Meridian Hedged Equity Fund Q2 2023 Investment Commentary (undefined:MEIFX)

Global inflation rate 2022 problem stockmarket and risk asset stockmarket crash


Market Summary

With inflation gradually easing and the U.S. economy holding firm, stocks generally advanced during the second quarter. Conditions prompted U.S. Federal Reserve (“Fed”) officials to pause their aggressive rate-hike campaign in June and forecast that the U.S. would avoid a recession in 2023. Fed Chair Jerome Powell did assert, however, that markets should expect further rate increases in the coming months, perhaps as many as two more by year-end.

Fueled by a surge in artificial intelligence (AI)-related technology stocks, double-digit gains in large-cap growth stocks led the stock market higher, according to the Russell family of indices. Market volatility, as reflected in the VIX Index, was largely benign during the period and revisited pre-pandemic lows in June. Running counter to stock investors’ general optimism, bond investors drove short- and long-duration yields higher, further sharpening the already inverted U.S. Treasury yield curve.

Top 10 Holdings (% Of Portfolio)

Holding1 (subject to change)


Lamb Weston Holdings, Inc. (LW)


Sally Beauty Holdings, Inc. (SBH)


Zoom Video Communications, Inc. (ZM)


Microsoft Corp. (MSFT)


Levi Strauss & Co. (LEVI)


Live Nation Entertainment, Inc. (LYV)


DigitalBridge Group, Inc. (DBRG)


Rivian Automotive, Inc. (RIVN)


Apple, Inc. (AAPL)


Labcorp (LH)


Fund Performance

The Meridian Hedged Equity Fund (the “Fund”) advanced 3.56% (Net) during the quarter, trailing its benchmark, the S&P 500 Index, which gained 8.74%.

Our experience is that outperformance is born out of capital preservation and avoiding large drawdowns, especially in volatile periods. When upward momentum in a select group of companies drives the broader market higher, as we saw during the three-month period ending June 30, 2023, the Fund’s portfolio strategy, which prioritizes the management of risk over the opportunity for excess market return, is prone to underperformance.

Overall, we work to maintain an “enduring” portfolio that can mitigate capital losses during turbulent bear market environments and experience upside participation during strong bull markets. To achieve that, we invest in quality businesses that are maintaining considerable competitive advantages, healthy balance sheets, robust cash flow characteristics, and muted volatility traits.

At any given time, roughly half of the Fund is invested in such higher quality, larger capitalization companies with promising growth prospects. The balance of the portfolio is invested in equities hedged in a risk-managed approach where more opportunistic investments are married with options in an effort to increase the margin of safety and reduce downside risks. Underlying this approach is our commitment to deep fundamental research, which serves as the core of our effort to balance downside protection with upside potential.

Bottom Three Detractors

Against this backdrop, leading detractors during the quarter included Levi Strauss & Co., Advance Auto Parts, Inc. (AAP), and Target Corporation (TGT).

Levi Strauss & Co. is a global apparel company known largely for its denim jeans, and it distributes its products through wholesale and retail channels. The stock declined during the quarter despite quarterly revenues that met expectations and slight increases in earnings and EBITDA as the company’s mainline brick-and-mortar outlets performed well. Management reduced full-year guidance due largely to issues in its U.S. wholesale segment, where inflationary pressures and supply chain issues weighed on the outlook. Management is confident the company will overcome those challenges with minimal price cuts, especially as supply chain difficulties ease. The company also expressed optimism around the upcoming back-to-school season as order fill rates are nearing historical levels. Separately, sales in China rebounded to pre-pandemic levels, with growth seen across all channels. While encouraging, we’re monitoring developments and maintaining our position in the company.

Advance Auto Parts, Inc. is a U.S.-based specialty retailer that sells automotive aftermarket parts, tools, and accessories. Operating more than 4,800 stores, the company serves both professional mechanics and do-it-yourself customers. During the quarter, the company reported disappointing financial results, including declining sales, a shrinking operating margin, and earnings per share that dramatically missed expectations. It also significantly reduced its dividend. Addressing the underperformance, management cited increased investments and an unfavorable product mix, raising concerns about rising price competition within the industry. Furthering the cautious tone, Advance Auto Parts reduced its full-year earnings outlook. Despite the assorted issues, we maintained our exposure.

Target Corporation is a general merchandise retailer that sells a wide variety of products, including clothing, home goods, groceries, and electronics through its network of more than 1,800 stores in the U.S. and Canada and its online presence. Already contending with share loss to competitors, Target slumped during the quarter amid weakness in discretionary category sales, modest growth in comparable store sales and store traffic, and a decline in comparable online sales. Relatively strong sales of consumer staples helped offset the financial impact and the company surpassed quarterly earnings per share expectations. Management also said it trimmed previously problematic inventory levels by 16% on a year-over-year basis but foresees that overall inventory shrinkage, including that resulting from elevated theft activity, will cut $500 million from the company’s full-year profits. As we believe the company’s challenges are transitory, we maintained our position.

Top Three Contributors

Leading individual contributors within the second quarter included Microsoft Corporation,, Inc. (AMZN), and Apple, Inc.

Microsoft Corporation is a diversified technology company that is reaping the benefits of its strategy of integrating its products and tools-both presently and for potential future business growth. For example, while impressive gains in its cloud business fueled quarterly results that exceeded expectations, results in its gaming and advertising lines surpassed expectations, as did the division that sells the Windows operating system to third-party computer manufacturers. Ultimately, budget-conscious customers are attracted to integrated offerings. Meanwhile, Microsoft is rapidly incorporating AI in its business model – beyond the 100 million users of its ChatGPT chatbot. Offerings such as GitHub Copilot, which is an already launched AI-powered coding assistant; Office 365 Copilot, Copilot for Dynamics 365, Copilot for Viva Engage, and Security Copilot are expected to create new revenue streams as customers leverage AI technology to enhance productivity. Pleased with the current performance and optimistic about future growth, we maintained our stake in the stock., Inc. is a global e-commerce leader offering a diverse range of consumer and business products in addition to online services such as cloud computing, digital streaming, and AI-enhanced solutions. Market expectations for Amazon improved during the quarter due to prospects of an acceleration in the company’s web services growth and an upward turn in retail margins. Although the web services division has been temporarily affected by cloud optimizations, discounts, and ties to unprofitable tech companies, we believe the impacts largely stem from customers’ overinvestment during the pandemic and will ultimately prove transitory. As we remain enthusiastic about the long-term outlook for Amazon’s web services, we continue to own the stock.

Apple, Inc. is a multinational technology company that designs, develops, and sells consumer electronics, computer software, and online services. The company’s high-profile products include the iPhone, iPad, Mac computer, Apple Watch, and services such as iTunes, Apple Music, and iCloud. During the quarter, the company reported revenue, earnings, and gross margins that exceeded expectations due in large part to strong iPhone sales. It also announced its second $90 billion stock repurchase program in a year and upped its dividend. On the product front, the company unveiled its mixed-reality headset, the Apple Vision Pro, during the quarter. Priced at $3,499 and set to start shipping in early 2024, we believe marketplace adoption will be gradual, and the company’s primary income sources will remain the iPhone and App Store for the foreseeable future. As we believe those product lines will continue to provide solid fundamental growth, we maintained our exposure to Apple during the quarter.

Overall, the Fund continues to largely be managed in a sector-agnostic way, given our investment philosophy and approach. Therefore, changes in sector weights during the quarter generally reflected the performance of underlying holdings.


Although investors largely cheered the Fed’s late-period decision to halt its rate-hike campaign, we remained wary. While the pause seemed to move the central bankers closer to a full stop on the rate increases, which would be hello

positive, the potential for an economic slowdown or recession amid labor market softening and reduced consumer spending continued to run high. As did the likelihood of declining corporate earnings, which historically has led to equity market volatility. Although, such conditions can potentially lead to compelling buying opportunities.

Despite the considerable unknowns, we continue to feel good about our conservative approach of buying high-quality businesses that we believe will compound value over the long term. Furthermore, believing that out of volatility, opportunity is born, we’re generally comfortable with much of the portfolio’s positioning, including our option activity designed to offset a portion of the market’s potential downside. Regardless of whether conditions are good or poor, we stick to our playbook and prudently work to manage risk by leveraging deep fundamental company-level research rather than macroeconomic assessments. Meanwhile, our charge remains to prioritize risk over return, even if that means trading some incremental market upside for downside protection. Through the combination of stock selection and our covered call strategy, we believe our disciplined and conservative approach to deploying capital is ideal for a market in transition.

Thank you for your continued partnership with ArrowMark.

Fund Total Performance (As of 6/30/2023)

Share Class


Gross Expense Ratio

Net Expense Ratio

Inception Date

3 Month

1 Year

3 Year3

5 Year3

10 Year3

Since Inception3,4

Class A Shares – No Load











Class A Shares – With Load











Class C Shares











Investor Class Shares











Legacy Class Shares











S&P 500 Index2







Prior to December 30, 2022, the Meridian Hedged Equity Fund was known as the Meridian Enhanced Equity Fund.

The Fund’s performance data represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data shown. The investment return and principal value of an investment will fluctuate so that you may have a gain or loss upon sale. You can obtain performance data current to the most recent month-end at Meridian Funds.

1Listed holdings are presented to illustrate examples of the securities the Fund has bought and do not represent all of the Fund’s holdings or future investments. Information about the Fund’s holdings should not be considered investment advice. There is no guarantee that the Fund will continue to hold any one particular security or stay invested in any one particular sector. Holdings are subject to change at any time and are as of the date shown above.

2 The Fund’s Index, the S&P 500® Index, is a commonly recognized market-capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance. One cannot directly invest in an index.

3Performance is annualized.

4Since inception returns are calculated using the Fund’s Legacy class inception date of 1/31/05.

A Class: Prior to 7/1/15, the A-Class was named Advisor Class. The historical performance shown for periods prior to inception on 11/15/13 was calculated using historical Legacy class performance as adjusted for estimated class-specific expenses for distribution, shareholder servicing, and sub-transfer agency fees without consideration of any expense limitation or waivers. The annual gross expense ratio is 1.54% as of 12/30/22. The annual net expense ratio is 1.54% as of 12/30/22. If the class had been offered prior to 11/15/13, the actual performance and expenses may have differed from the amounts shown. Performance shown for class A shares with load includes the Fund’s maximum sales charge of 5.75%. C Class: The historical performance shown for periods prior to inception on 7/1/15 was calculated using historical Legacy class performance as adjusted for estimated class-specific expenses, for distribution, shareholder servicing, and sub-transfer agency fees, without consideration to any expense limitation or waivers. The annual gross expense ratio is 2.17% as of 12/30/22. The annual net expense ratio is 2.00% after a recoupment of 0.17% as of 12/30/22. If the class had been offered prior to 7/1/15, the actual performance and expenses may have differed from the amounts shown. Investor Class: The historical performance shown for periods prior to inception on 11/15/13 was calculated using historical Legacy class performance as adjusted for estimated class-specific expenses for shareholder servicing and sub-transfer agency fees without consideration of any expense limitation or waivers. The annual gross expense ratio is 1.19% as of 12/30/22. The annual net expense ratio is 1.19% as of 12/30/22. If the class had been offered prior to 11/15/13, the actual performance and expenses may have differed from the amounts shown. Legacy Class: Legacy class shares of the Fund are no longer available for purchase by new investors, except under certain limited circumstances which are described in the Statement of Additional Information. The annual gross expense ratio is 1.20% as of 12/30/22. The annual net expense ratio is 1.20% as of 12/30/22.

Investors should consider the investment objective and policies, risk considerations, charges, and ongoing expenses of an investment carefully before investing. The prospectus contains this and other information relevant to an investment in the fund. Please read the prospectus carefully before you invest or send money. To obtain a prospectus, please contact your investment representative or access the website at Meridian Funds.

Principal Investment Risks

There are risks involved with any investment. The principal risks associated with an investment in the Fund, which could adversely affect its net asset value, yield, and return, are set forth below. Please see the section “Further Information About Principal Risks” in the Prospectus for a more detailed discussion of these risks and other factors you should carefully consider before deciding to invest in the Fund. An investment in the Fund may lose money and is not a deposit of a bank or insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Investment Strategy Risk: The Investment Adviser uses the Fund’s principal investment strategies and other investment strategies to seek to achieve the Fund’s investment objective of long-term growth of capital. There is no assurance that the Investment Adviser’s investment strategies or securities selection method will achieve that investment objective. Equity Securities Risk: Equity securities fluctuate in price and value in response to many factors including historical and prospective earnings of the issuer and its financial condition, the value of its assets, general economic conditions, interest rates, investors’ perceptions, and market liquidity. Market Risk: The value of the Fund’s investments will fluctuate in response to the activities of individual companies and the general stock market and economic conditions. As a result, the value of your investment in the Fund may be more or less than your purchase price. Growth Securities Risk: Because growth securities typically trade at a higher multiple of earnings than other types of securities, the market values of growth securities may be more sensitive to changes in current or expected earnings than the market values of other types of securities. In addition, growth securities, at times, may not perform as well as value securities or the stock market in general and may be out of favor with investors for varying periods of time. Small Company Risk: Generally, the smaller the capitalization of a company, the greater the risk associated with an investment in the company. The stock prices of small-capitalization and newer companies tend to fluctuate more than those of larger capitalized and/or more established companies and generally have a smaller market for their shares than do large capitalization companies. Foreign Securities Risk: Investments in foreign securities may be subject to more risks than those associated with U.S. investments, including currency fluctuations, political and economic instability, and differences in accounting, auditing, and financial reporting standards. Foreign securities may be less liquid than domestic securities so the Fund may, at times, be unable to sell foreign securities at desirable times or prices. In addition, emerging market securities involve greater risk and more volatility than those of companies in more developed markets. Significant levels of foreign taxes are also a risk related to foreign investments. Options Risk: Options on securities may be subject to greater fluctuation in value than an investment in the underlying securities. Purchasing and writing put and call options are highly specialized activities and entail great than ordinary investments. Glossary: Alpha: A measure of performance on a risk-adjusted basis. Alpha compares the volatility (price risk) of the Fund to the risk-adjusted performance of the benchmark Index. Free cash flow is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. Options are financial derivatives sold by an option writer to an option buyer. The contract offers the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at an agreed-upon price during a certain period of time or on a specific date. CBOE Volatility Index (VIX): The VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500 Index, and is calculated by using the midpoint of real-time S&P 500® Index (SPX) option bid/ask quotes. Price-to-earnings: A valuation ratio of current share price compared to its per-share operating earnings over the previous four quarters. Basis Point: A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.

ALPS Distributors, Inc., a member FINRA, is the distributor of the Meridian Mutual Funds, advised by ArrowMark Colorado Holdings, LLC. ALPS, Meridian, and ArrowMark are unaffiliated.

The statements and opinions expressed in this commentary are as of the date of the commentary. All information is historical and not indicative of future results and is subject to change.

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

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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