Global Conservative portfolio positioning intra-quarter update as of 10/13/2023

With stronger-than-expected U.S. economic activity so far this year, we still see late-cycle risks of a significant slowdown ahead. We have modestly adjusted allocations to take advantage of opportunities in select U.S. equity sector overweights while reducing exposure to corporate credit in fixed income.

October 13, 2023

ACTIONS and OVERVIEW:

Adjusted U.S. mid- and late-phase equity sector exposures

• Trimmed existing Utilities ETF holding
• Added to existing Health Care ETF holding
• Added to existing Communication Services ETF holding

Shifted some exposure from corporate to Treasury bonds

• Trimmed existing long-term corporate bond ETF holding
• Added to existing intermediate Treasury ETF holding

Portfolio rebalance

Resilient consumer spending and other pockets of strength have supported stronger-than-expected real GDP growth near its long-term average in the U.S. this year.  However, we still expect that economic growth will slow to below-trend in the next 6 to 18 months, and we see risk of an even sharper slowdown tied to lagged impacts of elevated interest rates, tight lending standards, and slowing corporate profit growth.

Our portfolios remain defensively positioned, with avoidance of early-phase, cyclical U.S. equity sectors, but we have made modest adjustments to capitalize on opportunities in our U.S. Health Care and Communication Services overweights, and to manage our U.S. Utilities sector overweight.  We also reduced corporate bond exposure and increased our Treasury bond overweight, given narrowed corporate spreads and the risk of credit deterioration amid slowing economic growth.

UPDATE DETAIL

Adjusted U.S. mid- and late-phase equity sector exposures

• We believe the U.S. Utilities sector, while still an overweight, is incrementally less attractive than other late-phase sectors in the current interest rate environment, despite sharp valuation compression year-to-date, given its typically levered balance sheets and relatively high dividend yields.
• We believe Health Care, our largest U.S. sector overweight, possesses attractive fundamentals and could exceed its long-term, high single-digit growth potential in the next 6 to 18 months as the sector moves past its largest earnings decline since 2009, which was largely driven by COVID-specific factors that are now abating.
• We believe the U.S. Communication Services sector can achieve attractive earnings growth in a stable or slowing economic backdrop, given its exposure to secular trends in technology such as streaming media and digital advertising as well as the potential for margin expansion in the sector.

Shifted some exposure from corporate to Treasury bonds

• Investment grade credit spreads have narrowed since the regional banking turmoil in March, particularly for longer-duration corporate bonds, but spreads are likely to widen, in our view, given our late-cycle economic outlook.
• Corporate balance sheets do not yet seem distressed, but we have seen recent deterioration in credit metrics for investment grade corporate bonds, such as rising leverage ratios and falling interest coverage ratios.
• With this adjustment, the portfolio is more meaningfully underweight corporate bonds, and has a material overweight of Treasury securities.
• While we have modestly reduced the yield and duration of the fixed income exposure, our analysis suggests that even a modest widening of credit spreads could more than offset the yield advantage of long-duration corporate bonds.