Global Balanced portfolio positioning intra-quarter update as of 02/27/2025
We continue to see a maturing U.S. economic cycle, where the most likely scenarios over the next 12-18 months are either continued late-cycle expansion—supported by healthy personal income and spending, broadening corporate profits, and sturdy balance sheets—or a migration into a slowdown phase of the cycle. We have made select portfolio changes to remain positioned for evolving opportunities and risks.
February 27, 2025
ACTIONS and OVERVIEW:
Selectively increased U.S. Information Technology allocation
- Added to existing U.S. Software industry ETF holding
Selectively reduced U.S. Financials sector overweight
- Eliminated U.S. Capital Markets industry ETF holding
Portfolio rebalance
We have added to Software industry exposure and reduced our Capital Markets industry overweight within U.S. equity allocations. Typically, both expansions and slowdowns are relatively favorable for Information Technology fundamentals as businesses invest in productivity later in the cycle. Our economic cycle research shows Software is also a more consistent outperformer than other Information Technology industries during slowdowns, and it likely faces less risk, in our view, from ongoing policy uncertainty around trade and tariffs.
Meanwhile, Capital Markets firms have exhibited the recovery that we anticipated back in early 2024, and we believe it is now appropriate to trim that exposure. We expect slower growth in capital markets activity going forward, but economic conditions should still be favorable for the industry. Portfolios retain a reduced U.S. Capital Markets overweight through our overweight of the broader sector.
UPDATE DETAIL:
Selectively increased U.S. Information Technology allocation
- U.S. Software industry fundamentals remain healthy, in our view, and are typically supported by technology capex during the later stages of the economic cycle.
- Enhanced technological adoption by small-and-medium sized businesses, including re-emerging demand after a multi-year period of resource optimization by customers, can help support revenue growth for Software companies.
- Software companies’ implementation of AI is a catalyst for margin expansion, in our view, as many companies we follow have reported substantial productivity gains from AI.
- While the Software industry trades at a premium to the Information Technology sector and the S&P 500, its valuations remain the most attractive relative to its history among the three largest industries within the sector.
- Software companies typically have relatively predictable revenue streams along with high margins and free cash flow, which we believe makes the Software industry more appealing than other parts of the Information Technology sector in an environment of elevated policy uncertainty, particularly with respect to tariffs.
Selectively reduced U.S. Financials sector overweight
- The U.S. Capital Markets industry has performed favorably since our strategic shift to an overweight of the industry last spring, and it is now trading at elevated valuations, which we believe diminishes the potential for further outperformance versus the sector moving forward.
- Our analysis shows that the U.S. Capital Markets industry’s outperformance of the broad market has historically been linked to accelerating earnings growth for the industry, yet we see the potential for earnings growth to decelerate this year amid challenging year-over-year comparisons.
- Economic conditions should still support continued growth in capital markets activity, and we are comfortable maintaining a reduced overweight of the Capital Markets industry via our broader U.S. Financials sector overweight.
The most recent complete presentation can be viewed here.
Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Global Balanced holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary.