Global Conservative portfolio positioning intra-quarter update as of 11/06/2025

Large-cap stocks have dominated the U.S. market in recent years, but we believe cycle-specific headwinds for small-caps could begin to abate within our typical 6-to-18-month investment horizon. We have initiated an opportunistic small-cap U.S. equity allocation, funded by a pro rata reduction in large-cap U.S. equity position target weights.

November 6, 2025

ACTIONS and OVERVIEW:

Added new U.S. small-cap equity allocation

• Purchased new U.S. small-cap ETF position

Reduced U.S. large-cap equity exposure

• Trimmed U.S. large-cap ETF holdings on pro rata basis

Portfolio rebalance

The U.S. economy has been in expansion since early 2023, which historically would be supportive of small-capitalization firms.  However, Fed rate hikes in 2022-2023, elevated interest rates that followed, and regional bank stress in early 2023 fostered restrictive financial conditions that have weighed on small-cap companies’ earnings power.  Further, the rapid rise of A.I. has contributed to narrow large-cap market leadership and historic market concentration in the U.S.

Now, the Fed has resumed rate cuts, and we see easing credit conditions.  Given this and an unusually wide valuation discount for small-cap stocks, we see small-caps as an increasingly attractive-yet-underappreciated part of the U.S. market with the potential to outperform in a continued expansion.  Furthermore, investor expectations for A.I. are very elevated, despite significant uncertainty over its near-term economic benefits, and small-caps may also offer relative insulation if highly valued tech-focused large-cap stocks fail to meet elevated growth expectations.

UPDATE DETAIL:

Added new U.S. small-cap equity allocation

• Despite an ongoing economic expansion, small-cap stocks have lagged large-cap equities by a historically extreme degree over the past 3 years amid restrictive rates, tight bank credit conditions, trade uncertainty, and narrow profit breadth that concentrated gains in mega-cap stocks.
• We see potential for headwinds that have weighed on small-cap stocks to begin to abate as the Federal Reserve has resumed its rate-cutting cycle; the loan growth backdrop has improved alongside easier credit conditions; and worst-case tariff outcomes now seem unlikely.
• Earnings for the S&P SmallCap 600 Index declined in recent years, but have shown signs of stabilization in 2025, and we believe small-caps can achieve high-teens earnings growth in 2026 and 2027, given lower interest rates, easing trade policy uncertainty, OBBBA tax provisions, and margin support from A.I.-driven productivity gains.
• The S&P 600 currently trades at about a 30% valuation discount to the S&P 500, in line with extremes that have preceded multi-year periods of small-cap outperformance.
• The S&P 600 focuses on the upper end of the small-cap capitalization range and incorporates a profitability screen, which gives the index a bias toward higher margins, lower debt ratios, and lower valuations versus the Russell 2000.

Reduced U.S. large-cap equity exposure

• While S&P 500 earnings growth is widely projected to remain elevated, we see potential for the relative strength of large-cap versus small-cap earnings to wane in 2026.
• U.S. large-cap equities have rallied since the “Liberation Day” pull-back, posting one of the strongest 6-month gains on record, which has pushed large-cap valuation multiples back to cycle highs across most valuation metrics.
• Shifting some of our U.S. equity allocation to small-caps diversifies our cyclical exposure, which could benefit if market returns broaden out as we anticipate, while retaining an overweight of defensive, late-phase sectors.