Stock-Specific Opportunities Emerged in Volatile Markets

A range of high-quality growth compounders spanning the information technology (IT), consumer discretionary, financials and industrials and business services sectors emerged amid market volatility during the quarter. Uncertainty about central bank intentions, economic fundamentals and trade policies triggered bouts of shifting sentiment and market direction. Even though we were active in adjusting the composition of the portfolio, sector positioning was little changed from the previous quarter. In these conditions, we still look to build a balanced portfolio with companies that we believe will increase earnings and market share over the medium term and weather economic and political risks such as Brexit.

Raised IT Overweight, Adding to WANdisco

We raised our large overweight allocation to the information technology (IT) sector, adding to our investment in UK-based WANdisco, a big data technology company and specialist in distributed computing, taking advantage of share price weakness.

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IT is one of our largest absolute positions, which is consistent with our growth approach. We continue to favor companies in software, IT services, and semiconductors and semiconductor equipment, with innovative and resilient business models that are supported by solid bases of recurring revenues or driven by structural trends. Wirecard and Keywords Studios are our largest holdings in IT services. Within software, we hold WANdisco and First Derivatives, a provider of software and consulting services, particularly to finance, technology, and energy organizations. IQE is our largest investment in semiconductors.

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We also hold video game developers, one of the fastest-growing segments of the entertainment industry. Our investments include Team 17, a UK-based company that is one of the longest-running independent video game developers, and Codemasters Group Holdings, a well-established UK-based developer and publisher known for its racing games.

Pared Underweight in Financials

We�cut our underweight allocation to financials, initiating in Tikehau Capital, an alternative asset manager and holding investment company, taking advantage of share price weakness.

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We remain overweight the capital markets industry, focusing on the relatively higher-quality asset managers that are durable growth companies. Our largest holdings include XPS Pension Group JTC, a fund management company; and Flow Traders, an electronic liquidity provider based in the Netherlands, which specializes in exchange-traded products.

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We are underweight banks and insurance, which generally have been stunted by deleveraging, litigation issues, and increased regulation. Among banks, we hold Finecobank, an Italian financial service company that specialize in online brokerage, and Van Lanschot, a Dutch diversified bank that is now increasing its focus on wealth and asset management. In the insurance industry, we hold Sabre Insurance, a UK-based provider of auto insurance, and DFV Deutsche Familienversicherung, an innovative online German insurer�specializing in health, property and casualty insurance at cheaper rates than the established companies.

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• Tikehau Capital is rapidly transforming itself from a principal investment holding company into a leading European alternative asset manager. We expect the alternative asset management division, which manages assets of EUR ?13 billion, to grow strongly thanks to Tikehau's reputation, track record and fundraising efforts.

Adjusted Mix of Consumer Discretionary Stocks

We further adjusted the composition of our holdings in the consumer discretionary sector, modestly raising our exposure. We exited LeoVegas, a mobile gambling company, after disappointing performance amid increasing regulatory pressure. We also sold our position in Just Eat, one of Europe's largest food carryout ordering websites, and reduced our position in Takeaway.com Holding, a leading online food carryout service in Europe. Just Eat's recent performance has disappointed as well-financed competitors such as Deliveroo enter an increasingly crowded field. We took profits on Takeaway.com Holding after a strong performance this year.

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We added three new listings, Trainline, the UK's leading online rail and coach booking platform; Watches of Switzerland, a retailer of watches and jewelry in the UK; and Loungers, the only operator of all-day caf�-bars of scale in the UK. We also opened a position in Hellofresh, a Germany-based online provider of meal kits, taking advantage of share price weakness.

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We own a broad swath of companies with our largest bets in the internet and direct marketing; retailing; leisure products; and hotels, restaurants, and leisure industries. In internet and direct marketing, we own shares in Takeaway.com, one of the largest holdings in the portfolio; ASOS, a leading global online fashion retailer; and Trainline. In specialty retail, our biggest position is SMCP SAS, a French fashion retailer. Our leisure product positions include Mips, a maker of helmets for reducing rotational forces on the brain caused by impacts to the head, and Thule, a Sweden-based company engaged in the development and manufacture of sport, outdoor and cargo products. In hotels, restaurants, and leisure, our largest position is Malta-based Kambi, which provides outsourced online sports betting services.

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• We participated in the market launch of Trainline, the UK's leading online rail and coach booking platform, which is benefiting from favorable structural trends. Bookings increasingly are being made online, and this shift still has a long runway; end markets are growing as consumers increasingly adopt rail and coach travel; and there is a regulatory drive to liberalize the supply side, particularly in Europe. The company has been upgrading its platform, which should support operating leverage and boost operating profit.

Industrials and Business Services: Raised Underweight

We adjusted our positions in industrials and business services, increasing our underweight allocation to a sector that is likely to struggle as the economy loses momentum. We exited our holdings in Varta, a maker of lithium-ion batteries, and Aalberts Industries, a Dutch specialist in industrial services and flow control. We added Polypipe, the largest manufacturer of plastic piping systems in the UK and a top 10 player in Europe.

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We are overweight professional services and industrial conglomerates. In the former, our largest position is Intertrust, an international trust and corporate management company, followed by Alpha Financial Markets, a leading global consultant to the asset and wealth management industry. In the latter, we own shares in DCC, an ex-venture capital company that provides international sales, marketing, and support services. The company offers diversified exposure to the UK/Irish economies and has an impressive long-term record of growing earnings and dividends.

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We own some holdings in the machinery industry, though we are underweight. Our investments include Norma, a Germany-based maker of clamps, connectors, and fluid systems that we expect to benefit from the trend of engine downsizing and carbon dioxide emission control and from the stronger global focus on leakage control of gases and fluids. We also have positions in Spirax-Sarco Engineering, a UK-based fluids control business that is expanding into overseas markets, and Konecranes, which is increasing the number of cranes under its control.

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• We exited Varta, taking profits after strong performance since the start of the year. We do not expect the shares to rise much further as the company expects growth to be slower this year. We sold our holding in Aalberts Industries because slowing economic growth is likely to weigh on cyclical stocks in the months ahead. While Polypipe, our new holding, is trading at levels that reflect a UK discount caused by Brexit uncertainty, the company has continued to deliver mid-single-digit organic growth and improved margins, beating targets set at its 2014 launch onto the market.

Deepened Real Estate Underweight

We further reduced our exposure to the real estate sector, selling our holding in Gecina, a France-based real estate investment trust that owns office properties in Paris. The sector has become less attractive amid uncertainty about the central bank intentions on monetary policy.

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Our holdings include Ado Properties, which owns high-quality residential assets in Berlin; two homebuilders, Aedas Homes in Spain and Instone Real Estate in Germany; and Inmobiliaria Colonial, a Spanish REIT that operates a high-quality portfolio of offices in Madrid, Barcelona, and Paris.

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• We exited Gecina as because a record amount of office space is expected to be delivered in 2019 even as demand for offices has contracted sharply. Meanwhile management is planning to increase its project pipeline despite a stretched balance sheet and ongoing dividend hikes.