Global Conservative portfolio positioning intra-quarter update as of 02/13/2024

We still see either a slowdown or a “soft landing” as likely in the U.S. Given ongoing resilience of some economic data and the potential for monetary policy easing, we have adjusted portfolios to modestly increase likely economic sensitivity and capitalize on opportunities in specific areas of the market.

February 13, 2024

ACTIONS and OVERVIEW:

Added new allocation to U.S. Financials equity sector

• Added new U.S. Financials sector ETF holding

Reduced U.S. late-phase equity sector exposure

• Trimmed existing U.S. Consumer Staples ETF holding

Reduced fixed income overweight/increased equity exposure

• Adjusted target weights proportionally within asset classes

Reduced corp. bond duration, modestly increased allocation

• Sold long-term corporate bond ETF holding
• Added new short-term corporate bond ETF holding

Increased Treasury duration, decreased Treasury overweight

• Sold floating-rate Treasury ETF holding
• Added to existing intermediate Treasury ETF holding

Portfolio rebalance

We have added an allocation to the U.S. Financials sector, and reduced our overweight of the Consumer Staples sector, but we retain an overweight of late-phase, defensive U.S. sectors in aggregate. We have also reduced our overweight of fixed income and increased equity exposure, in line with our relatively balanced view of the potential for a slowdown or continued economic growth.  Within fixed income, we have shifted corporate credit exposure to short-term maturities, where we see less risk from potential credit spread widening, while modestly increasing the overall corporate allocation.  Offsetting the reduction of corporate duration, we have increased the average duration of Treasury exposure by shifting a floating-rate Treasury allocation to traditional intermediate Treasury bonds.  We also rebalanced portfolios.

UPDATE DETAIL:

U.S. Equities: added Financials allocation/reduced late-phase Consumer Staples overweight

• We see specific opportunity in U.S. Financials, including Banks, where we think modest earnings expectations undervalue the potential benefits of monetary policy easing (particularly for larger banks with strong balance sheets), and the Financial Services industry, where we see positive secular trends for credit card and payments firms.
• We expect U.S. Consumer Staples to see slower earnings growth in 2024 versus other late-phase sectors, despite trading at a higher relative valuation, as pricing power fades.

Reduced fixed income overweight/increased equity exposure

• Resilience in consumer spending and the labor market, along with disinflationary tailwinds, help give the Fed the flexibility to start easing monetary policy, which can support economic activity and returns on risk assets like equities.
• We trimmed fixed income exposure, but retain a modest overweight, given our economic outlook and a risk/return profile we view positively for bonds at this point in the cycle.

Reduced corp. bond duration, modestly increased allocation

• We view a modest increase of corporate exposure, particularly at shorter durations, as appropriate given the incremental reduction we see in near-term recession risk.

Increased Treasury duration, decreased Treasury overweight

• We see opportunity in intermediate-and-long duration Treasury securities with the interest rate hiking cycle likely at an end, as the potential price appreciation of longer-duration securities in a declining rate environment could more than offset their lower current yield tied to the inverted Treasury curve.