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 June, though narrow AI and semiconductor leadership masked meaningful divergence beneath the surface. Semiconductor stocks led gains alongside a rotation into cyclicals, value, and small caps, while mega-cap technology cooled on concerns over rising hyperscaler capital expenditure. The Fund’s currency hedge detracted during the month, as a weaker Australian dollar meant unhedged investors benefited from foreign currency exposures translating into relatively higher Australian dollar terms.
In the US, equity returns were mixed, with strength in semiconductors and small caps offset by weakness in mega-cap technology. Economic data proved broadly supportive, with payrolls surprising meaningfully to the upside and retail sales accelerating. Falling oil prices filtered through to lower headline inflation expectations, while activity surveys showed sequential improvement in new orders across both manufacturing and services.
European equity markets led major regions in June, supported by lower oil prices and rotation into cyclicals and value. German industrial production remained flat year over year, and UK industrial survey data stayed in negative territory, while Southern Europe showed modest improvement in activity levels. Inflation eased across the region as lower energy prices moderated cost pressures, with German and UK forward inflation readings both easing.
Chinese equities weakened as domestic pressures overshadowed continued external strength. Export activity remained robust, and industrial production accelerated modestly. Domestic conditions continued to lag, with consumer spending contracting during the month, while headline inflation remained contained.
Portfolio Commentary
The Fund outperformed the benchmark in June. Information technology and industrials led contribution, driven by stock selection, while consumer discretionary and staples detracted. Industrials and information technology remained the portfolio’s largest overweights, with financials and consumer staples the largest non-exclusionary underweights.
Taiwan Semiconductor Manufacturing, the Taiwanese leading-edge foundry, extended its strong run as foundry demand strengthened alongside supportive pricing and capacity expansion. Fujikura, the Japanese optical fibre and cabling manufacturer, rebounded after May weakness as management raised full-year guidance on stronger fibre demand and pricing. ASML, the Dutch supplier of semiconductor lithography equipment, contributed as wafer fabrication equipment spending expectations were revised higher across logic, memory and Chinese customers.
Amazon pulled back with cloud hyperscalers on data centre capital expenditure concerns, though the thesis of accelerating AWS revenue and resilient online retail remains intact. Broadcom detracted as its earnings failed to impress heightened expectations, with the position reduced ahead of the release. Not owning Applied Materials, a leading US semiconductor equipment supplier, also weighed, though exposure through ASML, Teradyne and Advantest is considered adequate.
Additions were led by Keyence, Lumentum and Johnson & Johnson. Keyence, the Japanese specialist in machine vision and factory automation, is well placed across datacenter, semiconductor and manufacturing infrastructure. Lumentum, a leading US supplier of optical lasers, continues to benefit from strong generative AI datacenter demand. Johnson & Johnson offers diversified alpha as prescription data across psoriasis and multiple myeloma franchises point to upside. Broadcom and Alphabet were trimmed on profit-taking, while AstraZeneca was cut on negative estimate revisions after a weak first quarter.
Three new positions were initiated in Cisco, Ibiden and Kioxia. Cisco benefits from accelerating datacenter routing and switching demand and enterprise campus recovery on generative AI adoption, with Silicon One driving order growth. Ibiden, a Japanese semiconductor package substrate supplier, benefits from robust GPU and ASIC accelerator demand alongside growing CPU inference workloads. Kioxia, the Japanese NAND flash memory manufacturer, was initiated on tightening memory supply and looming storage prices not yet reflected in consensus or its 4x forward earnings valuation. Residual Microsoft and Hitachi positions were exited to redeploy into more dynamic holdings.
Portfolio fundamentals remain compelling. Forward earnings revisions continued to run well ahead of the benchmark, with 84% of holdings receiving upgrades against 60% for the index. Aggregate earnings growth also outpaces the benchmark, while valuation has compressed to 22.3x forward earnings, leaving the portfolio increasingly attractive relative to growth. Historically, this combination has been consistently followed by positive relative performance.
MSCI made no rating changes to portfolio holdings in June. On engagement, the team met with Lumentum, whose failure to publish a 2025 Sustainability Report and removal of ESG metrics from executive compensation following a CEO transition were both disappointing. Management confirmed that the underlying sustainability priorities remain in place, and the team encouraged reinstating both disclosure and the compensation linkage.