Added to Consumer Discretionary; Pared Outperformers

We added seven new names and eliminated five in the third quarter. As well as initiating in new ideas, such as in consumer discretionary, we have been trimming names that have done exceptionally well, such as in communication services and consumer staples, as well as those where we have lost conviction.

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The strategy's profile continues to reflect our focus on durable growth companies with a sustainable competitive advantage. We have maintained a bias toward health care and information technology, and we also have an overweight position in communication services, largely due to our holdings in computer gaming stocks. We remain underweight to industrials and business services and to real estate.

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Although we remained overweight to micro-cap names (names with a market capitalization of less than USD 500 million), we took selective advantage of relative strength to cut our exposures if we could not identify any meaningful fundamental change. Since the start of the year, 11 of the 24 names that we exited were in the micro-cap bucket.

Industrials and Business Services

We reduced our underweight in industrials and business services as attractively valued opportunities presented themselves. We initiated positions in Headhunter, a leading Russian recruitment business, and Aalberts, a diversified industrial company operating in industrial machinery and equipment. We added to Howden Joinery, the UK's leading supplier of kitchens. However, we trimmed our position in Va-Q-Tec, which designs and manufactures customized vacuum insulation panels, booking profits after strong performance.

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We are overweight in 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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In the machinery industry, apart from Aalberts, we own Va-Q-Tec and Rotork, the world's leading designer and manufacturer of heavy-duty industrial valve actuators devices. We also hold 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.

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• Headhunter is a clear market leader in the expanding online recruitment market in Russia. The company owns the largest database of CVs, giving it a scale advantage over competitors, and is the best-known brand in the market, which should help it increase market share, revenues, and margins.�

Information Technology

We increased our overweight in information technology (IT), by adding CANCOM, a German provider of information technology infrastructure and services.

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IT is one of our largest absolute and relative positions, which is consistent with our growth approach. We are overweight in electronic equipment, software, and semiconductors and semiconductor equipment, where we continue to favor companies with innovative and resilient business models that are supported by solid bases of recurring revenues or driven by structural trends.

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In electronic equipment, our largest holding is Renishaw, a world-leading metrology company, producing best-in-class touch-trigger probes and motion encoders for the machine tool industry. First Derivatives, a provider of software and consulting services, particularly to finance, technology and energy organizations, is our main investment in software. In semiconductors and semiconductor equipment, our biggest position is Aixtron, a leading Germany-based provider of deposition equipment to the compound semiconductor industry.

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• CANCOM is a strong company in an industry on the right side of change. We believe improving fundamentals and structural growth will be driven by digitization of German small and medium-sized companies and of government functions; outsourcing of IT functions to specialists like CANCOM; and consolidation of a fragmented IT services sector.

Consumer Discretionary

We adjusted our holdings in the consumer discretionary sector, reducing our overweight allocation. We exited Kambi, a provider of outsourced online sports betting services, and Joules Group, a British clothing company, in order to pursue ideas with greater runways for growth. We recycled the funds into positions in THG Holdings, a large UK e-commerce company that specializes in consumer products, and Knaus Tabbert, Germany's leading leisure vehicles maker, participating in their initial purchase offers.

We own a broad swath of companies in the sector. Our largest industry bets are internet and direct marketing, where we hold ASOS, a leading global online fashion retailer, and Shop Apotheke Europe, an online retailer of pharmaceutical products, and leisure products, where our investments 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 that develops and manufactures sport, outdoor, and cargo products.

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• THG Holdings is poised for strong long-term growth as e-commerce takes a larger share of the retail market. The company has begun licensing its enterprise-focused e-commerce platform that helps retailers and brands build a direct global online channel to consumers. The beauty and nutrition e-commerce businesses are already profitable and expanding rapidly.
• Knaus-Tabbert has, in our view, a long runway for growth supported by three factors: continued organic market share gains, where the company and current management have an impressive track record over the last decade; the structural growth of the end market, in particular the higher-priced motorhome segment and the core German market; and margin expansion driven by scale and production efficiency.

Health Care

Health care sector remains a key long-term bet that contains some of the portfolio's largest relative and absolute positions. We added Morphosys, a Germany-based biotech company that specializes in the discovery and development of therapeutic antibodies.

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Our largest industry allocations are:

• health care equipment and supplies, where we own Ambu, a Denmark-based provider of diagnostic and life-supporting devices for hospitals and rescue services;
• biotechnology, where Abcam, a Danish company engaged in producing and marketing research-grade antibodies, is our main investment;
• life sciences tools and services, where Eurofins Scientific, a leading global provider of bioanalytical laboratory testing services, is our largest holding; and
• health care providers and services, where we own shares in Amplifon, an Italian company that distributes, adjusts, and personalizes hearing aids.

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• We believe Morphosys and partner Incyte could generate sizable sales from tafasitamab, a drug for treating blood cancer. The U.S. Food and Drug Administration has already approved its use in combination with another drug for the treatment of relapsed or refractory large B-cell lymphoma in adult patients. We believe that it could eventually be more widely used as a front-line treatment.

Communication Services

We further reduced our overweight in communication services, taking some profits in Stillfront, a Sweden-based publisher of digital games, after strong performance and exiting Karnov, a legal information provider that has not fulfilled its promise since its initial public offering last year.

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Our largest industry bet is entertainment, where we hold four games developers, one of the fastest-growing segments of the industry. Apart from Stillfront, our investments include Codemasters Group Holdings, a UK-based video game developer and publisher, and Frontier Developments, a world management games specialist.

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We are also overweight interactive media and services, where we hold Scout24 Holding, an online classified advertising company that operates mainly in Germany, and the leading UK real estate portal, Rightmove.