U.S. Sector portfolio positioning intra-quarter update as of 08/10/2024
With late-cycle conditions and risks still present, and a reasonable likelihood that interest rates have peaked for this cycle, we believe it is appropriate to maintain moderate overall economic sensitivity in portfolios but make some adjustments to account for evolving market opportunities and risks.
August 10, 2024
ACTIONS and OVERVIEW:
Reduced mid-phase sector exposure
- Trimmed existing Information Technology ETF holding
- Trimmed existing Communication Services ETF holding
Increased allocation to Financials sector
- Added to existing Financials sector ETF holding
Established new allocation to Real Estate sector
- Added new Real Estate sector ETF holding
Adjusted late-phase sector allocations
- Trimmed existing Health Care sector ETF holding
- Added to existing Consumer Staples sector ETF holding
Portfolio rebalance
After an 18-month period of strong outperformance, the mid-phase Information Technology and Communication Services sectors carry lofty valuations but also face potential earnings growth deceleration in our 6 to 18-month investment horizon. We see this as a risk to their relative performance and have reduced exposure to these sectors. Meanwhile, given our interest rate outlook and the potential for improving fundamentals in select early-phase sectors, we have added to our existing Financials sector allocation and initiated a Real Estate sector allocation. We also have shifted some exposure from Health Care to Consumer Staples, which we believe incrementally enhances diversification among our more defensive allocations.
UPDATE DETAIL:
Reduced mid-phase sector exposure
- Information Technology and Communication Services face the prospect of decelerating earnings growth within our investment horizon, and slowing relative earnings growth has typically led to weak relative returns for these sectors.
- The largest tech-related companies are investing heavily in AI infrastructure, and this elevated cap ex amid slowing revenue and earnings could weigh on relative performance.
- Despite a recent market pullback, these sectors’ valuations remain elevated, presenting risks, in our view, if earnings or the near-term benefits from AI fall short of expectations.
Increased allocation to Financials sector
- Financials sector exposure has become incrementally attractive to us as a source of select economic sensitivity.
- We believe the sector could benefit from improved fundamentals over the next year tied to easing credit conditions and a rebound in capital markets activity.
Established new allocation to Real Estate sector
- We expect the Fed to begin easing this year, and that an opportunistic Real Estate allocation can help capitalize on fundamental and valuation impacts of lower interest rates.
- REIT fundamentals have been stable over the past two years, in our view, with 90%+ occupancy levels (excl. Office), and funds from operations growth is expected to accelerate in coming quarters amid steady top-line growth.
Adjusted late-phase sector allocations
- The modest reallocation from Health Care to Consumer Staples incrementally diversifies our defensive exposure.
- Health Care remains our largest sector overweight, reflecting its attractive earnings growth potential and defensive characteristics amid lingering macro risks.
- We expect Consumer Staples should benefit from normalizing top-line volume growth after post-COVID challenges, and the sector could achieve a premium valuation if the economy continues to weaken.
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’ U.S. Sector 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.