Market Overview
Investors spent much of the six-month period ended December 31, 2022, responding to shifting inflationary tides and the course of the U.S. Federal Reserve (the “Fed”). Accordingly, evidence that the central bank’s hawkish maneuvers, including four rate hikes totaling 275 basis points during the period, were effectively slowing the rate of inflation led to stock gains, although wariness over policymakers’ path forward tempered investor enthusiasm, especially late in the period.
A considerable impediment for the Fed was continued strength in the labor market, as the economy steadily added new jobs and wages advanced. Persistent expectations for a 2023 recession, reflected in a sharpening inversion of the U.S. Treasury yield curve, further clouded sentiment.
Midcap stocks generally led the market higher, according to the Russell family of indices, followed by small cap stocks and large cap stocks. From a style perspective, returns were mixed as growth stocks outgained value stocks among midcap and small cap positions while value stocks decidedly outperformed growth stocks in the large cap space.
Fund Performance
The Meridian Growth Fund (the “Fund”) Legacy Class Shares returned (0.46)% (net) during the six-month period ended December 31, 2022, underperforming its benchmark, the Russell 2500® Growth Index, which returned 4.59%.
Our investment process prioritizes the management of risk over the opportunity for return. We look to build an enduring fund that can mitigate capital losses during turbulent bear market environments and, secondarily, participate on the upside during strong market environments.
At the sector level, our position in the information technology sector contributed positively to returns during the period, outperforming the benchmark holdings by over 6%. In addition, stock selection was positive in the communication services sector. Conversely, an underweight position in the energy sector weighed on relative performance, as energy was the best-performing sector in the index. While we continue to look for investment opportunities in the energy space, we have yet to find companies that meet our strict investment criteria and overcome concerns about the potential for a decline in commodity prices during a recession.
Against this backdrop, the three largest individual contributors to the Fund’s relative performance during the period were ON Semiconductor Corp., Merit Medical Systems, Inc., and GLOBALFOUNDRIES, Inc.
ON Semiconductor Corp. is a semiconductor manufacturer with a diverse product portfolio including high exposure to the automotive and industrials end markets. ON Semi’s exposure to the auto end market is particularly attractive, as advanced driver assistance systems and self-driving features have led to strong demand for the semiconductors that power these technologies. The company is also well-positioned in the industrials end market, where it benefits from low pricing pressure due to the longer lifecycle of industrials products relative to consumer products. While recent outperformance has been driven in part by the success of the company’s silicon carbide based solutions, which are in high demand from electric vehicle manufacturers, we believe its promising outlook is also buoyed by an increase in long-term supply agreements, which increase visibility by locking in prices and reducing dramatic swings in supply and demand. ON Semi reported strong quarterly results during the period, with revenues up 25% and gross margins approaching 50%. As the stock approached our price target during the period, we trimmed our exposure.
Merit Medical Systems, Inc. designs, develops, manufactures, and markets single-use medical products on a global basis for thousands of purposes ranging from surgical procedures to biopsies. Long focused almost exclusively on revenue growth, the company is now more focused on improving margins, returns, and cash flow as part of its three-year strategic plan it rolled out in 2021. Impressively, the company is executing ahead of schedule and is on track to achieve its revised financial targets, yet top-line performance remains strong, as evidenced by broad-based 10.5% organic revenue growth in its most recent period. Given the prospects for continued outperformance, we maintained our position in the company.
GLOBALFOUNDRIES, Inc. is a semiconductor contract manufacturing and design company that went public in 2021. The company has benefitted from a global shortage of semiconductors, particularly those used in the automotive and industrial markets. During the period, the stock rallied as the company reported that revenues rose more than 20% on a year-over-year basis and EBITDA increased sharply. The company’s facility location footprint in the U.S. and Europe has proven beneficial as customers are increasingly reducing exposure to China and Taiwan, where geopolitical risks are rising. Separately, like many
