Aristotle Value Equity commentary for the first quarter ended March 31, 2016.

Markets Review

Sluggish economic growth, a fragile oil price recovery and uncertainty surrounding global monetary policy led to U.S. stocks ending the first quarter just slightly above where they began, as the S&P 500 posted a total return of 1.35%. However, as is often the case, the quarter’s endpoints did not tell the whole story, as volatility abounded. How soon investors seemed to forget that the S&P 500 Index began 2016 with a decline in excess of 10% for the first six weeks of the year in sympathy with sinking Chinese shares on reports of a more significant-than-expected slowdown in China’s manufacturing economy. During that period, commodity prices continued to fall and the U.S. dollar strengthened further, making U.S. goods less competitive globally.

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About midway through the quarter, however, the tide shifted. An oil price recovery, central bank easing outside the United States and stable American economic data contributed to a rally in U.S. equities, as the S&P 500 Index surged more than 12% from its February 11 inflection point. Stocks also benefited from a weakening in the U.S. dollar; despite a strong start to the year, the WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, fell 4% in the first quarter—its largest drop in nearly six years.

With respect to style, we saw a shift in performance in the first quarter. Within the Russell U.S. equity indices, so-called “value” stocks outperformed their growth counterparts across the capitalization spectrum. When performance is analyzed by market cap, mid cap companies posted the best performance, followed by large caps; these segments reported low single-digit returns. Small caps overall posted narrow losses, but the dichotomy between growth and value was greatest among the smallest companies, with small cap value advancing while small cap growth declined. Performance varied widely by sector, underscoring the importance of our commitment to broad diversification to manage risk. Eight of the ten sectors in the S&P 500 Index advanced, led by Telecommunication Services and Utilities, each up more than 15% for the quarter. Concurrently, both Health Care and Financials declined more than 5%.

Overall, international developed equity markets trailed the U.S. stock market in the first quarter on economic weakness as well as concern over the potential “Brexit,” or U.K. withdrawal from the European Union, as the June 23 date for the U.K. referendum drew closer. Continuing its aggressively accommodative monetary policy, the Bank of Japan followed the European Central Bank’s lead and lowered Japanese interest rates into negative territory. Further monetary easing by several developed market central banks notwithstanding, the MSCI EAFE Index (net) reported a total return of -3.01% in U.S. dollars. In a reversal of recent quarters, the dollar weakened against other developed market currencies, resulting in a -6.52% local currency return in the MSCI EAFE. While most developed country indices reported low-to-mid single-digit declines in U.S. dollar terms, there were some notable exceptions: resourcerich New Zealand and Canada posted low double-digit gains. At the other end of the spectrum, Italy and Israel each declined more than 10%.

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On the other hand, emerging markets bounced back in the first quarter after languishing for three years, aided by the firming prices of oil and other commodities as well as central bank easing around the world. Despite looming concerns over potential credit-rating cuts, emerging market equities outperformed their developed counterparts in the first quarter, with a few notable exceptions. The MSCI Emerging Markets Index (net) posted a 5.71% total return in U.S. dollars; its gain was a more moderate 2.73% in local currencies, reflecting relative weakness in the American greenback. Latin America was particularly strong, with the MSCI indices in Brazil, Peru and Colombia all advancing more than 20% in U.S. dollar terms. A few emerging markets did decline in the quarter, however—most notably Greece, -12.23%, and China, -4.80%, both in U.S. dollars.

Amidst uncertainty over the timing of the next U.S. interest rate hike, long-term U.S. Treasury yields reported their steepest quarterly decline in more than three years. The yield on the 10-year Treasury fell to 1.784% as of March 31, its lowest quarter-end level since the end of 2012 and down from 2.273% on December 31.

On the commodity front, oil prices were extremely volatile. The 3.5% gain in U.S. crude masked its roller coaster quarter, as oil prices surged 46% from their February 2016 low (yet remained 60% below their June 2014 high). Natural gas prices, on the other hand, plunged 16% in the first three months of the year. Meanwhile, gold notched its largest quarterly gain since 1986, rising 16.5% in the first quarter. Such a leap reflected continued economic concerns as gold regained some of its luster compared to other asset classes.

Aristotle Value Equity – Performance & Attribution Summary

Against this economic backdrop, Aristotle Value Equity portfolio advanced modestly in the first quarter of 2016. The Aristotle Value Equity Composite posted a total return of 1.10% gross of fees (1.01% net of fees), modestly trailing the Russell 1000 Value Index, which rose 1.64%, and the broad S&P 500 Index, which gained 1.35%. For the year ended March 31, 2016, the Aristotle Value Equity Composite posted a total return of 1.22% gross of fees (0.88% net of fees), outperforming the Russell 1000 Value Index, which reported a total return of -1.54%, while underperforming the S&P 500 Index return of 1.78%. Longer-term performance remained strong, with the Aristotle Value Equity Composite gaining 11.37% gross of fees (10.93% net of fees) annualized for the five years ended March 31, 2016. This result was ahead of the Russell 1000 Value Index, up 10.25%, and slightly behind the S&P 500 Index, up 11.58%.

The modest underperformance in the first quarter resulted primarily from security selection in the Consumer Staples and Financials sectors. The portfolio’s lack of exposure to the Telecommunication Services sector also detracted from relative return, as it was the second-best performing sector in the quarter. (All sector under- and overweights relative to the benchmark result from bottom-up security selection rather than tactical allocation decisions.) Meanwhile, favorable security selection in the Information Technology sector added value, as did the portfolio’s significant underweight in the worst-performing sector, Financials. Overall, however, the negative factors slightly outweighed the positive in the quarter, yielding modest underperformance relative to the value benchmark.

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Japanese financial services firm Mitsubishi UFJ Financial was the most significant detractor from relative return in the first quarter. Shares of large Japanese banks suffered from downgrades on the expectation that the Bank of Japan’s negative interest rate policy adopted in January would put downward pressure on earnings. However, Mitsubishi UFJ Financial Group, Inc. has the lowest exposure (only 15% of profits) to domestic lending of the major Japanese banks due to its subsidiaries, including Union Bank of California and its stake in Morgan Stanley. We met with management in Tokyo during the quarter and were favorably impressed by the candidness of management and the progress that has been made toward “westernizing” the bank, such as changing the board

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