Global Conservative portfolio positioning intra-quarter update as of 11/4/2022

Continued deterioration in some economic data along with the Fed’s aggressive monetary policy stance point to increasing economic risks, in our view, and we have further increased the portfolio’s overweight of late-phase, defensive U.S. equity sectors.

November 4, 2022


Increased late-phase U.S. equity sector overweight

  • Added to existing U.S. Consumer Staples equity sector ETF
  • Added to existing U.S. Utilities equity sector ETF holding

Reduced mid-phase U.S. equity sector exposure

  • Eliminated a position in a Tech-focused ETF that provided incremental exposure to the mid-phase U.S. Information Technology, Communication Services, and Consumer Discretionary equity sectors

In our view, economic developments, including continued deterioration in some economic data and the Fed’s monetary policy stance, point to later cycle economic conditions and, in turn, slower economic growth with increasing risk of recession. We continue to see rising risk of waning real personal consumption growth, slower business investment, and a softening labor market, all of which increase the risk of earnings shortfalls relative to consensus estimates, particularly for companies in the most economically sensitive equity sectors and, to a lesser degree, the mid-phase U.S. Information Technology, Communication Services, and Consumer Discretionary sectors. In view of the evolving risk to economic growth and earnings, we have increased our existing overweight allocations to U.S. late-phase equity sectors, specifically Utilities and Consumer Staples, and reduced the size of our overweight to U.S. mid phase equity sectors.


Increased late-phase U.S. equity sector overweight

  • We believe the general stability of U.S. Consumer Staples and Utilities company revenues and earnings leave these sectors well insulated from the mounting economic risks facing broader market earnings estimates.
  • While the U.S. Consumer Staples and Utilities’ sectors currently trade at a relative premium to the S&P 500 and near the upper end of their historical range, these dynamics are common during economic slowdowns and recessions.
  • Interest rate risk for rate-sensitive defensive sectors like Consumer Staples and Utilities has diminished, in our view, as we see limited upside to intermediate/long-term rates and the potential for additional Fed Funds tightening to result in deeper yield curve inversion and recession fears.
  • We expect U.S. Utilities companies should benefit from the ability to pass through higher fuel costs to customers in the current inflationary environment, and the sector’s domestic focus limits foreign exchange and supply chain risks.

Reduced mid-phase U.S. equity sector exposure

  • Given our outlook, we believe a reduction in our overweight of U.S. mid-phase sector exposure is appropriate, and the multi-sector ETF we eliminated carried a higher market beta than our remaining mid-phase sector holdings.
  • We see a mix of factors impacting U.S. mid-phase sectors, with headwinds like digital advertising pricing pressure and impacts from COVID demand pull-forward, but also positive secular tailwinds like the shift to cloud computing, adoption of digital payments, and business investment for efficiency and a post-COVID work environment.
  • As economic growth slows, we believe U.S. mid-phase sectors should see less deceleration in revenue and earnings than early-phase sectors (which we continue to avoid), and that a modest overweight to mid-phase sectors remains appropriate in conjunction with our significant overweight of more defensive U.S. late-phase sectors.

The most recent complete presentation can be viewed here.

Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.

Holdings, Sector Weightings, and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Global Conservative holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary. Upon request, WestEnd Advisors will provide a list of all recommendations for the prior year.

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