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
Market Review
Global equity markets advanced in May as resilient economic data in the US and China supported risk appetite, even as inflation concerns gained prominence. Activity indicators held up better than expected across both regions, offsetting continued deterioration in European data and helping equities push higher. A modestly stronger Australian dollar was a slight drag on unhedged returns.
US equities rose as manufacturing sentiment, employment trends and retail sales all remained robust. Manufacturing new orders accelerated, payrolls came in well ahead of consensus with upward revisions to prior months, and consumer spending proved resilient despite higher commodity prices. The principal counterweight was inflation, with both core consumer prices and producer prices accelerating notably above expectations, raising the prospect of higher policy rates for longer.
European equities lagged as the region’s hydrocarbon import dependency continued to weigh on growth and inflation dynamics. German retail sales were particularly weak, and business conditions surveys fell to multi-year lows, while UK construction activity and retail sales also disappointed. Producer price pressures accelerated sharply across southern Europe, pointing to further inflation pass-through over the coming months.
Chinese equities were supported by the strength of the export-oriented economy. Industrial production growth remained solid, industrial profits accelerated meaningfully, and inflation stayed subdued. The housing market remained mixed, with improving transaction volumes balanced against continued home price declines.
Portfolio Commentary
The Fund underperformed the benchmark in May. Information technology and industrials were the largest detracting sectors, partly offset by positive stock selection in financials and consumer staples. The portfolio’s largest overweights remained industrials and information technology, with financials and materials the largest non-exclusionary underweights.
Samsung Electronics, the South Korean semiconductor and memory chip manufacturer, was the strongest contributor as generative AI fundamentals continued to strengthen. Accelerating token consumption and customer product roadmap disclosures point to a favourable supply and demand backdrop for DRAM and NAND, the two main categories of memory chips. Recent technological advances have also allowed Samsung to regain market share. HEICO, the US-based supplier of aftermarket commercial aerospace parts, reported strong results, benefiting from production challenges at original equipment manufacturers and resilient demand. ASML, the Dutch lithography provider, outperformed as capacity concerns abated on positive management commentary.
Conversely, Fujikura, the Japanese optical fibre and cable manufacturer, pulled back after strong year-to-date performance as initial fiscal year guidance came in below expectations, though follow-up diligence reinforced the view that guidance will prove conservative. Siemens Energy gave back some of its year-to-date gains as European equities underperformed, though turbine and grid demand remains robust. The underweight in Micron also detracted, with preferred memory exposure expressed through Samsung.
Sectoral weightings were broadly unchanged. The largest additions were ABB, the Swiss electrification and automation provider benefiting from data centre spending and warehouse automation demand, Advantest, the Japanese semiconductor test equipment manufacturer, added as chip capacity and complexity drive testing intensity, and Johnson & Johnson, where key therapeutic franchises point to faster-than-expected prescription trends.
The largest reductions were to Hitachi, Amphenol, and Microsoft, where lacklustre Japanese IT services trends, the threat of optical displacement of copper interconnects, and continued underperformance in cloud and productivity software, respectively, drove the team to redeploy capital. Three new positions were initiated: Emcore, the US electrical and mechanical services contractor. Keyence, the Japanese machine vision and factory automation specialist, and Lumentum, the US-based laser provider benefiting from optical interconnect adoption in generative AI datacentres. Residual positions in Spotify and Insmed were exited.
Portfolio fundamentals remain compelling. Forward earnings revisions of +1.3% continued to outpace the benchmark’s +0.5%, while aggregate earnings growth accelerated to +31.5%, well ahead of the index. Valuation held steady, leaving the portfolio increasingly attractive relative to its growth profile, a combination historically followed by positive near-term relative performance.
On ESG, no holding received an MSCI rating change during May. The team engaged twice with JPMorgan Chase on leadership development, employee survey cadence, and cybersecurity posture amid growing generative AI adoption. Engagement with Societe Generale, the French banking group, highlighted strong integration of ESG metrics into executive compensation, with 20% of CEO variable pay tied to customer experience, HR, and carbon emission targets.