Global Balanced portfolio positioning intra-quarter update as of 3/31/2020
Increased early-phase/trimmed late-phase U.S. equity sector exposure; and added small/mid-cap U.S. exposure funded by a reduction in European equities
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 adding an allocation to U.S. Energy equities, increasing allocations to U.S. Financials and Industrials equities, and adding a modest allocation to U.S. small/mid-cap equities. These additions were funded by trimming allocations to the U.S. Utilities and Consumer Staples equity sectors and developed European equities. 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 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 U.S. equity sector exposure: We do not know when the COVID-19 crisis will peak, but, at some point, we believe the market should make a sustained rebound in anticipation of economic recovery. The U.S. Energy sector has 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 could benefit from pent-up demand for a range of supplies and equipment when uncertainty eases, and we believe the U.S. Financials sector, with the Federal Reserve acting to support credit markets, should weather the COVID-19 crisis better than many investors anticipate.
Trimmed existing late-phase U.S. equity sector exposure: Since recently adding to U.S. Utilities exposure, we have seen massive U.S. monetary and fiscal stimulus, which we believe should reduce investor uncertainty and improve the potential for economic rebound, so we believe a reduction of Utilities exposure was now warranted. The U.S. Consumer Staples sector’s strong recent outperformance continued to provide an attractive point, in our view, for reducing exposure and adjusting the risk/return profile of the portfolio as we contemplate an eventual turning point in this crisis.
Added U.S. small/mid-cap equity allocation; trimmed Europe: We believed adding a moderate allocation to U.S. small/mix-cap equities, which generally outperform in the early phases of an economic recovery, was appropriate given our anticipation of an eventual equity market rebound. We have increasingly viewed the U.S. as better positioned than Europe to weather COVID-19’s economic impacts, due to the relative strength of the U.S. economy going into the crisis, the diversified nature of the U.S. economy, and degree of U.S. monetary and fiscal stimulus.