U.S. Sector portfolio positioning intra-quarter update as of 1/29/2020

Reduced Information Technology Overweight and Added to Consumer Discretionary Exposure

January 29, 2020

We have adjusted sector exposure in the U.S. Sector strategy by reducing our overweight of Information Technology and adding to Consumer Discretionary exposure, which now represents a material overweight. While our broad economic outlook has not changed materially, we do see potential for modest increases in longer-term interest rates, which could pressure extended equity valuations. Given our outlook and the relative valuations of the Information Technology and Consumer Discretionary sectors, we believe the risk/reward tradeoff for Information Technology is less attractive than it was six or twelve months ago, while moving to a material overweight in U.S. Consumer Discretionary is warranted.

Outlook Update: Our economic outlook, overall, has not changed significantly. We continue to see signs of a mature cycle in the U.S., but we also expect moderate growth to continue and the U.S. consumer to remain the highlight of the U.S. economy. However, our interest rate outlook has shifted modestly. With continued economic growth and diminished likelihood of a full blown U.S./China trade war, we anticipate real interest rates will move up from near cycle lows and a modest uptick in inflation will put upward pressure on longer-term interest rates. Further, we see elevated asset valuations moving to the top of the Fed’s risk list and, while we do not expect the Fed to raise short-term interest rates, we would not be surprised to see the Fed’s messaging turn less dovish in an attempt to talk down extended valuations.

Reduction of Information Technology/Increase of Consumer Discretionary Exposure: Strong U.S. equity market performance since early 2019 was driven almost entirely by valuation expansion. Since the beginning of 2019, the forward P/E ratio of the S&P 500 as a whole moved from about 14.5x to about 18.5x. The Information Technology sector significantly outperformed over that period, and its P/E moved up from about 18.0x to about 22.2x (at the high end of its historical range, excluding the Technology bubble of the late 1990s). The Consumer Discretionary sector is more reasonably valued, in our view, especially when accounting for the impact of its largest constituent, Amazon.com, which we believe is well positioned given continued strength in e-commerce, strength of the U.S. consumer, and the secular trend toward cloud computing. We believe the Information Technology and Consumer Discretionary sectors are both fundamentally advantaged in the current economic environment, and despite reducing Information Technology exposure, we remain overweight to the sector. However, the risk of a modest increase in longer-term interest rates could put pressure on extended equity valuations, which could weigh more heavily on Information Technology returns.

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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.

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