Global Balanced Portfolio Positioning Intra-Quarter Update as of 09/14/2017

Shifted short-term bond exposure toward TIPS, trimmed European equity exposure in favor of U.S., and adjusted U.S. equity sector exposures

Within the Global Balanced strategy’s U.S. fixed income allocation, we have recently reduced short-term corporate bond exposure and increased short-term Treasury Inflation Protected Securities (“TIPS”) exposure.  We anticipate that recent disinflationary pressures—such as price competition in mobile data plans, food price deflation, and soft import pricing from a previously strong dollar—have only temporarily reduced broader inflation measures.  As these temporary factors abate, we anticipate inflation will reaccelerate moderately.  Additionally, a tight labor market should increasingly contribute to wage inflation which, in turn, will place additional upward pressure on inflation and, combined with the Federal Reserve’s reduction of its balance sheet, longer-term interest rates.  Ongoing tightening of monetary policy should also put upward pressure on short-term interest rates.  Thus, we believe it is appropriate to maintain a focus on short-duration fixed income securities while increasing inflation protection in portfolios.

In the strategy’s equity allocation, we reduced European exposure and increased U.S. exposure proportionally.  European equity returns have benefited this year from improving sentiment tied to a modest acceleration in Eurozone GDP growth, recent election results, and (for U.S. investors) a material decline the U.S. dollar versus both the euro and the British pound.  The economic growth differential between Europe and the U.S. has now closed, largely due to economic reacceleration in Europe’s smaller, peripheral economies.  Looking forward, we believe economic growth in the major countries that make up the bulk of Europe’s equity markets is unlikely to improve materially.  We also anticipate recent dollar weakness will reverse as the U.S. economy continues to grow, U.S. monetary policy tightens, and the stronger euro causes the European Central Bank to move slowly on its plan to end quantitative easing.  Meanwhile, our allocation to select sectors in the U.S. should present significant opportunity for outperformance versus global markets in the continued modest economic growth environment ahead.

Within the strategy’s U.S. equity allocation, we increased Financials Sector exposure.  This reflects, in part, our increased confidence that banks and capital market firms will benefit from regulatory reform.  Additionally, banks should benefit from rising interest rates as economic growth continues, temporary disinflationary pressures abate, and the Federal Reserve continues tightening monetary policy.  Therefore, the recent pullback in longer-term interest rates and our expectation that Republicans deliver some degree of corporate tax reform presented an attractive opportunity to add to Financials exposure.

Concurrently, we reduced our exposure to the U.S. Information Technology equity sector and, on the margin, the U.S. Telecom Services Sector.  We continue to believe the U.S. Technology Sector will benefit from positive secular trends like cloud computing and online advertising growth.  These trends should drive above-market earnings growth and returns amid ongoing economic expansion, and the portfolio remains overweight to the sector.  However, following material outperformance for the U.S. Technology Sector so far in 2017, we believe it is appropriate to reduce our overweight in favor of the diversification and opportunity that we see in the Financials Sector.

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.