Portfolio Manager Commentary Q1 '24

Large Cap Dividend

For large cap stocks, the first quarter of 2024 looked very much like a continuation of 2023. A few mega-cap technology companies drove most of the market’s gains and dividend stocks continued to lag the overall market. Fortunately, the rally finally started to broaden during the month of March with more value-oriented stocks sharing in the gains. During the first quarter, the Dividend strategy posted a 3.88% return, net of fees, versus an 10.56% return for its benchmark, the S&P 500.

Portfolio Review 

Much of our underperformance during the quarter could be attributed to our sector exposure. In the first quarter the three worst performing sectors in the S&P 500 were Real Estate, Consumer Discretionary, and Utilities. These are all sectors that are traditionally home to dividend-paying stocks and are overrepresented in the Dividend strategy compared to the benchmark. Real Estate and Utilities are also sectors that are disproportionately affected by the rising interest rate expectations we witnessed early in the year. Conversely, the best performing sectors were Energy, Communication Services, and Financials -- in all of which we are underweight relative to the benchmark.

Annualized Net Returns as of 03/31/2024

	QTD	YTD	1Y	3Y	5Y
US Large Cap Dividend	3.88%	3.88%	11.17%	4.39%	9.43%
Benchmark (S&P 500)	10.56%	10.56%	29.87%	11.50%	15.06%

We expect that interest rates will continue to influence the Dividend strategy’s performance for the remainder of the year. Though it appears that rates may have peaked for this cycle, the bond market has reduced the number of Federal Reserve rate cuts it is pricing in from five cuts to three. We expect performance to improve if interest rates finally reverse course, but in the interim we remain focused on what we can control – owning high quality businesses with strong balance sheets and healthy growth prospects. In the long term, we think these qualities will be a bigger determinant of total shareholder returns than trying to predict short-term swings in interest rates.

Factoring in position size and performance, these three companies had the largest positive impact on the strategy in the first quarter:

• Fastenal: 19.78% return; 5.95% weighting
• Microsoft: 12.09% return; 7.74% weighting
• Walmart: 14.89% return; 5.97% weighting

Fastenal has performed well as the economy has remained strong and the recession many analysts were projecting failed to materialize. Still, customers remain cautious, and we think management has done an excellent job of managing the business despite stubborn inflation and numerous supply chain disruptions. Operating margins ended 2023 half a percentage point higher than the previous year and cash flow generation was strong enough that the company announced a special dividend to distribute excess capital.

Microsoft continues to be the crowd favorite “AI beneficiary” thanks to its tight relationship with OpenAI and rapid growth in the Azure cloud hosting business. In the fourth quarter, Microsoft posted 18% revenue growth, which is an impressive number off an already massive revenue base. The company is performing well across business segments and the integration of Copilot capabilities across product lines has investors excited about the future. Microsoft also announced the hiring of Mustafa Sulyman, cofounder of both Inflection AI and Alphabet-owned DeepMind, as CEO of the newly created Microsoft AI business unit signaling the company’s commitment to maintaining AI leadership status.

Walmart rebounded in the first quarter following weak stock performance to close out 2023. The company’s fourth quarter results were better than expected as customers searched for lower priced options to combat persistent inflation. Thanks to the company’s successful omnichannel strategy, Walmart’s stores saw strong comparable sales growth and the third-party online market is gaining traction and should contribute to future growth.

Factoring in position size and performance, these three companies had the largest negative impact on the strategy in the first quarter:

• American Tower: -8.47% return; 5.41% weighting
• Agree Realty: -8.08% return; 4.23% weighting
• United Parcel Service: -4.43% return; 4.91% weighting

As the world’s largest cell tower operator, American Tower fell victim to the interest rate headwinds afflicting the entire real estate sector. Investors are concerned over the higher cost to service the company’s heavy debt load, and they are also worried about slowing growth as 5G investments slow. We think these worries are more than discounted in the current share price. American Tower’s business continues to post solid cash flow, and shares trade at very reasonable prices—near 19 times our estimate of 2024 AFFO.

Despite the poor stock performance, we think Agree Realty is performing reasonably well in a tough market for the real estate sector. Agree’s acquisition growth strategy is dependent on new properties earning a yield at least a one-and-a-half percentage point spread above its cost of capital. This has become difficult as the cost of debt has risen and owners have been reluctant to reduce their prices. Over the past few months, Agree has finally seen an uptick in transaction activity and is achieving more attractive pricing on recent acquisitions. We expect that Agree could be one of our top performers when interest rates eventually reverse course and yield spreads revert to normal levels.

It has been a rough couple of quarters for United Parcel Service. The company is facing softer than expected package volumes along with rising costs from its new labor contract. However, the slowdown could be a blessing in disguise as it has given management cover to conduct layoffs and consolidate facilities to reduce costs. Also, provisions in the new labor contract enable management to introduce automation technologies for the first time, which should help improve productivity and profitability down the road. CEO, Carol Tomé, earned a reputation as an efficient operator during her time as Home Depot CFO, and we expect the current environment gives her more freedom to trim costs and improve profitability.

Portfolio Changes

There were no portfolio changes during the quarter.

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The above information is intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

All information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice. We do not represent that any opinion, estimate or projection will be realized. While we believe this information to be reliable, no representation or warranty is made concerning its accuracy.

Performance results are based on a representative account for each strategy, not individual client accounts. Clients can see their actual account performance on the Interactive Brokers’ website at any time. Client account results may not exactly match the performance of the representative accounts. Such variance is due to a number of factors, including differences in trade prices, transaction fees, market activity, any restrictions have you may have imposed on your account(s), and the amount and the timing of deposits or withdrawals.

The performance information presented herein has been generated during a period of extraordinary market volatility. Accordingly, the performance is not necessarily indicative of results that we may achieve in the future, and we do not represent and it cannot be assumed that the performance of our strategies will be subject to the same economic risk factors that contributed to the above returns. Performance results discussed above represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed above. The investment strategy and focus of our model portfolio strategies can change over time. Similarly, there is no assurance that the securities purchased will remain in a model portfolio strategy or that securities sold may not be repurchased. The mention of specific holdings does not constitute a recommendation by MFWM or its affiliates.

To the extent we invest more heavily in particular sectors or industries of the economy, the performance of our strategies will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any model portfolio, client portfolios may be significantly invested in a sector or industry as a result of our portfolio management decisions. Similarly, a model portfolio’s investment may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance, and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. It is not possible to invest in an index.

This message is provided for informational purposes only, reflects our general views on investing and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals, including (without limitation) tax professionals, regarding all personal finance issues. While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. This message may not be relied upon as personalized financial planning or tax advice.

MFWM is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own. HOWEVER, REGISTRATION AS AN INVESTMENT ADVISOR DOES NOT IMPLY ANY LEVEL OF SKILL OR TRAINING. Access to MFWM is only available to clients pursuant to an Investment Advisory Agreement and acceptance of our Client Relationship Summary and Brochure (Form ADV, Parts 2A and 2B). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) and IRA rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.

International

Markets of all stripes celebrated 2024’s beginning on the prospect that monetary authorities might accomplish the improbable—taming inflation without meaningful collateral damage to the global economy. Even as questions surrounding the timing and magnitude of rate cuts linger, the investing collective has taken the optimist’s view—as growth-oriented assets appear to have benefited most. While international stocks were more subdued, as the prospect of economic slowdown and inflation weigh more heavily in Europe, they largely followed suit. Against this backdrop, the International SMA returned 5.25% net of fees during the first quarter, versus 4.43% for our benchmark, the S&P Global ex-U.S. BMI.

As ever, we remain focused on the long-term. Despite the markets’ decided enthusiasm, we continue to find meaningful opportunities in international equities. We initiated three new positions in the quarter past: food and ingredients powerhouse Kerry Group, video game icon Nintendo, and the eponymous and venerable sports and car manufacturer Porsche AG. Most notably, we believe these businesses represent a meaningful high-grading of the portfolio on quality of enterprise.

Equally important, the businesses within the International strategy continue to deliver impressive growth and profitability, meaningfully reinvest in their enterprises, and execute at a high level. With all of this as context, we’re excited for the future.

Annualized Net Returns as of 03/31/2024

	QTD	YTD	1Y	3Y	5Y
International	5.25%	5.25%	16.04%	1.81%	7.78%
S&P Global ex-U.S.	4.43%	4.43%	13.96%	2.01%	6.46%

Portfolio Review

A review of key contributors to the portfolio’s quarterly results follows. As we’ve written before, a portion of your International SMA remains invested in ETFs to achieve geographic exposures: 13.35% on average, returning 3.87% on a weighted average basis.

On a weighted basis, giving effect to average weighting and absolute return, the portfolio’s largest contributors were as follows:

• Novo Nordisk: 24.76% return; 6.89% weighting
• Taiwan Semiconductor Company: 31.24% return; 4.85% weighting
• ICON: 18.68% return; 7.30% weighting

Novo Nordisk continues to ride the success of its obesity drug, Semaglutide, aka Wegovy. Year-end results revealed Novo sold $4.6 billion worth of Wegovy in 2023, and as supply issues are resolved, the consensus among many is for meaningful growth in 2024. Perhaps more importantly, semaglutide continues to deliver positive results in the non-obesity realm, reporting positive data on the reduction of cardiovascular risk and kidney disease—which should persuade insurers to cover treatment and greatly expands the potential market. Novo has also seen success in its early-stage, next-generation obesity drug, Amycretin, further suggesting there could be a long runway for this area of treatment and Novo Nordisk.

Shares of the world’s top foundry, Taiwan Semiconductor (TSMC), rose 31% in the quarter. We believe TSMC has likely reached an inflection in the cycle, and could see revenue grow 20% to 25% this year. The stock has also benefited from the market’s continued enthusiasm for all things AI-related. Given the company’s ~90% share of leading-edge chips, TSMC is a true enabler of AI, and could supply the lion’s share of chips powering AI for the foreseeable future. Its ramp-up of three-nanometer production this year and the introduction of two-nanometer next year indicate progress are on track. Shares remain reasonably valued at 20 times earnings.

ICON’s shares rallied nicely in the quarter past, as the company issued an upbeat outlook, and investors took heart that the beleaguered SMID-biotech customer segment’s trial spending might nose up as interest rates decline and venture spending picks up. More significantly, in our opinion, ICON continues to grow at rates in excess of the industry—taking share as clients appreciate its operational savvy, strength in decentralized trials, and the scale of the recently merged PRA-ICON entity. Equally, management continues to execute on the operations front, finding cost savings and efficiencies in the merged entity. Altogether, this combination has allowed solid growth: Adjusted earnings increased 9% for the year. Despite recent gains, shares remain reasonably valued, in our opinion, at roughly 23 times our estimate of 2024 free cash flow.

Turning to the quarter’s detractors, giving effect to average weighting and return, the weighted average contributors are as follows:

• HDFC: -16.60% return; 2.59% weighting
• Cellnex: -10.29% return; 4.51% weighting
• Atlassian: -17.97% return; 2.01% weighting

HDFC Bank was down sharply after releasing earnings in mid-January, as the integration of its mortgage-focused sister company (confusingly also named HDFC) likely means margin and profitability pressure for longer than investors had expected. While the share price move was somewhat dramatic, we think the period in question is more likely several quarters, not several years. While it’s possible more hiccups will follow, we're confident about HDFC’s long-term prospects, given management's track record. We still believe HDFC is one of the best run banks in India and that the country's prospects support a long growth runway, which should make this a small bump in the road.

Pan-European cell tower operator Cellnex’s shares declined 10% in the quarter past, as worries that interest rates might remain higher for a bit longer—or interest rate cuts not be so deep as first imagined—weighed on businesses/shares with bond proxy-ish characteristics. Specific to Cellnex, we believe some investors fret over Cellnex’s leverage profile, and the possibility that higher rates might crimp margins/profits. We appreciate these concerns, but believe the shares more than discount this possibility, and have accounted for it in our valuation work. Most significantly, we found a lot to like in the quarter past: Management outlined a credible plan for growing the business, cutting leverage, and boosting the share price at its recent capital markets day—and the business delivered impressive FY23 earnings. Altogether, we believe the shares continue to represent solid value, as they trade near 14 times our estimate of RLFCF (Cellnex’s measure of cash flow).

Collaboration software provider Atlassian’s shares took a tumble after releasing its quarterly results. Atlassian is a high-growth company and even results that on the surface seem good can disappoint lofty expectations. In this case, even though quarterly revenue topped $1 billion for the first time ever and came in ahead of expectations, the cloud component of that revenue disappointed a bit as more existing customers appear to be choosing a data center deployment over a cloud deployment for the company’s offerings. In our eyes, this is a function of customer choice rather than a deficiency in the cloud offering. The company’s core small- and mid-sized business customers remain cautious with seat expansions, as well. While noisy, we see business progressing in the right direction at Atlassian with strong demand for its native AI functionality, IT service management product adoption, and deepening relationships with enterprise customers.

Portfolio Changes

It was an active quarter for the International SMA, by our standards and in absolute terms. We started positions in three new companies this quarter: Kerry Group, Nintendo, and Porsche. We also sold out of our positions in Fanuc, Fast Retailing, Temenos, the iShares MSCI South Korea ETF, the VanEck Africa Index ETF, and trimmed our position in NovoNordisk.

Kerry’s integrated solutions model sets it apart from its peers with what we believe to be an unparalleled portfolio of flavor and ingredient solutions, a collaborative client-servicing model and scarce personnel, and a global manufacturing presence. With roughly 10% share of its end-markets, we believe Kerry can grow at a mid- to high-single-digit rate for a sustained period—longer than conventional wisdom might dictate—on the heels of faster growth from smaller consumer products companies (which comprise two-thirds of sales), market share gains, faster growth in food service, and pricing.

As shares trade near 20 times our estimate of free cash flow, we believe the market hasn’t given Kerry’s long-term prospects due—a function of near-term concerns over a weakening economy, multiple compression on the heels of higher rates, and its exposure to out-of-home dining. For long-term investors, we believe this creates an attractive opportunity in what we believe to be a very high-quality enterprise.

Nintendo is perhaps best known for its video game consoles and iconic franchises like Mario, Zelda, and Donkey Kong that count fans across multiple generations. Its current console, the Nintendo Switch, has sold over 132 million units and is the 3rd best-selling console ever, proving Nintendo still makes great gaming hardware. However, our thesis is predicated on the belief that Nintendo’s business has evolved away from the cyclical nature of consoles into a more sustainable model centered on Nintendo more as a gaming platform anchored by its world-class first party titles and attracting third party developers. The business is also becoming more digitized in distribution of software and online game items, and Nintendo’s growing online subscription service provides recurring revenue. At long last the company is also starting to leverage its best-in-class IP and become more of an entertainment company with a connected universe outside of video games in movies, theme parks, and merchandise. We believe this transformation should be well-managed given Nintendo’s unique culture, long-term orientation and strong net cash balance sheet of $14 billion. Lastly, we see Nintendo as a beneficiary of the broader improvements in corporate governance in Japan.

Over the past decade, Porsche has presided over a spectacular growth run: increasing production 3x and sustaining double-digit growth to profits/free cash flow. All the while, it has posted profitability and return metrics more befitting of a luxury brand than an auto manufacturer, delivering high-teens operating margins and low-20% returns on invested capital. But for its outstanding success, we believe Porsche’s best days are not past. As Porsche manages aggressive fleet electrification targets—80% of production by 2030—we believe the market has misunderstood the prospective profitability impact. In short, we believe Porsche’s BEVs are more profitable than the market appreciates, approaching that of its core internal combustion franchise. Equally, we’d wager Porsche has considerable untapped pricing power in rare, special edition vehicles and customization—its 911 franchise routinely has wait lists of a year or longer. Last, and significantly, we believe Porsche possesses the ability to manage profitability as it transitions from internal combustion (ICE) to BEV—its ICE franchise is spectacularly profitable. We expect Porsche to flex production mix and price as costs warrant, allowing it to maintain margins as it transitions.

We also see considerable potential to grow unit volumes—Porsche estimates it has sold 2.7 million vehicles, where the global High Net Worth Individual population approximates 60m. Taken together, we see potential for sustained high-single-digit/low-double-digit growth to free cash flow. Against these prospects, we believe the shares appear attractively valued, at roughly 21 times trailing free cash flow. We believe the market has unduly fixated on near-term macro headwinds in China, and concerns over BEV profitability, affording long-term investors compelling value.

Coincident with our Nintendo purchase, we sold our positions in Fanuc and Fast Retailing. In short, we believe Nintendo to be a higher-quality enterprise, better use of capital, and more attractive means of getting exposure to Japan. We sold our positions in the iShares South Korea ETF and VanEck Africa Index for similar reasons. While the two originally represented a layered attempt at attaining exposure to South Korea and Africa, we sold the positions on the belief we can find more attractive opportunities in individual equities.

As above, we also sold our position in Temenos. This was an intriguing investment opportunity for us because they offer a high-quality technology platform to capitalize on the banking industry slowly and reluctantly modernizing. We believe the transition from on-premises computer equipment to a cloud-based solution would make Temenos well-positioned to take market share at banks moving off increasingly obsolete legacy systems. While the company has grown its customer base over the time we’ve owned the stock, we haven’t seen the volume of wins we had hoped for among U.S. banks and global Tier 1 banks. Aside from the legacy systems they must replace, additional competition has arisen from companies that are offering more modular systems than the large tech stack that Temenos can provide. The company is also in a bit of a holding pattern as it has been operating with an interim CEO and searching for a permanent leader since early 2023. We still believe there is opportunity among companies providing the software backbone to retail banks, but we no longer trust Temenos to execute well enough to be a long-term winner.

Lastly, we trimmed our position in NovoNordisk. This wasn’t, and isn’t, a commentary on our confidence in the company, or its prospects—it was a portfolio management decision. At the time, Novo shares had grown to 7.5% of the portfolio, so we trimmed to a more palatable 5% threshold.

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The above information is intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

All information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice. We do not represent that any opinion, estimate or projection will be realized. While we believe this information to be reliable, no representation or warranty is made concerning its accuracy.

Performance results are based on a representative account for each strategy, not individual client accounts. Clients can see their actual account performance on the Interactive Brokers’ website at any time. Client account results may not exactly match the performance of the representative accounts. Such variance is due to a number of factors, including differences in trade prices, transaction fees, market activity, any restrictions have you may have imposed on your account(s), and the amount and the timing of deposits or withdrawals.

The performance information presented herein has been generated during a period of extraordinary market volatility. Accordingly, the performance is not necessarily indicative of results that we may achieve in the future, and we do not represent and it cannot be assumed that the performance of our strategies will be subject to the same economic risk factors that contributed to the above returns. Performance results discussed above represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed above. The investment strategy and focus of our model portfolio strategies can change over time. Similarly, there is no assurance that the securities purchased will remain in a model portfolio strategy or that securities sold may not be repurchased. The mention of specific holdings does not constitute a recommendation by MFWM or its affiliates.

To the extent we invest more heavily in particular sectors or industries of the economy, the performance of our strategies will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any model portfolio, client portfolios may be significantly invested in a sector or industry as a result of our portfolio management decisions. Similarly, a model portfolio’s investment may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance, and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. It is not possible to invest in an index.

This message is provided for informational purposes only, reflects our general views on investing and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals, including (without limitation) tax professionals, regarding all personal finance issues. While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. This message may not be relied upon as personalized financial planning or tax advice.

MFWM is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own. HOWEVER, REGISTRATION AS AN INVESTMENT ADVISOR DOES NOT IMPLY ANY LEVEL OF SKILL OR TRAINING. Access to MFWM is only available to clients pursuant to an Investment Advisory Agreement and acceptance of our Client Relationship Summary and Brochure (Form ADV, Parts 2A and 2B). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) and IRA rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.

Large Cap Core

The market got off to a hot start in 2024. Large cap technology stocks continued to drive most of the market’s gains in the first two months of the year, then in March we saw the value side of the portfolio begin to contribute as well. During the first quarter, the Large Cap Core strategy posted a 9.13% return, net of fees, versus an 10.56% return for its benchmark, the S&P 500®.

Though the Core strategy slightly underperformed the benchmark, we still see this as strong performance on the heels of a blockbuster year in 2023. If we dig into the results, there were three subtle shifts in the market that to us appeared to have a notable influence on the Large Cap Core strategy’s performance, both positively and negatively.

First, as mentioned above, was that value stocks perked up at the end of the quarter. After trailing growth stocks for all of 2023, and then continuing to lag through February, value stocks significantly outperformed the market in the month of March. In fact, for the quarter two of the top three performing sectors were financials and energy, both of which historically have tended to fall under the value side of the spectrum. In the Core strategy we saw strong performance from our insurance companies with Berkshire delivering strong gains and Markel rebounding after a couple of rough quarters.

Annualized Net Returns as of 03/31/2024

	QTD	YTD	1Y	3Y	5Y	10Y
US Large Cap Core	9.13%	9.13%	35.42%	8.40%	13.79%	13.50%
Benchmark (S&P 500)	10.56%	10.56%	29.87%	11.50%	15.06%	12.97%

Second, there was a divergence among the Magnificent Seven, the mega cap stocks that drove most of the market’s gains in 2023. Though Nvidia continued its meteoric rise, Apple and Tesla both turned negative. Our holdings of Alphabet, Amazon, Meta, and Microsoft performed well, but the group started to look to us like less of a sure thing than in previous quarters. As the market rallied in March a much broader assortment of sectors participated in the gains versus what we saw in previous quarters.

The last shift was that interest rate expectations began to rise as the economy remained stronger than expected and signs of inflation continued to pop up in the economic data. In response, the bond market reduced the number of Federal Reserve rate cuts that it was pricing in from five cuts to three. This shift had a discernible effect on the real estate sector, which was the only sector to post negative returns during the quarter. Unfortunately, this is one of the sectors that we are overweight through our holding in Equinix, American Tower, and Alexandria Real Estate.

Factoring in position size and performance, these three companies had the largest positive impact on the strategy in the first quarter:

• Meta Holdings: 37.33% return; 8.36% weighting
• Amazon⁠.com: 18.72% return; 6.64% weighting
• Berkshire Hathaway: 17.91% return; 6.32% weighting

Meta Holdings continued its hot streak into 2024. The company easily beat analysts’ expectations in the fourth quarter with 25% topline growth and a year-over-year doubling of operating profitability. Management is investing heavily in A.I. capabilities, which has helped Meta’s apps (Facebook, Instagram, Reels) cement their position as a top online advertising portal. Meta also surprised investors by announcing its first dividend. Though the payout is relatively small, we believe it’s an important signal to the market that management expects the recent pop in profit margins to stick around for a while.

Amazon shares rallied smartly during the quarter on accelerating growth in AWS, margin expansion on fulfillment optimization in its e-commerce operations, and robust margin-accretive growth in its advertising segment. Though Amazon’s growth is likely to slow from previously torrid rates, we still see great potential for bottom line growth: AWS should potentially benefit from growing cloud adoption and AI tailwinds, retail’s margins could creep ever higher as the company continues to automate and reduce inflationary pressures, incremental margins on advertising are very high, and Prime possesses large and untapped pricing power. And so, while Amazon shares aren’t exactly bargain-priced, we remain happy owners.

A combination of improved underwriting profits and strong investment returns helped push Berkshire Hathaway higher in the first quarter. The company’s railroad and energy segments were laggards during the quarter, but we feel that fundamentals in those businesses are expected to improve as the year progresses. Berkshire used about $2.5 billion to repurchase shares during the quarter but that’s a drop in the bucket compared to the record $168 billion of cash and treasuries on the balance sheet. Book value per share increased by 7% and Berkshire’s stock is now trading at 1.5-times book, which is at the high end of its historical range. Even so, we think the company remains a solid bet in an uncertain market environment.

Factoring in position size and performance, these three companies had the largest negative impact on the strategy in the first quarter:

• American Tower: -8.47% return; 4.08% weighting
• BioMarin: -9.42% return; 2.04% weighting
• Starbucks: -4.25% return; 2.28% weighting

As the world’s largest cell tower operator, American Tower fell victim to the interest rate headwinds afflicting the entire real estate sector. Investors are concerned over the higher cost to service the company’s heavy debt load and they are also worried over slowing growth as 5G investments slow. We think these worries are more than discounted in the current share price. American Tower’s business continues to post solid cash flow, and shares trade at very reasonable prices—near 19 times our estimate of 2024 AFFO.

BioMarin has recently underperformed expectations due to the disappointing launch of its new hemophilia therapy, Roctavian. In the fourth quarter of 2023, the company hired a new CEO, and activist investor Elliott Management also took a large stake in the business, signaling change is afoot. For the past year it’s been our belief that the company was trying to maximize near-term revenue to make itself more attractive to an acquirer. These recent developments support our suspicion that BioMarin’s days as an independent business are likely numbered.

Starbucks also reported a disappointing fourth quarter with slowing same-store sales growth in both the U.S. and China, resulting in weaker than expected guidance. The good news is that management expects to meet its store expansion goals for the coming year, and the company is continuing to make progress with its “reinvention” plan, which is driving improved profitability in the U.S. and strong earnings per share growth. Though the recent stock performance has been underwhelming, it appears to us that the company is making deliberate moves to get the business, and the stock, moving in the right direction.

Portfolio Changes

During the first quarter we added three new holdings to your portfolio in Danaher, Moderna, and Vertex, and we sold out of our positions in PayPal and Splunk.

We are starting a new position in Danaher to gain more exposure to the life sciences and biotech industries. By buying a top seller of laboratory equipment, we will own a picks-and-shovels provider to a growing industry without taking the binary risk associated with drug development. Danaher’s stock has stagnated over the past year, but we think a rebound is coming as sales growth is expected to reaccelerate in the second half of the year. The recent weakness looks like an attractive opportunity to us to purchase a market leader with great long-term growth prospects.

Moderna is a pioneer in the use of mRNA to treat and prevent disease. The company is best known for its Covid-19 vaccine, which was an important proof-of-concept for the safety and efficacy of mRNA technology. The company is in the process of developing vaccines for a wide range of other diseases including flu and RSV, as well as therapeutics for cancers, autoimmune disorders, and other rare diseases.

Vertex is also a biotech company, but its focus is on the development and commercialization of both small molecule and biological therapeutics. The company has a dominant franchise in cystic fibrosis and an expansive pipeline of late-stage development candidates for other diseases including diabetes, sickle-cell anemia, beta thalassemia, renal disease, and acute/chronic pain. Both companies have a deep pipeline of candidates nearing the final stages of FDA approval that have the potential to become billion-dollar franchises on their own and we think it’s an opportune time to add both companies while the sector is out of favor.

PayPal has been a disappointing investment for us. It has taken longer than we expected for the company to right the ship following numerous missteps during the pandemic-era tech bubble. We still believe that PayPal is fixable, but while the company is figuring things out, competitors like Apple and Adyen have been gaining ground. At this point we’re willing to take our lumps and move on to other opportunities that we think have better return prospects going forward.

Splunk is being acquired by Cisco Systems with the deal expected to close in the third quarter of 2024. Shares were trading just shy of the $157 per share acquisition price, so there was little return potential by continuing to hold. We used the proceeds from the sale to reallocate to both new investment opportunities and existing positions with higher return potential.

We also trimmed our positions in Palo Alto Networks and Costco based on stretched valuations. Palo Alto Networks has been a great performer over the past year and had become one of the largest positions in the portfolio. Though we continue to believe that the cybersecurity industry has some of the best growth prospects in the tech sector, Palo Alto’s valuation has become elevated and we decided to trim the position for risk management purposes.

We’re also still a fan of Costco, but investor enthusiasm has driven the blue chip’s stock valuation to nosebleed levels. This is a business we would love to own forever, but we’re reducing the position size for risk management purposes. We intend to hang onto a small position to keep close track of the business and we will likely consider buying more shares in the future if the valuation returns to more reasonable levels.

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The above information is intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

All information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice. We do not represent that any opinion, estimate or projection will be realized. While we believe this information to be reliable, no representation or warranty is made concerning its accuracy.

Performance results are based on a representative account for each strategy, not individual client accounts. Clients can see their actual account performance on the Interactive Brokers’ website at any time. Client account results may not exactly match the performance of the representative accounts. Such variance is due to a number of factors, including differences in trade prices, transaction fees, market activity, any restrictions have you may have imposed on your account(s), and the amount and the timing of deposits or withdrawals.

The performance information presented herein has been generated during a period of extraordinary market volatility. Accordingly, the performance is not necessarily indicative of results that we may achieve in the future, and we do not represent and it cannot be assumed that the performance of our strategies will be subject to the same economic risk factors that contributed to the above returns. Performance results discussed above represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed above. The investment strategy and focus of our model portfolio strategies can change over time. Similarly, there is no assurance that the securities purchased will remain in a model portfolio strategy or that securities sold may not be repurchased. The mention of specific holdings does not constitute a recommendation by MFWM or its affiliates.

To the extent we invest more heavily in particular sectors or industries of the economy, the performance of our strategies will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any model portfolio, client portfolios may be significantly invested in a sector or industry as a result of our portfolio management decisions. Similarly, a model portfolio’s investment may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance, and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. It is not possible to invest in an index.

This message is provided for informational purposes only, reflects our general views on investing and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals, including (without limitation) tax professionals, regarding all personal finance issues. While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. This message may not be relied upon as personalized financial planning or tax advice.

MFWM is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own. HOWEVER, REGISTRATION AS AN INVESTMENT ADVISOR DOES NOT IMPLY ANY LEVEL OF SKILL OR TRAINING. Access to MFWM is only available to clients pursuant to an Investment Advisory Agreement and acceptance of our Client Relationship Summary and Brochure (Form ADV, Parts 2A and 2B). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) and IRA rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.

Hedged Equity

The good times rolled in equity markets after a small hiccup to start the year. Generally stronger than expected economic data and company earnings overpowered the disappointment of delayed interest rate cuts. Market participants were seemingly happy to take an optimistic view towards every development, perhaps emboldened by a boom from the unbounded possibilities of artificial intelligence.

US large cap stocks gained 10.56% in the first quarter, but the positive performance was broad. Mid caps rose nearly 10% and small caps inched forward 2%. Value stocks, led by the Energy sector, edged out growth stocks. International stocks joined the party with a 4% advance. The Hedged Equity portfolio strategy gained 4.07%, compared to a 7.32% rise in its benchmark.

The relative underperformance can be attributed to two areas: technology and rate proxies. Our portfolio is significantly underweight technology and overweight rate proxies (relative to the index). During the quarter, tech was a dominant sector and rate proxies performed poorly (real estate was the only sector that logged a negative return in the quarter). The tech surge was propelled by semiconductor and perceived AI beneficiaries. The businesses of our tech stocks (Alarm.com and Atlassian) performed a-okay but could not make up for the fervor (justified or not) for all things AI. Our rate proxies include a pair of cell tower companies and a land developer (we discuss this company, Howard Hughes, below). These companies have felt the pain of higher interest rates, a dynamic that should thaw in time, and in our view allow their unique attributes to drive results.

Portfolio Review

Factoring in size and performance, these three companies had the largest positive impact on returns during the quarter:

• Meta Platforms: 37.33% return, 6.20% average weight
• ICON: 18.68% return, 6.87% average weight
• Brown & Brown: 23.31%, 5.48% average weight

Meta Platforms continued its hot streak into early 2024. The company easily beat analysts’ expectations in the fourth quarter with 25% topline growth and a year-over-year doubling of operating profitability. Management is investing heavily in A.I. capabilities which has helped Meta’s apps (Facebook, Instagram, Reels) cement their position as a top online advertising portal. Meta also surprised investors by announcing its first dividend. Though the payout is relatively small, we believe it’s an important signal to the market that management expects the recent pop in profit margins to stick around for a while.

Annualized Net Returns as of 03/31/2024

	QTD	YTD	1Y	3Y	5Y
Hedged Equity	4.07%	4.07%	21.39%	0.42%	7.35%
Benchmark (70% of S&P 500)	7.32%	7.32%	20.35%	8.27%	10.72%

Shares of ICON rallied nicely in the quarter past, as the company issued an upbeat outlook, and investors took heart that the beleaguered smaller-biotech customer segment’s trial spending might nose up as interest rates decline and venture spending picks up. More significantly, in our opinion, ICON continues to grow at rates in excess of the industry—taking share as clients appreciate its operational savvy, strength in decentralized trials, and the scale of the recently merged PRA-ICON entity. Equally, management continues to execute on the operations front, finding cost savings and efficiencies in the merged entity. Altogether, this combination has allowed solid growth: adjusted earnings increased 9% for the year. Despite recent gains, shares remain reasonably valued, in our opinion, at roughly 23 times our estimate of 2024 free cash flow.

Middle-market insurance broker Brown and Brown posted a strong quarter—on stock returns and business results. The company continues to benefit from hard insurance markets, gain share from lesser competitors, and complete value accreting acquisitions—all the while growing EBITDAC, its preferred measure of operating profits, 23% year over year. Despite returning nicely this year, we believe shares remain reasonably valued, at 22 times our estimate of 2024 free cash flow.

Factoring in size and performance, these three companies had the largest negative impact on returns during the quarter:

• Invesco QQQ Trust ETF: 8.56% return, -8.58% average weight
• Atlassian: -17.97% return, 3.43% average weight
• Howard Hughes Holdings: -15.11% return, 3.82% average weight

The largest detractor during the quarter was our hedge (short) of the Invesco QQQ Trust ETF. This ETF represents the tech- and mega-cap heavy Nasdaq 100, which has been on a tear, but pairs nicely with the mega-caps we own in size in the Hedged Equity Portfolio. Nvidia is a large holding in the ETF and returned a sizzling 82%, making Meta Platform’s 37% return look pedestrian. Market hedges often can be a headwind in strong up markets like this but can also provide needed cushion during any market pullback.

Collaboration software provider Atlassian’s shares took a tumble after releasing its quarterly results. Atlassian is a high-growth company and even results that on the surface seem good can disappoint lofty expectations. In this case, even though quarterly revenue topped $1 billion for the first time ever and came in ahead of expectations, the cloud component of that revenue disappointed a bit as more existing customers appear to be choosing a data center deployment over a cloud deployment for the company’s offerings. In our eyes, this is a function of customer choice rather than a deficiency in the cloud offering. The company’s core small- and mid-sized business customers remain cautious with seat expansions, as well. While noisy, we see business progressing in the right direction at Atlassian with strong demand for its native AI functionality, IT service management product adoption, and deepening relationships with enterprise customers.

Howard Hughes finished 2023 on a positive note, but the stock could not escape the negative sentiment toward the real estate sector caused by revised interest rate expectations. Thanks to strong demand for new home construction, the average sale price for new lots across the master-planned communities crossed $1 million per acre for the first time, a 22% year-over-year gain. Demand is also strong for the company’s new residential projects and pre-sales for the condo towers in Honolulu are nearly sold out. Office valuations remain depressed in most markets, but Howard Hughes’ properties continue to outperform their surrounding metro areas. The company is pursuing a spin-off of its newly formed Seaport Entertainment division, which management expects to complete in the second half of the year.

Portfolio Changes

There were no portfolio changes made during the quarter. We remain modestly positioned, with an approximately 70% net exposure.

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The above information is intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

All information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice. We do not represent that any opinion, estimate or projection will be realized. While we believe this information to be reliable, no representation or warranty is made concerning its accuracy.

Performance results are based on a representative account for each strategy, not individual client accounts. Clients can see their actual account performance on the Interactive Brokers’ website at any time. Client account results may not exactly match the performance of the representative accounts. Such variance is due to a number of factors, including differences in trade prices, transaction fees, market activity, any restrictions have you may have imposed on your account(s), and the amount and the timing of deposits or withdrawals.

The performance information presented herein has been generated during a period of extraordinary market volatility. Accordingly, the performance is not necessarily indicative of results that we may achieve in the future, and we do not represent and it cannot be assumed that the performance of our strategies will be subject to the same economic risk factors that contributed to the above returns. Performance results discussed above represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed above. The investment strategy and focus of our model portfolio strategies can change over time. Similarly, there is no assurance that the securities purchased will remain in a model portfolio strategy or that securities sold may not be repurchased. The mention of specific holdings does not constitute a recommendation by MFWM or its affiliates.

To the extent we invest more heavily in particular sectors or industries of the economy, the performance of our strategies will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any model portfolio, client portfolios may be significantly invested in a sector or industry as a result of our portfolio management decisions. Similarly, a model portfolio’s investment may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance, and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. It is not possible to invest in an index.

This message is provided for informational purposes only, reflects our general views on investing and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals, including (without limitation) tax professionals, regarding all personal finance issues. While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. This message may not be relied upon as personalized financial planning or tax advice.

MFWM is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own. HOWEVER, REGISTRATION AS AN INVESTMENT ADVISOR DOES NOT IMPLY ANY LEVEL OF SKILL OR TRAINING. Access to MFWM is only available to clients pursuant to an Investment Advisory Agreement and acceptance of our Client Relationship Summary and Brochure (Form ADV, Parts 2A and 2B). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) and IRA rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.

Large Cap Aggressive Growth

During the first quarter, the Large Cap Aggressive Growth strategy posted an 8.46% return net of fees versus a 10.56% return for its benchmark, the S&P 500®. The Aggressive Growth strategy outpaced the market for the first two months of the year, but gave up the lead in the final weeks of the quarter. January and February returns were driven primarily by large cap technology stocks (the sweet spot for this strategy), but in March the market rally broadened to include more sectors and value stocks took the lead. This is a notable shift after value stocks lagged the market for all of 2023. Whether this trend will continue remains to be seen, but it does appear to us that the market can no longer rely on the Magnificent Seven to carry the entire load.

During the quarter we witnessed a great example of why volatility is part and parcel of a high growth, concentrated portfolio. A significant contributor to our underperformance this quarter was our second largest position and one of our biggest winners from last year, Palo Alto Networks. It won’t show up on our list of top performance detractors below because of timing (it rallied to start the year before it dropped), but we think there’s a worthwhile lesson in highlighting Palo Alto separately.

Last year, Palo Alto was the biggest positive contributor to Aggressive Growth’s performance and the position grew to over 13% of the portfolio. As a result, we found ourselves in a classic growth investor’s conundrum: Do you let your winners run even though they appear somewhat overvalued, or do you sell them to lock in gains and manage risk? For this strategy, our preference is generally to let our winners continue to compound over time, even if that means we’ll experience a few more bumps along the way.

After making it through most of earnings season with great returns, we hit the bumps. Palo Alto surprised investors with weak guidance coupled with a shift in sales strategy that rattled the market and caused the stock to drop over 30% in a day. Despite the movement in the stock price, we still think Palo Alto is ideally positioned to benefit from the growth of the cybersecurity industry and that it should have many years of growth ahead of it. However, we realize that business doesn’t happen in a straight line, nor do stock prices always track the progress of the business.

Annualized Net Returns as of 03/31/2024

	QTD	YTD	1Y	3Y	5Y
US Large Cap Aggressive Growth	8.46%	8.46%	38.63%	4.55%	11.73%
Benchmark (S&P 500)	10.56%	10.56%	29.87%	11.50%	15.06%

This certainly won’t be the last time that we see a big swing in the Aggressive Growth portfolio caused by one or more positions making big moves. Expect that big returns are almost always accompanied by stomach-churning volatility along the way, and the most difficult thing to do is to hang on for the ride.

Factoring in position size and performance, these three companies had the largest positive impact on the strategy in the first quarter:

• Meta Holdings: 37.33% return; 7.80% weighting
• Amazon⁠.com: 18.72% return; 11.56% weighting
• Salesforce: 14.61% return; 7.59% weighting

Meta Holdings continued its hot streak into 2024. The company easily beat analysts’ expectations in the fourth quarter with 25% topline growth and a year-over-year doubling of operating profitability. Management is investing heavily in A.I. capabilities which has helped Meta’s apps (Facebook, Instagram, Reels) cement their position as a top online advertising portal. Meta also surprised investors by announcing its first dividend. Though the payout is relatively small, we believe it’s an important signal to the market that management expects the recent pop in profit margins to stick around for a while.

Amazon shares rallied smartly during the quarter on accelerating growth in AWS, margin expansion on fulfillment optimization in its e-commerce operations, and robust margin-accretive growth in its advertising segment. Though Amazon’s growth is likely to slow from previously torrid rates, we still see great potential for bottom line growth: AWS should potentially benefit from growing cloud adoption and AI tailwinds, retail’s margins should creep ever higher as the company continues to automate and reduce inflationary pressures, incremental margins on advertising are very high, and Prime possesses large and untapped pricing power. And so, while Amazon shares aren’t exactly bargain-priced, we remain happy owners.

The strong momentum that Salesforce experienced in 2023 has continued into the first quarter of 2024. The company is seeing strong demand for its AI-powered solutions and it’s continuing to find opportunities for improved operational efficiency and profitability. Similar to Meta, Salesforce also announced its first-ever dividend, which is a strong indicator to us that the new culture of operating efficiency is here to stay. Thanks to Salesforce’s position as a critical system of record for customer data, we feel it is uniquely positioned to help companies employ A.I. tools to generate more value from their own proprietary data.

Factoring in position size and performance, these three companies had the largest negative impact on the strategy in the first quarter:

• BioMarin: -9.42% return; 5.46% weighting
• Twilio: -19.40% return; 1.02% weighting
• MercadoLibre: -3.79% return; 6.49% weighting

BioMarin has recently underperformed expectations due to the disappointing launch of its new hemophilia therapy, Roctavian. In the fourth quarter of 2023, the company hired a new CEO and activist investor Elliott Management also took a large stake in the business, signaling change is afoot. For the past year it’s been our belief that the company was trying to maximize near-term revenue to make itself more attractive to an acquirer. These recent developments support our suspicion that BioMarin’s days as an independent business are likely numbered.

Twilio got off to a rough start to the year as company founder, Jeff Lawson, announced his resignation following several quarters of activist investor pressure. The company will continue its turnaround efforts under new CEO, Khozema Shiphandler, who was previously president of the company’s telecommunication business unit. This change triggered a strategic review of the business by the board of directors who ultimately decided to hang on to the Segment business, despite intense activist pressure to sell it, and refocus on growing the higher-margin software business. In the interim, Twilio intends to use its $3 billion of net cash to continue buying back shares.

MercadoLibre’s shares lagged during the quarter, but overall we feel the business remains healthy. For the fourth quarter, profitability missed expectations and the guidance for the coming year wasn’t as strong as investors had hoped. Still, the e-commerce volume continues to grow rapidly and the credit segment results were excellent. The company is also pushing to grow their advertising business which would create an additional high-margin earnings stream.

Portfolio Changes

During the first quarter we added three new holdings to your portfolio: Autodesk, Moderna, and Vertex. We sold out of two positions: PayPal and Splunk.

Autodesk is the gold standard in computer-aided design (CAD) software. These solutions empower designers, builders, and makers to create innovative and sophisticated products, buildings, infrastructures, and entertainment media all while improving efficiencies, reducing costs, and promoting sustainability. We think Autodesk has a wide competitive moat, and could be a long-term beneficiary of increased construction and infrastructure spending.

Moderna is a pioneer in the use of mRNA to treat and prevent disease. The company is best known for its Covid-19 vaccine, which was an important proof-of-concept for the safety and efficacy of mRNA technology. The company is in the process of developing vaccines for a wide range of other diseases, including flu and RSV, as well as therapeutics for cancers, autoimmune disorders, and other rare diseases.

Vertex is also a biotech company, but its focus is on the development and commercialization of both small-molecule and biological therapeutics. The company has a dominant franchise in cystic fibrosis and an expansive pipeline of late-stage development candidates for other diseases including diabetes, sickle-cell anemia, beta thalassemia, renal disease, and acute/chronic pain. Both companies have a deep pipeline of candidates nearing the final stages of FDA approval that have the potential to become billion-dollar franchises on their own. We think it’s an opportune time to add both companies while the sector is out of favor.

PayPal has been a disappointing investment for us. It has taken longer than we expected for the company to right the ship following numerous missteps during the pandemic-era tech bubble. We still believe that PayPal is fixable, but while the company is figuring things out competitors like Apple and Adyen have been gaining ground. At this point we’re willing to take our lumps and move on to other opportunities that we think have better return prospects going forward.

Splunk is being acquired by Cisco Systems with the deal expected to close in the third quarter of 2024. Shares were trading just shy of the $157 per share acquisition price, so we saw little return potential in continuing to hold. We used the proceeds from the sale to reallocate to both new investment opportunities and existing positions with higher return potential.

We also made several other smaller tweaks to the portfolio by trimming Palo Alto Networks and adding to existing positions in CoStar Group, Danaher, and Thermo Fisher Scientific.

Palo Alto Networks has been a fantastic performer over the past year and has become the largest position in the portfolio. Though we continue to believe that the cybersecurity industry has some of the best growth prospects in the tech sector, Palo Alto’s valuation had become stretched, and we decided to trim the position for risk management purposes and reallocate elsewhere.

We think 2024 could finally be a breakout year for CoStar Group’s stock. Negative sentiment surrounding the commercial real estate industry has caused the stock price to stagnate, but we think investors are overlooking the potential of CoStar’s new Homes.com residential platform to steal market share from Zillow.

Over the past two years, the biotech and pharma industries have been working through a post-pandemic hangover, resulting in an inventory destocking cycle that has been longer than anticipated. Both Danaher and Thermo Fisher expect demand to reaccelerate in the second half of 2024, which we think should get both stocks moving again.

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The above information is intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

All information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice. We do not represent that any opinion, estimate or projection will be realized. While we believe this information to be reliable, no representation or warranty is made concerning its accuracy.

Performance results are based on a representative account for each strategy, not individual client accounts. Clients can see their actual account performance on the Interactive Brokers’ website at any time. Client account results may not exactly match the performance of the representative accounts. Such variance is due to a number of factors, including differences in trade prices, transaction fees, market activity, any restrictions have you may have imposed on your account(s), and the amount and the timing of deposits or withdrawals.

The performance information presented herein has been generated during a period of extraordinary market volatility. Accordingly, the performance is not necessarily indicative of results that we may achieve in the future, and we do not represent and it cannot be assumed that the performance of our strategies will be subject to the same economic risk factors that contributed to the above returns. Performance results discussed above represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed above. The investment strategy and focus of our model portfolio strategies can change over time. Similarly, there is no assurance that the securities purchased will remain in a model portfolio strategy or that securities sold may not be repurchased. The mention of specific holdings does not constitute a recommendation by MFWM or its affiliates.

To the extent we invest more heavily in particular sectors or industries of the economy, the performance of our strategies will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any model portfolio, client portfolios may be significantly invested in a sector or industry as a result of our portfolio management decisions. Similarly, a model portfolio’s investment may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance, and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. It is not possible to invest in an index.

This message is provided for informational purposes only, reflects our general views on investing and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals, including (without limitation) tax professionals, regarding all personal finance issues. While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. This message may not be relied upon as personalized financial planning or tax advice.

MFWM is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own. HOWEVER, REGISTRATION AS AN INVESTMENT ADVISOR DOES NOT IMPLY ANY LEVEL OF SKILL OR TRAINING. Access to MFWM is only available to clients pursuant to an Investment Advisory Agreement and acceptance of our Client Relationship Summary and Brochure (Form ADV, Parts 2A and 2B). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) and IRA rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.

U.S. Small & Mid-Cap

For a few years now the place to be has been in large capitalization stocks. And the bigger the better. The first quarter was a good one for mid caps, but still not enough to keep up with the big dogs. Small caps continue to lag behind, poorly, barely notching positive returns in the quarter while larger companies inked near 10% advances.

Generally stronger-than-expected economic data and company earnings overpowered the disappointment of delayed interest rate cuts. Market participants were seemingly happy to take an optimistic view towards every development, perhaps emboldened by a boom from the unbounded possibilities of artificial intelligence. (Make sure you’re sitting down before looking at the performance of Nvidia and Supermicro this quarter.)

Within Mid Caps specifically, Technology and Energy led the way from a sector view, but sector performance was broadly strong. Only Real Estate and Communication Services posted negative returns, prompting some to proclaim the long-awaited broadening of the rally has arrived. It’s not that clear, however. If we look down the size spectrum just a touch, six of the 11 sectors in small cap land posted negative results, suggesting the “higher for longer” impacts still linger.

The performance of your US Small and Mid Cap strategy was positive, but individual company performance was mixed. As noted below, this was a very active quarter for portfolio changes and we’re excited about where things stand for the years ahead.

Net Returns as of 03/31/24

	QTD	YTD	1Y	3Y	5Y
US Small and Mid-Cap	6.06%	6.06%	23.21%	-1.65%	8.07%
Benchmark (S&P Midcap 400)	9.96%	9.96%	23.35%	6.97%	11.72%

Portfolio Review

Factoring in size and performance, these three companies had the largest positive impact on returns during the quarter:

• Brown & Brown: 23.31% return, 7.32% average weight
• Axon Enterprise: 21.12% return, 7.09% average weight
• Shockwave Medical: 70.88% return, 1.99% average weight

Middle-market insurance broker Brown and Brown posted a strong quarter—on stock returns, and business results. The company continues to benefit from hard insurance markets, gain share from lesser competitors, and complete value-accreting acquisitions—all the while growing EBITDAC, its preferred measure of operating profits, 23% year over year. Despite returning nicely this year, we believe shares remain reasonably valued, at 22 times our estimate of 2024 free cash flow.

Public safety kingpin Axon Enterprise turned in a stellar close to its most recent year. On the numbers, this was the fifth straight year of 25%-plus revenue growth and 2023 included expanding profit margins to boot. Driving this success is the company’s ability to drive high value solutions to its public safety customers, with notable exciting product launches (Taser 10 and Axon Body 4) and continued adoption of its software offerings. Strong performance in its core markets is being supported by growing success in other markets: federal, international, corrections, and the private sector. With expectations set for another year of greater than 20% revenue growth and even better profit growth, the market continues to lift Axon’s shares higher.

Shares of Shockwave Medical were up 71% in the quarter as they rebounded strongly from a 52 week low set in November. Fueling the rise in shares was the company’s earnings report in February where the medical device maker reported 49% revenue growth last year and guided for 26% topline growth this year. Factors driving Shockwave’s growth include strong utilization in coronary procedures, improving reimbursement trends, and international expansion in countries like Japan and Germany. Shockwave’s shares ended the quarter near an all-time high after the Wall Street Journal reported on March 26 that Johnson & Johnson is considering acquiring the company.

Factoring in size and performance, these three companies had the largest negative impact on returns during the quarter:

• Howard Hughes Holdings: -15.11% return, 3.48% average weight
• Inari Medical: -26.09% return, 1.63% average weight
• GXO Logistics: -12.10% return, 3.02% average weight

Howard Hughes finished 2023 on a positive note, but the stock could not escape the negative sentiment toward the real estate sector caused by revised interest rate expectations. Thanks to strong demand for new home construction, the average sales price for new lots across the master-planned communities crossed $1 million per acre for the first time, a 22% year-over-year gain. Demand is also strong for the company’s new residential projects and pre-sales for the condo towers in Honolulu are nearly sold out. Office valuations remain depressed in most markets, but Howard Hughes’ properties continue to outperform their surrounding metro areas. The company is pursuing a spin-off of its newly formed Seaport Entertainment division, which management expects to complete in the second half of the year.

Shares of Inari Medical fell 26% in the quarter. The medical device company’s earnings release at the end of February raised concerns that the company’s growth is slowing down. While Inari reported revenue growth of 28.7% for 2023, its guidance for high teens revenue growth in 2024 could be an indication of increasing competition from other medical device companies like Penumbra, which is also a holding in the strategy. Management maintains their guidance that the company could achieve sustainable operating profitability in the first half of 2025.

GXO Logistics was a detractor to the fund this quarter, down 12%. The subpar performance was likely due to the company reporting negative organic revenue growth in the fourth quarter, as well as 2023 annual organic revenue growth that, while positive, was still below management’s original expectations. When you pair that news with guidance that is below the Street’s expectations and management’s long-term targets, share prices tend to move in the wrong direction. Basically what is happening here is that GXO’s customers’ order volumes are challenged at the moment as consumers have shifted spending habits from goods to services. This is not only unsurprising to us given high inflation and post-pandemic behavior, but is also uncontrollable as far as GXO is concerned. Thankfully its contracts are structured to preserve profitability across the economic cycle. While this performance is disappointing in the short-term, we continue to see GXO as a beneficiary of warehouse automation and outsourcing.

Portfolio Changes

During the quarter we trimmed four very strong performers (Brown & Brown, Axon Enterprise, Q2 Holdings, and Trex) and added to five businesses where we think the potential returns going forward are very attractive (Toast, Eastman Chemical, Inari Medical, Goosehead Insurance, and Globus Medical). We won’t detail each move (please refer to your trade alerts for more specific rationales), but will generalize to say that we’re mindful of position sizing and are always looking for opportunities to put more capital behind opportunities we think the market is getting wrong.

We sold five businesses during the quarter. Paycom and Paylocity have been longtime holdings that sell software to human resource departments at small- and mid-sized companies. They do it very well and have built very good businesses. But the barriers to entry in the space are low and competition is fierce. We’ve long monitored the competitive intensity as a key risk factor and are convinced that the path forward will be more challenging than the market expects. LCI and Markel have been long-term winners but their futures look less bright to us and we believe we can find better investment opportunities. Cognex is one that we got wrong. We overestimated the secular demand drivers and the company’s ability to grow. Recent executive turnover and sizable acquisition raise even more questions. We’re moving on.

In their place, we added five businesses we’re excited to own for the long term. SBA Communications is a business we’ve followed for over a decade. It operates cell phone towers and can be thought of as a toll on cellular data consumption. Rising interest rates have complicated the business model a bit, but we believe the company can manage through it and the merits of the business model should shine through as the rate environment normalizes. Toast serves restaurants, big and small, with a complete array of software and hardware solutions to streamline operations. It processes payments as well, but its differentiation lies in the completeness of its lineup and how well it addresses big problems for restauranteurs. Guidewire and DoubleVerify sell software, but they are very different businesses. Guidewire’s software helps insurers price policies, manage claims, and make better decisions. DoubleVerify brings transparency, trust, and efficiency to digital advertising in a world where tracking the effectiveness of ads is becoming more difficult. Globus is an established medical device business with a strong and share-gaining franchise in the spine market, complemented by a promising robotics segment. We believe the company strengthened its position and ability to compete by purchasing a peer, and that the benefits of the combined entity will be significant and lasting.

Qualitatively, we believe we’re swapping Quality for higher Quality. Quantitatively, our additions grew sales faster in 2023 than our deletions. According to consensus estimates, that is expected to hold true in 2024 as well. We believe this higher growth should also translate into higher cash flow growth if our estimates are roughly correct. In all, we think we’ve raised the average business Quality in the portfolio, are likely to benefit from stronger sales and profit growth, and have added companies we can envision owning for a long time.

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Fixed Income

The Fixed Income commentary refers to the following holdings: US Bonds Strategy (Vanguard Total Bond Market ETF; BND), Treasury Inflation-Protected Securities Strategy (Vanguard Short-Term Inflation-Protected Securities ETF; VTIP), and for taxable accounts only, US Muni Bonds Strategy (iShares National Muni Bond ETF; MUB).

Portfolio Review

U.S. Bond Strategy, which holds BND, was slightly negative in the quarter, with core bonds lagging the U.S. equity market, down just shy of -0.8% net of ETF expenses, excluding account level fees and expenses, in Q1. Volatility in the bond market is sticking higher than its 5-year average due to the ever-changing nature of interest rate expectations as well as sticky inflation conditions. As a result, long duration underperformed shorter- and intermediate-duration maturities during the quarter. High Yield and TIPS outperformed the broader bond market during the quarter. US Muni Bond Strategy, which holds MUB, posted a loss just under -0.3% net of ETF expenses, excluding account level fees and expenses, and the TIPS Strategy, which holds VTIP, posted a gain just shy 0.9% net of ETF expenses, excluding account level fees and expenses.

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US Stock Markets

The US Stock Markets commentary includes the following holdings: US Large Cap Strategy (Vanguard S&P 500 ETF; VOO), US Mid Cap Strategy (Vanguard Mid-Cap ETF; VO), and US Small Cap Strategy (Vanguard Small-Cap ETF; VB).

Portfolio Review

U.S. Stock Markets were up for the quarter with the US Large Cap Strategy (“Large Cap”), which holds VOO, up 10.4% net of ETF expenses, excluding account level fees and expenses, during the period. In a reversal from Q4 ’23, the US Small Cap Strategy (“Small Cap”), which holds VBI, underperformed Large Cap, posting a gain of 7.4% net ETF expenses, excluding account level fees and expenses, for the quarter. US Mid-Cap Strategy (“Mid Cap”), which holds VO, outpaced Small-Cap, but underperformed Large Cap and the broad market this quarter, with the Mid-Cap strategy up around 7.8% net of expenses, excluding account level fees and expenses. Once again, the technology sector led gains during the quarter, with U.S. stock performance driven by the likes of Microsoft, Meta, and Nvidia. In a turnaround from Q4, Energy and Industrials also posted low double-digit gains in Q1, another tailwind for U.S. equities. Large Cap Growth indices were up 11.4-12.7% in Q1 compared to 7.4-8.6% for Large Cap Value indices. Small Cap Growth outperformed Small Cap Value and the broad capitalization category. U.S. Consumers remained more resilient than expected, with consumer cyclicals and defensive delivering solid results during the quarter. Financials, Industrials, and Energy all outperformed the broad market. Higher dividend yielding stocks underperformed the broad market this quarter but delivered a high single digit performance.

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International Stock Markets

The International Stock Markets commentary includes the following holdings: International Developed Strategy (Vanguard FTSE Developed Markets ETF; VEA) and International Emerging Strategy (Vanguard Emerging Markets ETF; VWO).

Portfolio Review

Emerging Markets, which holds VWO, underperformed compared to Developed Markets Strategy, which holds VEA, gaining 1.7% and 5.3% net of ETF expenses, excluding account level fees and expenses, during Q1, respectively. In Developed Markets, Semiconductor, Healthcare, and Automotive stocks ASML Holding, Novo Nordisk, and Toyota were tailwinds amongst top holdings. In Emerging Markets, performance was bolstered by strong gains from Taiwan Semiconductor, Oil and Gas refiner Reliance, and Chinese Retail platform Meituan. Conversely, Brazilian steel miner Vale SA was a drag on Emerging Market’s performance this quarter.

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US Real Estate

The US Real Estate commentary refers to Real Estate Investment Trusts Strategy (Vanguard REIT ETF; VNQ).

Portfolio Review

REITs had a difficult first quarter. Following a March settlement with the National Association of Realtors (NAR) that could change how brokers are paid, Real Estate performance took a hit. Amidst the fallout, Simon Property Group, Digital Realty Trust, and CBRE stood out and delivered positive results for sector. The US Real Estate Investments Strategy, which holds VNQ, delivered a loss of -1.2% net of ETF expenses, excluding account level fees and expenses, in Q1.

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