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 August against a constructive earnings backdrop, with technology stocks recovering from July’s sharp sell-off and semiconductors rebounding on strong second quarter results. A stronger Australian dollar detracted from unhedged returns, as foreign currency exposures translated into lower Australian dollar terms.
US equities gained on resilient economic momentum. Manufacturing survey data surprised to the upside, hiring intentions firmed, and core inflation moderated to +2.5%. The technology sector recovered from July’s weakness as second quarter results from leading semiconductor and cloud infrastructure names reassured investors on artificial intelligence demand. Commentary across the sector pointed to supply rather than demand as the near-term constraint.
European equities were among the stronger regional performers as activity data turned more constructive. Composite survey readings moved back into expansionary territory and German factory orders extended their recent run of gains. Regional inflation remained contained. Late in the month, French assets came under pressure, with the country’s banks weakening as investors turned cautious on the political backdrop ahead of the 2027 Presidential election.
Chinese equities were held back by further deterioration in the domestic growth picture. Manufacturing and non-manufacturing survey data both slipped further into contractionary territory, while inflation remained subdued. External demand continued to provide some offset, though the backdrop pointed to a widening gap between the external and domestic sides of the economy.
Portfolio Commentary
The Fund underperformed the benchmark in August. Information technology and industrials were the largest detracting sectors, as elevated sectoral and factor-driven rotation weighed on individual holdings, partly offset by consumer staples and the underweight to utilities. Industrials and information technology remained the largest overweights, with financials and materials the largest non-exclusionary underweights.
Fujikura, a Japanese fibre optic cable manufacturer, was the top contributor, reversing sharply from July following a strong first quarter result and guidance raise. Operating profit rose 155% year over year, driven by soaring demand for optical components used in generative AI infrastructure. Nvidia also performed strongly, delivering a beat and fiscal 2028 revenue guidance well ahead of consensus, with management noting underlying demand is running materially higher but constrained by supply. Ibiden, a Japanese package substrate producer, contributed as analysis pointed to further upside in the substrate market.
Conversely, Howmet Aerospace, a US supplier of engineered aerospace and gas turbine components, was the largest detractor despite one of its strongest quarters on record and a material guidance raise. The shares came under pressure on elevated capital expenditure supporting industrial gas turbine and commercial aerospace capacity, and later on comments from Elon Musk that SpaceX intends to produce its own turbine blades and vanes. The team views the reaction as overdone given the likely four year plus timeline before competing supply arrives, alongside Howmet’s global share and long term customer agreements. Societe Generale, a French banking group, also detracted despite reaching 52 week highs early in the month, as French banks came under broad pressure ahead of the Presidential election.
Sectoral weightings were broadly unchanged. The largest additions were to Unilever, Ibiden, and Cisco. Unilever was built out as a defensive staples position with potential upside to organic growth on increased marketing investment and a possible re-rating following the divestiture of its slower growth food business. Cisco was added ahead of an earnings result that delivered stronger than expected guidance. The largest reductions were to Apple, trimmed on deteriorating Services data and pre-launch seasonal weakness, and TJX Companies, reduced around an earnings result in which near term missteps at Marmaxx offset resilience at Homegoods. The Fund initiated Advanced Micro Devices, a leading US semiconductor designer, with strong server CPU and GPU demand expected to drive continued data centre segment growth.
Underlying portfolio dynamics continued to improve. Forward earnings growth accelerated to 31.1%, well ahead of the benchmark’s 23.1% and expanding the gap materially versus July. 86% of holdings received positive revisions, well above the benchmark’s 63%. Valuation improved to its most attractive level relative to earnings growth in recent memory.
On ESG, Kioxia was upgraded by MSCI to BBB from BB, reflecting improvements in water stress management alongside management practices assessed as leading industry peers. The team engaged with AMD and welcomed continued progress on product energy efficiency and a new Climate Transition Plan with 2030 supplier carbon intensity commitments. A subsequent engagement with Nvidia highlighted progress on AI infrastructure efficiency and plans to expand product carbon footprint disclosures.