U.S. Sector portfolio positioning intra-quarter update as of 3/31/2020
Increased economically-sensitive, early-phase sector exposure, including new Energy allocation; trimmed existing late-phase sector allocations
March 31, 2020
We have continued to see progress toward a market bottom, in our view, as some of the major economic risks of COVID-19 have begun to be addressed (e.g. by the Fed’s credit market interventions, the $2 trillion stimulus package, and public health measures). Thus, we have increased exposures to more economically-sensitive and higher-beta areas of the equity markets, including a new allocation to Energy and increased allocations to Financials and Industrials. These adjustments were offset by reductions in Consumer Staples and Utilities exposure. However, we also recognize significant risks remain, particularly in balancing the public health and economic impacts of the pandemic, so, at present, we are maintaining diversified exposure across a higher number of U.S. large-cap equity sectors than is typical. Given the severity of the current shock and uncertainty regarding the timing and magnitude of a potential rebound, we believe this balanced approach to risk management is warranted as we transition through what is likely to prove a major economic inflection point.
Increased early-phase sector exposure: We do not know when the economic impact of the COVID-19 crisis will peak, but, at some point, we believe the market should make a sustained rebound in anticipation of economic recovery as this crisis wanes. The U.S. Energy sector had been one of the worst-performing areas of the global markets during the COVID-19 crisis, and we believe it now represents an attractive risk/reward profile, given our outlook. The U.S. Industrials sector is diverse and not uniformly impacted by the COVID-19 outbreak, and much of the sector could benefit from pent-up demand for a range of supplies and equipment when uncertainty eases. The U.S. Financials sector remains well capitalized, in our opinion, and with the Federal Reserve acting to preserve liquidity and credit market function, we believe the sector should weather the COVID-19 crisis better than many investors anticipate.
Trimmed existing late-phase sector exposure: Since recently adding to U.S. Utilities exposure, we have seen the Federal Reserve help stabilize credit markets, a $2 trillion U.S. fiscal stimulus package, and some signs that COVID-19 transmission may be slowing in in Europe, all of which should reduce investor uncertainty and improve the potential for economic rebound, so we believe a reduction of Utilities exposure was now warranted. We believe the U.S. Consumer Staples sector’s strong outperformance in March continued to provide an attractive point for reducing exposure and adjusting the risk/return profile of the portfolio as we contemplate an eventual turning point in this crisis.