Commentary: Mid Cap Strategy

• Despite an optimistic start, headlines around potential tariffs, global trade friction and a rotation out of AI-related tech stocks sent equities lower in the first quarter.
• The Strategy underperformed its benchmark, as market volatility magnified the idiosyncratic headwinds that pressured several of our industrials and technology holdings.
• With the threat of more tariffs and economic uncertainty on the horizon, our focus on stocks with strong balance sheets, pricing power and attractive company-specific drivers is even more important for weathering this storm.

Despite an optimistic start to the year, the threat of tariffs and trade policy changes under the new Trump administration and a rotation out of AI-related tech stocks spurred volatility and uncertainty that sent equities lower for the first quarter. Amid the decline, mid caps broadly outperformed other areas of the market with the Russell Midcap Index declining -3.40% compared to the -4.27%, -4.49% and -4.72% declines of the S&P 500 Index, the Russell 1000 Index and the Russell 3000 Index, respectively. Concerns over the economic ramifications of new tariffs, declining consumer sentiment and obfuscation of the trajectory of interest rates and earnings helped value stocks seize leadership from growth stocks with the Russell Midcap Value Index returning -2.11%, 500 basis points ahead of the Russell Midcap Growth Index.

From a sector standpoint, energy (+7.25%) was the top performer within the benchmark as the coldest January in nearly 40 years, a weakening U.S. dollar and concerns over global oil supply bolstered energy prices. The more defensive utilities (+6.82%), consumer staples (+1.95%) and real estate (+1.50%) sectors benefited from a rise in risk-off sentiment, while the financials (-2.02%) and health care (-3.32%) sectors declined but still outpaced the broader benchmark. The information technology (IT, -9.95%) sector saw the greatest selloff as the unveiling of Chinese AI model DeepSeek led to a pullback in AI and data center stocks. The consumer discretionary (-8.24%), industrials (-6.60%), communication services (-4.24%) and materials (-3.46%) also trailed the index.

Against this background the ClearBridge Mid Cap Strategy underperformed its benchmark for the first quarter, as market volatility and declining investor optimism magnified the idiosyncratic headwinds that pressured several of our holdings. Stock selection in the industrials sector was the leading detractor as the prospect of tariffs increasing the cost of manufacturing inputs and weakening economic growth projections weighed on industrial equipment manufacturer Regal Rexnord and modular office provider WillScot. Despite both companies reporting solid fourth-quarter performance, economic uncertainty and the prospect of a further push out in the recovery of short-cycle industrials weighed on their shares.

AI-beneficiary and strong fourth-quarter performer AppLovin came under pressure from several reports from short sellers seeking to capitalize on a reversal in the company’s strong momentum amid the broader tech retreat. However, we believe the AI-enabled advertising software platform continues to be one of the best AI opportunities within the mid cap market. Recent positive channel indicators for its e-commerce business point toward a solid and persistent future of attractive returns for AppLovin, and we used the short-natured weakness to add to our position.

Likewise, Marvell Technology, a networking and storage semiconductor company with a strong presence in data centers, pulled back after a strong run alongside other AI beneficiaries following the DeepSeek announcement. However, we believe that regardless of the impact of less capital and energy intensive AI models like DeepSeek, large AI hyperscalers will continue to build new and more data centers, providing Marvell with a long-term opportunity to capitalize on its position as a preferred partner in their construction.

Our top contributor during the period was EQT, North America’s largest natural gas producer. The company continued its upward trajectory from the fourth quarter as the U.S. endured its coldest winter since 1988, spurring an increase in demand. Additionally, the company continues to capitalize on strong operational performance, making additional progress on its goal of deleveraging and extending its lead as the lowest-cost producer in the basin. The increase in natural gas prices also helped bolster the share price of Baker Hughes.

We participated in the IPO of SailPoint, which offers identity security solutions to help companies manage and secure access to critical data and applications. Having known the company for a long time and previously owned it in its prior publicly traded forms, we believe the incorporation of AI has swelled SailPoint’s total addressable market — already growing at a high pace — as companies will need to begin addressing what data and functions their new AI agents can access across their enterprise.

Also within the IT sector, we added Microchip Technology, which supplies analog and mixed-signal microprocessors for use in the automotive, industrial, computing and other industries. We took advantage of recent weakness in the stock to add to the position. We believe that the return of the company’s prior CEO and efforts to rebuild relationships with customers has resulted in Microchip recovering market share to prior levels, and that it represents an attractive cyclical improvement story with asset optimization improvements and good business visibility.

We exited our position in chemical manufacturer Ashland. While we were optimistic about the end of destocking trends and a rebound in demand, the company continues to face sluggish end markets without signs of improvement. We redeployed the proceeds to relatively new holding International Paper, which we believe represents a strong turnaround story under the leadership of a new CEO and his plan to optimize its footprint, adjust pricing dynamics and improve margins over the next few years.

Visibility and earnings predictability is very low right now. As a result, we are focusing all our attention on companies who control their own destiny and can grow through this malaise. With the threat of more and greater tariffs and economic uncertainty on the horizon, we believe our focus on high-quality stocks with strong balance sheets, pricing power and attractive company-specific drivers is even more important to weathering the economic storm and emerging stronger on the other side. Additionally, we believe the pace and impact of these rapid-fire policy developments highlights the need for a dynamic and actively managed investment process, like ours, which we believe is even more essential to investors during periods of heightened volatility and uncertainty.

The ClearBridge Mid Cap Strategy underperformed its Russell Midcap Index during the first quarter. On an absolute basis, the Strategy had contributions from four of the 11 sectors in which it was invested during the quarter. The largest contributors were the energy and utilities sectors, while the industrials and IT sectors were the greatest detractors.

On a relative basis, stock selection in the industrials, health care, IT, financials and consumer staples sectors weighed on performance.Conversely, stock selection in the communication services and real estate sectors proved beneficial.

On an individual stock basis, the biggest contributors to absolute returns in the quarter were EQT, PPL, Hartford Insurance, Casey’s General Stores and DTE Energy. The largest detractors from absolute returns were Marvell Technology, Regal Rexnord, Avantor, WillScot and AppLovin.

In addition to the transactions listed above, we initiated new positions in Qorvo in the IT sector and Light & Wonder in the consumer discretionary sector. We exited positions in Eversource Energy in the utilities sector, Aspen Technology in the IT sector, Teleflex in the health care sector, Coty in the consumer staples sector, KKR in the financials sector and Noble in the energy sector.