among application developers. We like the company's opportunity to grow OpsGenie's user base and improve monetization of Trello through the introduction of new features. We expect Atlassian to benefit as software and application developers become increasingly important at enterprises of all sizes and see the potential for its collaboration and project management tools to gain further traction outside the IT department. In our view, Atlassian is a well-managed, secularly advantaged software company with a disruptive business model that has a long growth runway.
• We added to Twilio, a leader in cloud-based tools that enable enterprises to embed voice, video, and chat communications into their applications. The stock pulled back after the company announced solid quarterly results that beat the consensus estimate, but not by the same margin as in recent quarters. Not only do we value 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 trimmed the portfolio's stake in Intuit, a leading provider of financial software for consumers, small to mid-size businesses, and professional accountants. We believe the market underappreciates Intuit's dominant position, the durability of its business, and the company's opportunity to drive top-line growth and expand its total addressable market as it transitions to a software-as-a-service model and new features gain traction among business customers.
• We pared the portfolio's position in Proofpoint. In our view, Proofpoint's suite of leading email security solutions stands to benefit from strong demand growth as hackers increasingly target this vulnerability and enterprises shift their email to the cloud. We value Proofpoint's software-as-a-service model, growth potential in international markets, and ongoing investments to address emerging threats.
• We trimmed Synopsys to manage position size and exited Cadence Design Systems on strength. These companies are leading providers of electronic design automation software to the semiconductor industry.

Internet

The portfolio's overweight in internet remained in place at the end of the quarter, though we pared our exposure somewhat to reflect evolving risk/reward profiles in the subsector. We acknowledge the risk of increased volatility and remain attuned to the likelihood of 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 distract their management teams 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.

• We trimmed Facebook, but the stock remained one of the portfolio's largest positions. The stock finished the quarter lower, reflecting concerns about U.S. federal and state investigations into the company, as well as its exposure to data privacy- and content-related issues and its advertising-centric business model's sensitivity to macroeconomic weakness. We continue to monitor regulatory developments and acknowledge that developments on this front could increase volatility in Facebook's stock. However, user engagement on Facebook's platforms has remained robust, and we believe the company has multiple levers to pull to unlock value for shareholders. In our view, Facebook's share of consumer time spent on mobile devices, coupled with its ad monetization and targeting capabilities, should help it capture a sizable chunk of the secular growth in online advertising. We also like the company's opportunity to monetize Instagram and the WhatsApp messaging service's long-term potential.
• We exited Sea after the Singapore-based internet platform company reported quarterly results that suggested its popular "Free Fire" video game had lost some of its momentum after ramping up rapidly. Although we like how Sea's video game business balances published and self-developed titles and its e-commerce platform's long-term prospects, we believe the company's upcoming launches of several third-party video games could compress profit margins in future quarters and that these titles are unlikely to deliver the same magnitude of growth as "Free Fire."
• We sold some shares of Alibaba Group Holding to manage the portfolio's position size. 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, but complementary, services create ample opportunity for monetization, while its leadership in online retail and fintech offers exposure to rising household incomes in China and other emerging markets.
• We trimmed Alphabet. Google's parent company boasts leading positions in search, programmatic advertising, mobile, and video. We believe that Alphabet is well placed to deliver sustainable growth as it leverages its rich trove of user data and strength in AI to improve monetization across its platforms. In our view, the company's strong balance sheet, coupled with world-class computing talent and infrastructure, give it a leg up in driving innovation internally and through private investments. We will continue to monitor the risks and uncertainties associated with the state and federal investigations into Alphabet's business practices and incorporate these developments into our holistic assessment of the stock's risk/reward profile.

Semiconductors

The portfolio's allocation to semiconductors (an inherently cyclical industry) has the most exposure to macro conditions and developments in the U.S.-China trade dispute. 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 scenario could create a tailwind for linchpin companies in the semiconductor value chain that are vital to the design and manufacture of leading-edge chips. However, we believe this dynamic creates a tail risk for companies that specialize in commodified products where it would be easier for China to develop competing capacity. In the third quarter, we reduced the portfolio's position in this subsector, paring holdings with less valuation support and more exposure to China and/or cyclical end markets.

• 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 like Microchip Technology's history of profitability across the cycle and maintain our view that, over the long haul, its exposure to favorable end markets and improving pricing dynamics can drive revenue growth.
• We exited Qualcomm in favor of other opportunities. Although we like Qualcomm's leverage to the ramp-up in 5G wireless networks globally, we acknowledge that the timing of this rollout, the chipmaker's exposure to China, and uncertainty surrounding its royalty deals with handset makers Apple and Samsung Electronics could be headwinds for the stock.
• ASML Holding is a semiconductor capital equipment company that specializes in lithography tools, technologies that enable manufacturers to improve memory and logic chip performance by including more transistors on a silicon wafer. The stock surged after the company reported solid quarterly results in a difficult environment for semiconductors, with margin expansion and strong order growth standing out as the highlights. We like ASML Holding's monopoly position in next-generation lithography equipment, tools that we believe will be essential to producing the leading-edge chips needed to power AI and other intensive processes. In our view, the market underestimates the potential for this technology to drive revenue growth and improve profitability. We trimmed ASML Holding on strength to manage position size.
• We eliminated Infineon Technologies on strength and rotated into investment ideas that we believe offer better risk/reward profiles. In our view, the portfolio's position in NXP Semiconductors offers exposure to similar end markets without the potential drag of Infineon Technologies' purchase of Cypress Semiconductors.
• The portfolio's positions in Samsung Electronics and Micron Technology represent bets that the memory market has bottomed and that a restocking cycle should occur when large customers work through their excess chip inventories. Over the long term, we expect Micron Technology and Samsung Electronics 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 initiated a position in Applied Materials, a leading provider of semiconductor capital equipment. Over a longer time frame, we believe the company will benefit from rising capital intensity and more rational capital expenditure cycles in the semiconductor industry, which, in turn, should boost its cross-cyclical earnings power. Growing demand for semiconductors related to the so-called internet of things, hyper-scale data centers, and AI should act as another secular tailwind. In the near term, we believe that Applied Materials' undemanding valuation and signs of a bottom in the memory market create a compelling risk/reward setup for the stock.

Financial Services

In this subsector, we like select payments companies that operate strong business models and offer exposure to appealing secular growth trends, especially growth in online transactions. The portfolio ended the quarter significantly underweight financial services, as we see better growth stories and risk/reward profiles elsewhere in our investment universe.

• We added to Visa on weakness. We like the payment network's 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. Visa's reputation as a long-term compounder can also help to lift the stock when the market shifts into risk-off mode.

Hardware

The portfolio finished the quarter underweight the subsector, reflecting our belief that many of these businesses face 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 also gravitate toward names where we believe innovation has the potential to drive differentiated financial results and market share gains.

• We believe Pure Storage is well positioned to disrupt the enterprise storage market because of its superior technology and customer service, the revenue visibility and margin benefits that come from providing hardware as a service, and its lack of legacy technologies and other distractions that have limited established players' ability to innovate. In our view, investors do not fully appreciate Pure Storage's potential to sustain an above-market growth rate as it takes share from incumbent providers.