Fund performance

• Institutional Class shares of Columbia Dividend Income Fund returned -0.52% for the quarter ending June 30, 2024.The fund’s benchmark, the Russell 1000 Index, returned 3.57% for the same period.
• Positioning with respect to the information technology sector weighed most heavily on the fund’s performance versus the benchmark, followed by communication services and health care. Positive contributions were led by selection within financials and an underweight to real estate.
• For monthly fund performance, please check online at columbiathreadneedleus.com.

Average annual total returns (%) for period ending June 30, 2024

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Market overview

The major large-cap U.S. equity indexes climbed to a series of record highs in the second quarter, but leadership became increasingly narrow amid rising uncertainty about the outlook for the economy and interest rates. While economic growth remained positive overall, signs of strain in specific areas — particularly mid- to lower-end consumers — dampened the outlook for the second half of the year. In addition, statements from U.S. Federal Reserve officials appeared to indicate that there were unlikely to be meaningful rate cuts until 2025.

These developments contributed to modest losses in market segments with greater vulnerability to slowing growth and higher rates. Both mid- and small-cap stocks lost ground based on returns of -3.35% and -3.28%, respectively, for the Russell Midcap Index and Russell 2000 Index (RTY). The quarter was also characterized by weakness in the value style, as gauged by the -2.17% return of the Russell 1000 Value Index. Still, broad-based large-cap measures such as the Russell 1000 Index — which rose 3.57% — finished in positive territory thanks to continued strength in growth stocks. The Russell 1000 Growth Index surged 8.33%, far outpacing the broader market. Performance in this area was driven by a very narrow group of mega-cap technology companies that have become an increasingly large percentage of the total U.S. market. The top six stocks in the Russell 1000 Index had a weighting of nearly 30% as of June 30, meaning that gains in this segment were sufficient to offset the weaker returns elsewhere.

Quarterly portfolio recap

Sector weights (%): fund vs. benchmark as of June 30, 2024

Top holdings (% of net assets) as of June 30, 2024

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Top five contributors – Effect on return (%) as of June 30, 2024

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Top five detractors – Effect on return (%) as of June 30, 2024

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Selection within financials led positive contributions, driven by a bias toward higher-quality banks. In addition, a lack of exposure to non-dividend payer Berkshire Hathaway (BRK.A, BRK.B) proved additive as shares of the insurance-heavy conglomerate lagged in the quarter.

In addition, an underweight to real estate investment trusts (REITs) contributed positively. REIT valuations are interest-rate sensitive. The pushing out of expectations for Fed rate cuts and the rise in Treasury yields over the quarter weighed on the sector broadly.

Other leading individual contributors to performance included Walmart (WMT), as the low-cost retailer has seen its results benefit from increased demand from more affluent consumers impacted by inflation. In addition, Walmart has seen strong growth in e-commerce sales while continuing to expand its profitable digital advertising offering.

On the downside, the majority of the fund’s underperformance was driven by a lack of exposure to a handful of non-dividend paying mega-cap stocks viewed as leading beneficiaries of initiatives around artificial intelligence. Within information technology, the fund did not hold chipmaker Nvidia (NVDA), which has seen its results propelled by AI spending, or Apple (AAPL), which is viewed as positioned to benefit from adding AI features to its consumer devices. Within communication services, not holding Alphabet (GOOG,GOOGL) detracted notably, as the company’s Google search engine continues to add AI-enabled capabilities. Elsewhere within communication services, an overweight to Comcast (CMCSA) detracted, as concerns about growth in the broader broadband segment and increasing competition from fixed wireless providers continued to weigh on shares of the broadband provider.

Selection within health care detracted, driven by overweights to more defensive biotechnology and pharmaceutical stocks Johnson & Johnson (JNJ), Merck (MRK) and AbbVie (ABBV). An additional detractor was the lack of exposure to Eli Lilly (LLY), which has seen its shares boosted by the approval and uptake of GLP-1 drugs for treating obesity.

Within consumer discretionary, Home Depot (HD) was a leading laggard, as results for the building materials and home improvement retailer have suffered from a housing market stalled by higher interest rates. Finally, within industrials, weak freight volumes have negatively impacted railroad operator Union Pacific (UNP), while shares of aerospace precision motion and control technology company Parker Hannifin (PH) experienced profit-taking after a period of strength.

Outlook

We continue to consistently implement an investment process that focuses on identifying companies that can be winners over the long term rather than chasing the current market preference.

We look for companies with sustainable free cash flow, defensible profit margins, capital discipline and strong balance sheets, in the belief that such companies carry the potential to increase dividends throughout the economic cycle and through up and down markets. The recent shift in market expectations toward a more extended period of higher interest rates has shown signs of favoring the higher quality companies we tend to hold, at the expense of companies viewed as vulnerable to higher capital costs. However, we believe the strategy’s consistent focus on quality factors should benefit relative performance over full market cycles.

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