Columbia Acorn Fund Q2 2024 Investment Commentary

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Columbia Acorn Fund returned -6.01% in Q2, underperforming the Russell 2500 Growth Index's -4.22% due to disappointing earnings and market pullbacks.Key contributors included FTAI Aviation, Insmed, ...

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Institutional Class shares of Columbia Acorn Fund (MUTF:ACRNX) returned -6.01% in the second quarter. The fund’s benchmark, the Russell 2500 Growth Index, returned -4.22% for the same period. For monthly performance information, please check online at columbiathreadneedleus.com.  Market overview and performance drivers The second quarter saw market sentiment shift dramatically. The fund outperformed during April’s market retreat, providing a degree of downside protection, before lagging during May’s market recovery, accounting for the bulk of underperformance relative to the benchmark. We attribute the performance shortfall primarily to a disappointing earnings season for many of our holdings and a market that penalized any “noise” with large pullbacks. While the fund lagged the benchmark slightly for June, relative performance began to recover toward the end of the month. Throughout this time, we adhered to the fund’s disciplined process and rigorous risk management, which we believe softened the underperformance and also positions the fund to benefit from a recovery for most of these beaten-down holdings. The benchmark saw declines across most sectors, with only utilities and communication services finishing in positive territory. The sectors posting the biggest losses were materials, industrials and financials. Positioning in information technology, health care and consumer discretionary weighed most heavily on the fund’s relative performance, while positioning in financials, communication services and industrials proved additive. Stock selection was the principal driver of relative performance rather than sector allocation. Average annual total returns (%) for period ending June 30, 2024    Performance data shown represents past performance and is not a guarantee of future results. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data shown. Please visit columbiathreadneedleus.com for performance data current to the most recent month end. Institutional Class shares are sold at net asset value and have limited eligibility. Columbia Management Investment Distributors, Inc. offers multiple share classes, not all necessarily available through all firms, and the share class ratings may vary. Contact us for details.\nClick to enlarge Our strategy is focused on generating strong three-year returns with below-benchmark risk. We are growth investors who seek to hold innovative and high-quality small- and mid-cap companies trading at discounts to their intrinsic value. We view many of these undervalued, and often underfollowed, companies as “classification misfits,” as the stock price reflects a misunderstanding of the business model, which leads the market to either underestimate some positive long-term attribute or overstate a near-term risk. Such stocks present a significant source of potential outperformance as companies exceed expectations and the market ultimately recognizes their quality. Top holdings (% of net assets) as of June 30, 2024   Churchill Downs (CHDN) 3.04   SPX Technologies (SPXC) 2.40   Bio-Techne (TECH) 2.38   Five Below (FIVE) 2.25   BJ'S Wholesale Club (BJ) 2.12   Parsons (PSN) 2.08   Natera (NTRA) 2.03   Colliers International Group (CIGI) 2.02   Ryan Specialty Holdings (RYAN) 1.99   Willscot Mobile Mini Holding (WSC) 1.95   Top holdings exclude short-term holdings and cash, if applicable. Fund holdings are as of the date given, are subject to change at any time, and are not recommendations to buy or sell any security.    \nClick to enlarge Top five contributors - Effect on return (%) as of June 30, 2024    FTAI Aviation (FTAI) 0.49   Insmed (INSM) 0.45   Natera (NTRA) 0.37   SPX Technologies (SPXC) 0.36   Churchill Downs (CHDN) 0.36  \nClick to enlarge Top five detractors - Effect on return (%) as of June 30, 2024   Five Below (FIVE) -1.18   Exact Sciences (EXAS) -0.75   Repligen (RGEN) -0.73   Sprout Social - Class A (SPT) -0.70   Atkore (ATKR) -0.63  \nClick to enlarge In our view, the quarter’s underperformance reflects drawdowns for many of our holdings that undervalued their future growth potential. We anticipate that many of these stocks will recover over the next two or three quarters as trends stabilize and the market again begins to look to the future. That said, if we don’t see such a recovery, we will be prepared to conclude that our thesis is broken and move on from holdings as appropriate. Out of the dozen or so companies held in the fund that posted weak results, we did sell one and put some others on a “short leash,” while adding to roughly half. We remain valuation sensitive and continue our disciplined approach of trimming stocks as they approach our expected valuations and adding to those with more attractive risk-reward profiles. Sector weights (%): fund vs. benchmark as of June 30, 2024    Quarterly portfolio recap Absolute contributors included:   FTAI Aviation is an aviation leasing, maintenance and repair company that has built a unique business model, with exposure to the most attractive part of the aerospace aftermarket today — the CFM56 jet engine (sole-sourced engine for the Boeing 737 family and one of the two engine options for the Airbus A320 family). CFM56 engines are the largest engine market, with more than 22,000 engines manufactured and more than 21,000 in service today. FTAI’s strategic partnerships with Lockheed Martin and other engine manufacturers provide a significant moat. The company is well positioned to take advantage of the utilization of engine leasing assets due to strong demand, as airline traffic continues to pick up amid asset scarcity.  Insmed is a commercial-stage biopharmaceutical company focused primarily on treatments for pulmonary disease. The stock meaningfully outperformed during the quarter following positive Phase III data for its Brensocatib (Brenso) drug in treating non-cystic fibrosis bronchiectasis (NCFB). While the stock has roughly doubled since the beginning of the year, we are maintaining the overweight position as Brenso could be a potential game changer for the company, given a multi-billion-dollar total addressable market and no other approved NCFB therapies on the market.  Natera is a genomic diagnostics company with a leading market share in non-invasive prenatal screening and a first-mover advantage in the still-developing, but promising, market for cancer recurrence monitoring. Natera was also a top contributor in the first quarter and saw its shares continue to rise on incrementally strong results. Despite the move, we see further upside potential, with 2024 an inflection point for the company based on multiple clinical data catalysts. That said, we did trim the position in the quarter as part of our risk management process.  SPX Technologies is a manufacturer of industrial equipment, including cooling towers, boilers and transformers. The company benefited from its industry-leading brands, significant installed base which drives recurring revenue and continued transformation of its product portfolio. Led by the data center, semiconductor and health care markets, SPX has a multi-year path to organic growth and accretive acquisitions, which should further drive its innovation pipeline and scale advantages.  Absolute detractors included:   Five Below is a differentiated value retailer offering an enjoyable shopping experience. The stock underperformed in the quarter and year to date due to a variety of factors, including weaker sales to lower-income consumers, additional costs to combat inventory theft and fears around theoretical future tariffs and online competition, which we believe are overblown. Five Below is a classic classification misfit, with the current stock price overestimating short-term headwinds and underestimating the durable value creation in its business model, including the opportunity to more than double its base of stores. Five Below has competitive advantages, including scale benefits which strengthen each year with suppliers and in marketing. We added significantly to the position, viewing the stock as a “coiled spring” waiting for a more stable macroeconomic environment.  Exact Sciences is a leading provider of non-invasive cancer screening and therapy selection tests, including the leading colon cancer detection product, Cologuard. The stock underperformed during the quarter following a mixed earnings report on top of fears about competition. While the competition concerns could linger, our valuation work suggests the market is undervaluing the future value creation of the company and overstating competitive risks, as we believe Exact Sciences has superior products and a distribution moat. Overall, the company is still in the early innings of penetrating a large market, which carries the potential for double-digit revenue growth and expanding margins over the foreseeable future.  Repligen is a supplier of innovative solutions to the bioprocessing market, one of the fastest growing areas of health care. Near-term growth and stock price performance has been impacted by a mix of headwinds, including difficult COVID comparisons, destocking and broader pharmaceutical customer caution due to macro concerns, along with a somewhat surprising CEO transition. We believe fears around the management transition are overblown and that the market is overstating the transitory issues facing the company. We anticipate that Repligen’s fundamentals and stock valuation will quickly reflect any signs of an industry recovery, and the stock remains a large position in the fund.  Sprout Social is a software company specializing in social media management. Companies use Sprout to place advertising on social media sites, monitor customer feedback, track returns on spending, engage with influencers and make real-time changes to marketing campaigns. The stock pulled back sharply due to a disappointing first quarter and reduced guidance for the full year, driven by an elongated sales cycle for large deals. A CEO change also weighed on sentiment around the stock. We added to the position on weakness, viewing the valuation as inexpensive for an asset-light software company that has been growing revenues by approximately 20% annually.  Outlook As we have continued to state, in managing the fund we are macro aware but mainly focused on stock picking and taking advantage of the natural inefficiencies found in small- and mid-cap stocks. We make decisions based on fundamentals and relative risk- reward profiles. That said, barring the next “black swan” event (e.g., another pandemic or financial crisis), we view the economy as resilient even as it is clearly slowing and on a path to bringing inflation over time down to the Federal Reserve’s 2% target. The Acorn Fund portfolio is positioned with risk below the benchmark, while maintaining higher growth and profitability characteristics. By sector, the largest overweight remains in consumer discretionary, a diverse sector with many classification misfits and idiosyncratic growth drivers. We are also overweight industrials, an area with various attractive subsectors, including some benefiting from spending around infrastructure, data centers and defense, which are relatively insulated from macro concerns. The fund is underweight information technology, as many of these growing companies have valuations that are objectively high, although we do continue to see pockets of opportunity in beaten-down software stocks and hardware names with underappreciated tailwinds from artificial intelligence and rebounding auto trends. Within health care, we are underweight biotechnology, which has become a larger part of the benchmark. Outcomes for most clinical-stage companies are binary, and funding is not likely to recover to the elevated levels of 2020-2021. That said, we will invest in later-stage companies with a mix of clinical and commercial products that help limit the downside. While the first half of 2024 continued the trend of outperformance for large-to-mega-cap stocks, we see potential for this disparity to diminish as the year progresses, given an environment of flat-to-declining rates and small-cap valuations that are at historical lows versus large caps.   Use of products, materials and services available through Columbia Threadneedle Investments may be subject to approval by your home office. © 2016-2024 Columbia Management Investment Advisers, LLC. All rights reserved. Investors should consider the investment objectives, risks, charges, and expenses of Columbia Seligman Premium Technology Growth Fund carefully before investing. To obtain the Fund's most recent periodic reports and other regulatory filings, contact your financial advisor or download reports here. These reports and other filings can also be found on the Securities and Exchange Commission's EDGAR Database. You should read these reports and other filings carefully before investing. Include DISCLAIMER at bottom: With respect to mutual funds, ETFs and Tri-Continental Corporation, investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. To learn more about this and other important information about each fund, download a free prospectus. The prospectus should be read carefully before investing. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. Columbia Funds and Columbia Acorn Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA. Columbia Funds are managed by Columbia Management Investment Advisers, LLC and Columbia Acorn Funds are managed by Columbia Wanger Asset Management, LLC, a subsidiary of Columbia Management Investment Advisers, LLC. ETFs are distributed by ALPS Distributors, Inc., member FINRA, an unaffiliated entity. Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies. 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