Morgan Stanley operates as a global financial services company. The firm provides investment banking products and services to its clients and customers including corporations, governments, financial institutions, and individuals. It operates through the following segments: Institutional Securities, Wealth Management, and Investment Management. The Institutional Services segment provides financial advisory, capital-raising services, and related financing services on behalf of institutional investors. The Wealth Management segment offers brokerage and investment advisory services covering various types of investments, including equities, options, futures, foreign currencies, precious metals, fixed-income securities, mutual funds, structured products, alternative investments, unit investment trusts, managed futures, separately managed accounts, and mutual fund asset allocation programs. The Investment Management segment provides equity, fixed income, alternative investments, real estate, and merchant banking strategies. The company was founded by Harold Stanley and Henry S. Morgan in 1924 and is headquartered in New York, NY.
COMMENTARY
Global equity markets weakened significantly in March as an escalation of the US-Iran conflict and the closure of the Strait of Hormuz drove a sharp repricing of risk across regions and sectors. Surging energy prices weighed broadly on sentiment, with energy the only sector to post positive returns. A weaker Australian dollar provided a partial offset to negative returns for unhedged investors, as foreign currency exposures translated into relatively higher Australian dollar terms.
In the US, equities declined as rising energy costs reignited inflation concerns and pushed Treasury yields higher. Technology stocks were notably weak, with sentiment towards enterprise software deteriorating as AI productivity tool adoption disappointed and competitive dynamics in the large language model space intensified. Digital advertising demand also softened. Financials proved more resilient, supported by elevated trading volumes and robust capital raising activity.
In Europe, equity markets were more acutely affected given the region’s heavy dependence on energy imports. Spiking natural gas prices pressured margins across industrials and materials, while inflation accelerated and business sentiment deteriorated. German retail sales decelerated, and forward-looking survey data weakened.
In China, equity markets reflected continued divergence between external and domestic drivers. Export activity remained strong, while domestic conditions lagged due to declining consumer spending, ongoing weakness in property investment, and falling home prices.
Portfolio Commentary
The Fund underperformed the benchmark in March. Industrials and information technology were the largest detracting sectors, partly offset by positive stock selection in consumer discretionary and health care. The portfolio’s largest overweights remained industrials and information technology, with financials and materials the largest non-exclusionary underweights.
Morgan Stanley and JPMorgan Chase were leading contributors, as market volatility and resilient capital raising activity bolstered their trading businesses. Accelerating US loan growth provided additional support for JPMorgan Chase. TJX Companies, the US-based off-price retailer, also contributed as its value proposition resonated with cost-conscious consumers, driving strong same-store sales and market share gains.
Conversely, Samsung Electronics, the South Korean semiconductor and memory chip manufacturer, consolidated after being the portfolio’s strongest performer in February, though memory fundamentals continue to improve. Siemens Energy, the German provider of gas turbines and grid infrastructure, pulled back after strong year-to-date performance amid heightened Middle Eastern tensions, which pressured European equities. Societe Generale, the French banking group, was soft amid the same European weakness, though its core retail turnaround continues to surpass guidance.
The largest additions were to AstraZeneca, TJX Companies, and Mitsubishi Estate, a Japanese commercial and residential property owner benefiting from accelerating rental rates. The largest reductions were to Meta Platforms, Heidelberg Materials, and Microsoft. Meta was reduced to an underweight as advertising demand deteriorated and US litigation risk increased. Heidelberg Materials, the European building materials producer, was significantly reduced after the potential easing of CO2 emission regulations and spiking natural gas prices challenged the thesis. Microsoft was further reduced as Copilot adoption disappointed amid an increasingly competitive environment for AI-enabled productivity suites.
The Fund initiated Howmet Aerospace, the US-based supplier of engineered aerospace components, including turbine blades for commercial aircraft and gas turbine markets, benefiting from robust narrowbody demand and expanding exposure to generative AI datacenter investment. The residual Alibaba holding was exited as declining domestic consumption and heightened competition weighed on the core business.
Despite the challenging month, the portfolio’s underlying fundamentals remain compelling. Forward earnings revisions accelerated to +3.8% month over month, well ahead of the benchmark’s -0.1%, while valuation compressed to 21.0x, the most attractive level relative to earnings growth in recent memory. Historically, this combination has been consistently followed by positive near-term relative performance. The team views the forward investment landscape as increasingly attractive for the strategy’s dynamic growth approach.
On ESG, the team met with AstraZeneca to discuss sustainability practices and their incorporation into management incentive targets, with management moving beyond carbon-related targets into broader environmental metrics. MSCI updated its ratings methodology during March, resulting in upgrades for Epiroc, Microsoft, and Insmed, alongside downgrades for several holdings where revised criteria identified gaps in health and safety, labour practices, and data security disclosure.