Global Balanced portfolio positioning intra-quarter update as of 5/11/2021

Adjusted exposures among economically-sensitive U.S. sectors; increased European equity allocation; eliminated U.S. small-caps

May 11, 2021

ACTIONS:

Adjusted economically-sensitive U.S. sector exposures

• Added to U.S. large-cap Financials with new ETF holding
• Added to existing U.S. large-cap Info Tech ETF holding
• Trimmed U.S. large-cap Industrials ETF holding

Added to Europe; eliminated U.S. small-cap allocation

• Added to European equity exposure with new ETF holding
• Eliminated U.S. small-cap equity ETF holding

Full portfolio rebalance

We see global GDP growth, particularly in the U.S, as likely to be strong in the coming quarters, and we continue to emphasize economically-sensitive parts of equity markets. That said, the economic and profit recovery is occurring at an unprecedented pace, and we believe markets are increasingly discounting that fact through rising earnings growth estimates for 2021. Beyond the current burst of economic activity and earnings growth, we see opportunities to begin repositioning among economically-sensitive equity exposures in anticipation of a cyclical shift from rapid economic recovery to expansion.

We see underappreciated economic tailwinds for U.S. Financials and Information Technology in the environment ahead, while we believe the anticipated recovery in Industrials sector earnings has already been significantly discounted in the price of Industrials stocks.

U.S. small-cap stocks have more than doubled from their pandemic lows, but may face risks as the economy moves into expansion. In contrast, we see an improved risk/reward profile for European equities as the pandemic fallout subsides and European Union GDP growth potentially exceeds that of the U.S. in 2022.

UPDATE DETAIL

Added to U.S. large-cap Financials with new ETF holding:

• Rapid economic cycle progress over the next 18 mos. could lead the Fed to begin normalizing monetary policy.
• Continued economic growth and rising interest rates could be significant tailwinds for bank revenue and profits, and for capital markets/investment banking activity.
• ETF selection tilts our allocation toward banks/cap. mkts.

Added to existing U.S. large-cap Info Tech exposure:

• In the shift from recovery to expansion, we expect positive secular trends should limit Tech’s earnings deceleration.
• We expect that technology capex will remain strong as businesses invest to position for the post-COVID-19 world.
• The Technology sector could benefit from infrastructure stimulus, as tech investment is integral to so many entities.

Trimmed U.S. large-cap Industrials exposure:

• We now see the risk/return profile of the sector as less attractive than some other economically-sensitive sectors.
• Industrial product demand has recovered rapidly, which may leave less pent-up Industrials demand going forward.
• Industrials valuations are now at a premium vs. pre-pandemic, which we think prices in a big earnings rebound.

Added to European equity exposure with new ETF holding:

• We believe Europe could see a more sustained GDP rebound into 2022, given its recent vaccination progress.
• Europe is trading at its largest valuation discount to the U.S. since the Euro debt crisis.
• We see an improved risk/reward profile for Europe, but we remain slightly underweight, given Europe’s ongoing structural challenges.

Eliminated U.S. small-cap equity ETF holding:

• We have less confidence in U.S. small-cap outperformance as the economy shifts from recovery to expansion.
• Risks from tax reform and supply chain disruptions could cause small-caps to miss optimistic earnings estimates.