Global Balanced portfolio positioning intra-quarter update as of 3/23/2020
Added new exposure to two early-phase U.S. equity sectors, Industrials and Financials, to reduce portfolio risk relative to the market
March 23, 2020
We have added new exposure to two early-phase U.S. equity sectors, Industrials and Financials, which have been among the hardest-hit sectors in this crisis and, in our view, are likely to outperform when the market eventually turns around. As we consider both risk and return potential across all U.S. equity sectors, we believe these changes were appropriate, given the overall market decline thus far and the relative performance of specific sectors in that decline. These new positions were funded by a reduction in U.S. Consumer Staples sector exposure, which had been a strong outperformer since the market peak. We recognize, however, that market volatility is likely to persist for some time, and there could be significant downside to equities still ahead, so we continue to maintain an overweight to U.S. Consumer Staples.
Added modest early-phase U.S. equity sector exposures: We do not know when the economic impact of the COVID-19 crisis will peak, but, at some point, we believe the market should begin to rebound in anticipation of economic recovery as this crisis wanes. Given the unpredictability of such a rebound, we view the move from avoidance to an underweight exposure of U.S Industrials and Financials as a prudent risk control measure.
Most U.S. Industrials stocks have declined sharply in recent weeks, but companies in this diverse sector are not uniformly impacted by the COVID-19 outbreak – some industries that are most directly impacted (e.g. Airlines) represent a relatively small weight in the sector, and much of the sector could benefit from pent-up demand for a range of supplies and equipment when uncertainty eases.
U.S. Financials have underperformed amid falling interest rates, a flattening of the yield curve, tightening credit market conditions. In our opinion, however, U.S. financial institutions remain well capitalized after regulatory changes implemented since the 2008 financial crisis. 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 largest U.S. sector overweight to fund additions: We are maintaining an overweight to U.S. Consumer Staples, but we believe the sector’s strong outperformance in recent weeks provided an opportunity to begin adjusting the risk/return profile of the portfolio as we contemplate an eventual turning point in this crisis.
Portfolio Rebalance: In conjunction with these portfolio adjustments, and given that various positions have deviated from target weightings due to recent market movement, we have taken this opportunity to implement a full portfolio rebalance.