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 were broadly lower in September as rising sovereign bond yields and higher energy prices weighed on sentiment, partly offset by resilience in AI-related and mega-cap technology stocks. Longer dated bond yields in major markets reached multi-decade highs, raising concerns around borrowing costs and equity valuations. A weaker Australian dollar supported unhedged returns as foreign currency exposures translated into higher Australian dollar terms.
US equities were pressured by the move higher in Treasury yields, though technology and semiconductor names held up well on continued enthusiasm around generative AI demand. The underlying economic backdrop remained healthy, with jobless claims and services survey data running ahead of expectations and manufacturing activity firming. Consumer confidence softened on higher commodity prices, though the broader labour market remained resilient.
European equities lagged, held back by concerns around rising yields and a stronger US dollar. Composite survey data pointed to continued modest expansion, with services activity in expansionary territory. Inflation across the region accelerated as higher raw material input costs flowed through to producer prices.
Chinese equities reflected a persistent gap between external and domestic drivers. Retail sales growth slowed further, below already modest expectations, while year to date property investment contracted sharply. Manufacturing survey data showed some stabilisation, moving back into expansionary territory, though the broader domestic backdrop remained subdued.
Portfolio Commentary
The Fund outperformed the benchmark in September. Information technology was the largest contributing sector, driven by stock selection in semiconductor holdings, with the underweight to materials also additive. Industrials and financials detracted. Industrials and information technology remained the portfolio’s largest overweights, with financials and materials the largest non-exclusionary underweights.
Taiwan Semiconductor Manufacturing Company was the top contributor, reporting August revenue up 53% year over year on robust AI accelerator demand that reinforced its position as the leading manufacturer of advanced chips. ASML, a Dutch producer of advanced chip manufacturing equipment, also performed strongly on continued recognition of its central role in rising semiconductor capacity requirements. Teradyne, a US semiconductor test equipment provider, benefited from accelerating AI-driven test intensity.
Conversely, Morgan Stanley was the largest detractor as investors focused on a more cautious capital markets backdrop and the potential for softer investment banking and trading activity. JPMorgan Chase also lagged amid concerns around rising interest rates weighing on the broader banking group. The team continues to view the fundamental backdrop for both as constructive. The underweight to Meta Platforms early in the month also detracted following the announcement of Muse, a personal AI agent.
Sectoral weightings were broadly unchanged. The largest additions were to Advanced Micro Devices, built out further after its recent initiation, Roche, a Swiss pharmaceutical company, where the team added ahead of the expected launch of its oral SERD drug with scope for rapid adoption in breast cancer, and Lumentum, a US provider of optical components, as visibility into AI-driven optical networking demand continued to improve.
Hershey, a US confectionery manufacturer, was exited as high frequency data remained unconvincing and competitive pressure limited confidence in near term improvement. TJX Companies was also exited after reducing in August, with sales trends at the Marmaxx division slowing unexpectedly on merchandising missteps. The Fund initiated Target, a US retailer with a differentiated merchandise mix well positioned under new management. Meta was initiated following the Muse launch, reflecting conviction in its potential as a leading consumer AI platform.
Underlying portfolio fundamentals remained compelling. Forward earnings growth of 30.5% continued to run meaningfully ahead of the benchmark’s 23.3%, while 70% of holdings received positive earnings revisions, well above the benchmark’s 57%. Valuation compressed further to 19.2x, with the gap between earnings growth and the forward multiple continuing to widen in the strategy’s favour. The forward investment landscape remains increasingly attractive for the strategy’s dynamic growth approach.
On ESG, Visa was upgraded by MSCI to AAA from AA, reflecting industry-leading talent management, improved employee turnover trends, and stronger data privacy practices. AerCap, an Irish aircraft lessor, was downgraded to BBB from A on weaknesses in board structure and pay practices, to be raised in coming engagement. The team met with Cintas on sustainability strategy and with Advantest, a Japanese semiconductor test equipment manufacturer, welcoming progress across environmental efficiency, human capital, and governance.