American Century Mid Cap Value Fund Q2 2024 Commentary

Average Annual Total Returns for Period Ended 6/30/2024

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Portfolio Review

U.S. stocks advanced. During the quarter, broad U.S. equity markets rose amid moderating inflation, strong corporate earnings growth and weakening employment data. While the Federal Reserve kept interest rates steady, policymakers suggested they may cut rates once by year-end.

Large-cap growth stocks led U.S. equities higher. While large-cap growth stocks delivered notable gains, value stocks declined across the market-capitalization spectrum. Mid- and small-cap stocks also fell.

Health care detracted from performance. The portfolio’s allocation in the health care sector dampened performance during the period. Investors have been concerned with normalizing utilization rates, which weighed on certain names in the health care equipment and supplies industry, such as medical device maker Zimmer Biomet Holdings (ZBH).

Industrials weighed on results. The choices of investments in the industrials sector hampered performance. While the portfolio is broadly underweight in industrials relative to the benchmark, it is overweight in construction and engineering, an industry where security selection weighed on results.

Financials was an area of strength. Stock selections in the financials sector proved advantageous during the period. Not owning benchmark names in the financial services industry gave the portfolio a lift, while above-benchmark positions in the capital markets and banking industries also helped.

Key Contributors

Kimberly-Clark (KMB). Shares of this global consumer goods company outperformed after it posted better-than-expected quarterly financial results. Kimberly-Clark continued to drive profitability levels higher while posting healthy levels of sales growth.

HP (HPQ). Shares of this technology company advanced as positive data points signaled a turn in the PC cycle, particularly among large corporate customers. Shares were also buoyed by the introduction of artificial intelligence PCs by HP and its peers.

Teradyne (TER). Shares of this automated test equipment company rallied after Teradyne reported a strong quarter. Teradyne also provided an improved outlook, driven by increased demand within its semiconductor test business.

Key Detractors

Zimmer Biomet Holdings (ZBH). Even though this medical device company posted better-than-expected earnings, its shares declined on investors’ concerns about health care utilization slowing in the future. We believe Zimmer Biomet’s valuation remains attractive, and we expect stable demand and profit margin improvement.

Henry Schein (HSIC). This distributor of dental products and supplies underperformed as dental volumes and spending remained subdued. Dentists have not been spending on equipment, and consumers have delayed procedures due to higher interest rates and lower consumer spending. However, we think Henry Schein could expand its profitability.

Norfolk Southern (NSC). This railroad company underperformed after an activist investor was successful in electing only three directors to the board’s 13 seats. Norfolk Southern’s rail volumes also continued to be soft.

Notable Trades

Graphic Packaging Holding (GPK). We initiated a position in this consumer packaging company because we believe it offers an attractive risk/reward profile. Graphic Packaging continued to pay down debt and divest from low-return businesses, and it has started seeing returns from some of its recent large capital projects.

CRH (CRH). We initiated a position in this large provider of building materials. CRH manufactures and supplies aggregates, cement, ready-mixed concrete and asphalt. It also offers paving and construction services. Our research shows that CRH is a beneficiary of higher infrastructure spending and offers a strong balance sheet.

Ameriprise Financial (AMP). We exited our position in this financial services company to invest in other opportunities that we believe offered more attractive risk/reward profiles.

General Dynamics (GD). Shares of this global aerospace and defense company outperformed. Based on our research, we believe General Dynamics has benefited from strength in business jets and positive defense spending sentiment. In turn, we exited the position and invested the proceeds in opportunities that we believe offer more favorable risk/reward profiles.

Portfolio Positioning

The portfolio seeks to invest in companies where we believe the valuation does not reflect the quality and normal earnings power of the company. Our process is based on individual security selection, but broad themes have emerged.

Higher-quality stocks may offer resilience. We believe that while central banks may enact small cuts to interest rates if inflation continues to subside, the economy will likely still experience lagging effects of elevated rates this year. That, along with continuing geopolitical risks, could contribute to an uncertain economic environment for investors. Against this backdrop, we continue to focus on companies that we think are of higher quality because of their stable revenues and profits, low debt levels, stable cash flows and predictable business models that are typically less sensitive to economic conditions.

Attractive valuations in health care. Our research has led us to several health care stocks that we think offer compelling valuations and risk/reward profiles. We believe health care is less sensitive to the cyclical effects of the economy than other sectors because the economy’s performance tends to have less impact on demand. We think health care utilization rates should continue normalizing after the COVID-19 pandemic caused patients to delay services and procedures. Our research also indicates that shares of companies affected by sell-offs from so-called weight-loss drugs should continue to recover.

Opportunities in consumer staples. With slowing global growth, we have identified what we believed were select opportunities in the less cyclical consumer staples sector. Our research indicates that despite a challenging cost inflation environment, many consumer staples companies have been generating strong returns on capital, buying back stock and growing dividends. Moreover, industry consolidation has enabled companies to pass higher costs to consumers. We believe actions to offset inflation, including fewer discounts and more price hikes, should support earnings and margins.

Navigating the financials sector. Regional banks continue to face pressure amid a tight lending market. Bank failures from last year led to increased regulatory capital and liquidity requirements, posing another headwind to regional banks. Select insurance companies, which suffered last year due to larger payouts from catastrophes, have emerged with improved pricing power resulting from easing regulations on rates and competitors withdrawing from certain disaster-prone markets.

Limited opportunities in consumer discretionary. Our portfolio remains underweight in the consumer discretionary sector relative to the benchmark. We believe this sector has few high-quality companies with durable business models. Also, given factors like inflation and diminishing personal savings, we expect headwinds will continue to dampen discretionary spending.

Top 10 Holdings (%)

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

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.