Carillon Eagle Mid Cap Growth Fund Q1 2022 Commentary

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Summary

  • The Carillon Family of Funds spans a range of investment objectives and asset classes designed for long-term investors.
  • Mid-cap stocks overall posted rather disappointing returns in the first quarter of 2022.
  • The outlook for the cyclical areas of the stock market appears mixed against a backdrop of higher commodity prices, rising interest rates, and geopolitical unrest.
  • On a more positive note, strong pent-up demand for travel should help to bolster securities.

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Market Overview

Mid-cap stocks overall posted rather disappointing returns in the first quarter of 2022. There was, however, a notable level of disparity between the two style indexes, as the Russell Midcap® Growth Index (down 12.58%) significantly lagged its Russell Midcap® Value Index (down 1.82%) counterpart once again. On an individual sector basis within the Russell Midcap Growth Index, energy (up 37.42%) was undoubtedly the most notable performer as it outpaced the broader index by an incredible margin and was the only sector to see positive returns. Consumer staples (down 4.11%), utilities (down 4.17%), and financials (down 9.76%) outperformed the index on a relative basis despite seeing lackluster returns. On the opposite side, communication services (down 25.57%), consumer discretionary (down 16.41%), and healthcare (down 14.13%) were the worst-performing sectors.

Portfolio Review

Best Securities

Average Weight (%)

Contribution to Return (%)

Baker Hughes

1.88

0.77

CrowdStrike

2.48

0.41

LPL Financial

2.69

0.33

Anaplan

0.71

0.32

Splunk

1.18

0.31

Worst Securities

Pool

2.43

-0.74

RingCentral

1.12

-0.56

Fortune Brands Home & Security

1.41

-0.51

Tyler Technologies

2.16

-0.40

MSCI

1.97

-0.39

As of March 31, 2021. The information provided above should not be construed as a recommendation to buy, sell, or hold any particular security. The data are shown for informational purposes only and are not indicative of future portfolio characteristics or returns. Portfolio holdings are not stagnant and may change over time without prior notice. Past performance does not guarantee future results. Please note that the holdings identified do not represent all of the securities purchased, sold, or recommended for the fund. They are provided for informational purposes only. Carillon Tower Advisers, Eagle Asset Management, their affiliates, or their respective employees may have a position in the securities listed. Please contact Carillon at 800.421.4184 to obtain the calculation’s methodology and/or a list showing every holding’s contribution to the overall fund’s performance during the measurement period.

Baker Hughes (BKR), a diversified energy technology and equipment company, is currently seeing a number of tailwinds across its numerous lines of business. In the near term, the company should benefit from the recovery in oil field capital expenditure. In the intermediate term, it also should be able to benefit from the build-out of liquefied natural gas infrastructure to assist European nations in their efforts to reduce their reliance on Russian natural gas. Additionally, Baker Hughes offers carbon capture technologies to help customers meet lofty climate-friendly targets.

CrowdStrike (CRWD), a security software platform designed to protect information technology assets and cloud workloads, delivered strong earnings results with solid recurring revenue, customer growth, and profitability. We expect strong demand to continue, largely in part due to the elevated cyber security threat environment as Russia may seek to attack governments and enterprises in retaliation for economic sanctions imposed in response to its attack on Ukraine.

LPL Financial (LPLA) is an independent broker-dealer that offers technology, brokerage, and investment advisory services to financial professionals and institutions. The company was a strong outperformer once again in the quarter as it continues to see impressive net new asset growth and has successfully integrated a recent notable acquisition. The continued move higher in interest rates has provided an additional tailwind.

Anaplan (PLAN) provides predictive planning software for enterprises to model financial, sales, and supply chain dynamics. The company delivered strong quarterly results, with revenue and profitability ahead of expectations, led by a return in larger deal signings. Late in the quarter, a large private equity firm focused on software and technology announced it would acquire Anaplan for a hefty premium, sending the stock higher.

Splunk’s (SPLK) software analyzes data from servers and network equipment, from which insights can be gleaned about business trends, security, and operations. The company delivered revenue above expectations for the quarter and provided an outlook for cash flow generation above expectations. Splunk also announced the hiring of a new CEO with cloud and security software experience, indicating a favorable shift toward a customer-centric sales approach. The stock also benefitted late in the quarter from a more general bounce in beaten-down software stocks.

Pool (POOL) is the world’s largest wholesale distributor of swimming pool supplies, equipment, and related leisure products. After an impressive run, the shares cooled off a bit as investors took some profits on stocks that were perceived to have benefitted from the pandemic. Despite this, the firm continues to see strong demand and remains well positioned to capitalize on a number of firmly established secular trends. Migration trends toward the Sunbelt as well as the desire consumers have shown to invest in their outdoor living and entertainment spaces have resulted in healthy fundamentals for the pool industry going forward.

RingCentral (RNG) provides software-as-a-service solutions for global enterprise cloud communications. The firm’s shares have pulled back on fears of potential increased competition and tough comparisons to performance during the COVID-related surge in 2020 and 2021.

Despite these fears, the company’s revenue growth rate accelerated all through 2021, and we firmly believe competitive issues have not changed. Additionally, we believe there remains significant opportunity for growth in the next few years that should come from the numerous channel partnerships the company has signed recently in a very large addressable market.

Fortune Brands Home & Security (FBHS) provides a variety of building products such as plumbing, decking, doors, and security-related products. The company’s shares have declined as of late as rising interest rates have weighed a bit on investor sentiment in stocks tied to the housing industry. Additionally, the company has experienced some margin pressure specifically within its cabinet business as transportation, labor and supply chain issues linger.

Tyler Technologies (TYL), a provider of software for state and local governments with a focus on enterprise resource planning (ERP), courts and justice, public safety, and payments, delivered mixed earnings results. Revenue for the quarter was slightly ahead, but the revenue and profitability guidance for the full year came in below expectations. This was due to a mix shift toward cloud deals that carry lower up-front revenue recognition, as well as to duplicative data center expenses as the company transitions to a new cloud hosting vendor. Despite the near-term profitability pressures, the company is seeing a deal pipeline at pre-pandemic levels, suggesting a positive longer-term outlook.

MSCI (MSCI) provides critical decision support tools and services for the global investment community. Despite reporting strong results, the stock underperformed as the company saw its valuation compress as overall markets were under pressure. On a more fundamental level, MSCI reported revenue and earnings ahead of consensus expectations, and we continue to believe the company is well positioned to gain assets linked to its proprietary indexes. In addition, it is seeing accelerating growth in its environmental, social, and governance (ESG) and climate offerings, which now account for a notable portion of total company revenue.

Outlook

There is currently much to worry about with the first quarter of 2022 now behind us. Leading the list is the now-hawkish U.S. Federal Reserve (FED), which recently raised the federal funds rate 25 basis points, with perhaps up to seven increases to follow. Will these rate increases, coupled with the Fed’s efforts to shrink its balance sheet, precipitate a recession as the yield curve is currently nearing inversion? Fueling the Fed’s hawkish stance is raging inflation, which at the moment is running over 7% with the prospect of headline inflation approaching 10% in the near future. These numbers have been pushed higher by persistent supply chain issues and sharply higher wage rates. And oh yes, there is a major war in Ukraine that, coupled with a post-COVID recovery, has pushed oil prices to well over $100 a barrel. These sky-high oil prices augur for an economic slowdown. Upcoming year-over-year comparisons also will be negatively impacted by the absence of massive stimulus programs. Improvements in supply chain issues have certainly been slowed by the war in Ukraine as well as by further COVID-related lockdowns in China.

Somewhat offsetting the negative macroeconomic factors is the correction in high-multiple growth stocks that has recently taken place. The S&P 500 Index is now trading at a fair level of 20 times forward earnings estimates. Investor sentiment is also negative at the moment, which can generally be viewed as a positive for the market. With fixed income markets treacherous as rates rise and inflation soars, equities may prove to be the best investment alternative.

The outlook for the cyclical areas of the stock market appears mixed against a backdrop of higher commodity prices, rising interest rates, and geopolitical unrest. The energy sector looks poised for continued gains given the bullish underpinnings for oil and gas prices in light of Russia’s instability and a disciplined approach to growth from U.S. shale producers. Among the industries within the industrials sector, defense companies have seen a notable improvement in growth prospects as NATO allies increase spending to aid Ukraine and prepare for a more uncertain future. Conversely, building products companies are likely to experience a slowdown in demand following the sharp back-up in mortgage rates. Given the rapidly changing dynamic of the global economic outlook, our focus remains on finding companies that can successfully navigate the host of operational challenges, including rising raw materials costs, supply chain constraints, and a tight labor market.

To say that the healthcare sector has been under relentless selling pressure is an understatement. It also is quite an anomaly. After healthcare’s relatively extraordinary run in the decade leading up to 2021, the macroeconomic backdrop of a steepening yield curve led to a rotation into shorter-duration assets in 2021. This came at the expense of longer-duration assets often found in certain areas of the healthcare sector, such as biotechnology and healthcare equipment and supplies. Despite the now-ongoing rate increases by the Fed, with many more likely to follow, recent yield curve inversions have raised fears of a potential economic slowdown.

Aside from these macroeconomic dynamics, we also believe there are some fundamental issues currently challenging the healthcare sector. While a portion of rising input and transportation costs can be passed on to customers as inflation rises there are fears among investors that many healthcare manufacturers will not be able to continue passing on these costs for much longer. Labor availability is also an acute problem, particularly among healthcare providers and hospitals, where labor shortages, specifically among nurses, likely will last for the foreseeable future. When this is combined with an aging population that has significant healthcare needs, it creates an untenable situation where care cannot be delivered in a timely or efficient manner. This has caused pressure on the revenues and margins of healthcare providers.

As the yield curve flattens, we have positioned our healthcare holdings to have both exposure to stocks with longer duration and higher growth, as well as to those with reasonable valuations, profitability, and prospects of accelerating profits.

Just as the omicron variant was beginning to wane and life was starting to normalize after two years, the world woke up to a geopolitical crisis in Eastern Europe, where Russia attacked the sovereign nation of Ukraine. We believe this situation, combined with the ongoing inflationary pressures, will make market returns more challenging in the near term, and stock selection will become more important. We hope, however, that political resolutions will bring peace in Eastern Europe and remain optimistic that inflationary pressures will subside over time. Consumer spending has held up well, and enterprise spending has been increasing despite some of the issues in the supply chain, tight labor markets, and semiconductor chip shortages. Within technology, we continue to find attractive opportunities in themes such as cloud computing, artificial intelligence, mobility and telecommunications infrastructure, digital payments, the “Internet of Things,” smart homes, industrial automation, security software, e-gaming, and alternative energy.

The current outlook for the financials sector remains constructive yet volatile. Interest rates have regained their upward trajectory, moving materially during quarter. Given this backdrop, coupled with what remains solid economic growth, we see selective opportunities in the regional banking space. We see unique opportunities in those banks that are both asset-sensitive and located in geographies with outsized economic growth. In addition, we see appealing opportunities in certain financial firms that are gaining market share and also will benefit from a rising rate environment. Despite the year’s volatile start, the pace of merger and acquisition activity is expected to pick up as we move through the year. We believe this underlying environment will continue to benefit smaller advisory boutiques that are gaining share from the larger firms.

A lot has changed on the consumer landscape in the last three months. As noted earlier, inflation and sharply higher gasoline prices have taken a chunk out of the consumer’s pocketbook, and the absence of the federal government’s stimulus money will exacerbate this. Companies that sell hard goods are further challenged by supply chain issues, as well as by substantially higher labor costs. Higher interest rates will further hurt consumers and certainly figure to crimp the housing market. On a more positive note, strong pent-up demand for travel should help to bolster those securities.


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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Additional disclosure: Risk Considerations: Investments in mid-cap and small-cap companies generally involve greater risks than investing in larger capitalization companies. Mid-cap companies often have narrower commercial markets, more limited managerial and financial resources, and more volatile trading than larger, more established companies.

Growth companies are expected to increase their earnings at a certain rate. When these expectations are not met, investors may punish the stocks excessively, even if earnings showed an absolute increase. Growth company stocks also typically lack the dividend yield that can cushion stock prices in market downturns. The companies engaged in the technology industry are subject to fierce competition, and their products and services may be subject to rapid obsolescence. The values of these companies tend to fluctuate sharply.

Past performance is not indicative of future results and investing involves risk, including the risk of loss. All information as of March 31, 2022. Opinions expressed are the current opinions as of the date appearing in this material only. This material should not be construed as research or investment advice. No part of this material may, without Carillon Tower Advisers’ prior written consent, be copied, photocopied or duplicated in any form, by any means. The information provided should not be construed as a recommendation to buy, sell or hold any particular security.

The data is shown for informational purposes only and is not indicative of future portfolio characteristics or returns. Portfolio holdings are not stagnant and may change over time without prior notice.

Carillon Tower Advisers is the investment adviser for the Carillon Family of Funds and Eagle Asset Management is the sub-adviser to the Carillon Eagle Mid Cap Growth Fund. Carillon Fund Distributors is a wholly owned subsidiary of Eagle Asset Management and Eagle Asset Management is a wholly owned subsidiary of Carillon Tower Advisers. All entities named are affiliates.

Benchmark Index:

The Russell Midcap® Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000® Growth Index.

The Russell Midcap® Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses, or sales charges.

Frank Russell Company (Russell) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication.

No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication. The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

©2022 Carillon Tower Advisers, Inc. All rights reserved.

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