Review & Outlook

Importantly, the current market environment has also created attractive opportunities outside of today’s AI leaders. Many high-quality companies within our Quality Growth universe have underperformed the broader market despite strong fundamentals and durable business models. In our view, some of these companies are currently trading at valuations that reflect short-term investor sentiment rather than their long-term earnings potential. This disconnect creates opportunities for investors with a long-term perspective.

Earlier in the AI cycle, investors rewarded companies such as Microsoft, Google, Amazon, and Oracle for their leadership in developing the computing infrastructure needed to advance artificial intelligence. However, as the capital required to build data centers and expand AI capabilities has increased significantly, investors have begun evaluating whether the long-term economic returns will justify these investments.

Key questions facing the market include:

• The sustainability of current levels of AI investment and capital spending
• The impact of higher interest rates and financing costs
• The ability of companies to generate attractive returns on infrastructure investments
• The opportunity cost of prioritizing AI spending over dividends or share repurchases
• The pace of AI adoption and the development of practical applications
• The long-term economic benefits for both developers and users of AI technology

As Quality Growth investors, we remain focused on companies with durable competitive advantages, strong balance sheets, proven business models, and the ability to generate consistent cash flows over time. We view AI as a transformative technology that has the potential to improve productivity, increase efficiency, and enhance the capabilities of businesses across many industries. While the ultimate impact of AI remains difficult to predict, we believe the strongest companies will be those that successfully integrate this technology into their operations while maintaining their underlying competitive advantages.

Looking ahead, our investment decisions continue to be guided by several key themes:

• Stable employment conditions and resilient consumer spending continue to reduce the likelihood of a significant economic downturn.
• Current challenges within private credit and private equity markets appear manageable and are unlikely to create broad economic contagion.
• Strong hospital and senior living occupancy rates continue to support demand for healthcare services, supplies, and surgical equipment.
• Improving pharmaceutical approval trends provides a favorable environment for biotechnology and life science companies.
• Limited housing inventory, improving homebuilder margins, and recent housing policy developments suggest the potential for improvement in the housing market.
• The highest percentage of stocks since the technology bubble of the early 2000s are currently moving independently of the broader market, creating attractive opportunities for diversification.
• Expanding earnings expectations across multiple sectors continue to support the benefits of a diversified portfolio rather than concentrated market exposure.

Portfolio Positioning

Our portfolio activity during the first half of the year reflects our continued focus on identifying attractive long-term opportunities:

• Purchases exceeded sales as we continued reallocating capital from securities with elevated valuations into companies where we believe the long-term opportunity is more attractive.
• Cash allocations remain near historically low levels and below our normal targets, reflecting our constructive outlook for equities and the broader economy.
• With investment-grade corporate bonds spreads near historically tight levels and significant corporate debt issuance expected, we have maintained a balanced allocation between government and corporate bonds.

Our investment philosophy remains unchanged. We continue to believe that successful long-term investing requires discipline, diversification, and a focus on valuation, risk management, and business fundamentals. While recent market performance has been driven by a concentrated group of companies and themes, history has shown that market leadership evolves over time. We believe a broadly diversified, balanced, and growth-oriented portfolio is well positioned to benefit from continued technological advancement and the broader economic opportunities created by innovation.

As always, if you have any questions or if your personal circumstances have changed, please do not hesitate to contact us.

Warm regards,

Daniel A. Kane, CFA
President

Stephen F. Knapp, CFA
Director of Research

Jeanne C. Goedecke, CFA
Portfolio Manager