Global Conservative portfolio positioning intra-quarter update as of 7/7/2022

As our outlook evolves, we have continued to position portfolios to balance risks and opportunities in a mid- to late-phase economic backdrop.

July 7, 2022

ACTIONS and OVERVIEW:

Eliminated early-phase U.S. Financials sector allocation

• Sold remaining U.S. Financials sector ETF position

Increased allocation to late-phase U.S. sectors

• Added to an existing U.S. Health Care sector ETF holding
• Added new position in a U.S. Utilities sector ETF

Shifted equity exposure from Europe to Developed Asia

• Trimmed an existing European equity ETF holding
• Added to an existing Developed Asian equity ETF holding

Increased fixed income and reduced equity allocations

• Adjusted new and existing holdings proportionally

Reduced overweight of corporate credit within fixed income

• Sold a short-term high yield bond ETF position
• Trimmed an existing investment grade corporate bond ETF
• Added new position in an intermediate Treasury bond ETF

The U.S. and global economic cycles continue to progress rapidly.  While we expect the U.S. economic expansion to likely extend into 2023, we have seen, as anticipated, signs of slowing growth in economic data.  In addition, we believe the Federal Reserve’s recent shift toward more aggressive monetary tightening has exacerbated risks that the economic cycle could progress toward a late-phase slowdown more rapidly than we expected in our base case earlier in the year.  In this evolving environment, we see increased risk to corporate earnings and, more broadly, to the performance of particularly economically sensitive parts of the financial markets.

UPDATE DETAIL:

Eliminated early-phase U.S. Financials sector allocation

• We see increased risk that the economy shifts to a late-phase slowdown more rapidly than expected, which we believe would have an outsized negative impact on U.S. Financials, as interest rates could fall, capital markets activity could slow, and credit losses could increase.

Increased allocation to late-phase U.S. sectors

• We believe the U.S. Health Care sector offers a favorable combination of reliable earnings growth at compelling absolute and relative valuations.
• We view U.S. Utilities as increasingly attractive, given the advancing economic cycle and rising recession risks.

Shifted equity exposure from Europe to Developed Asia

• We view Europe’s economy as more vulnerable than those of the U.S. or Japan due to various idiosyncratic headwinds for the region, including war in Ukraine, tight supply in energy and food markets, and the ECB’s first sustained monetary tightening cycle since the mid-2000s.
• We see potential for continued re-opening and accommodative monetary policy to drive economic acceleration in Japan, developed Asia’s largest economy, after several waves of lockdowns slowed its initial pandemic recovery.

Increased fixed income and reduced equity allocations

• Given reduced risk for fixed income and increased risk for equities, we believe it is appropriate to move allocations in line with the strategy’s blended benchmark and focus our active allocations within each asset class on areas we expect to benefit in a mid- to late-phase environment.

Reduced overweight of corporate credit within fixed income

• As slowing economic growth and tightening financial conditions increase downside risk to corporate earnings, we believe it is appropriate to increase the credit quality of fixed income allocations by reducing our overweight of corporate credit and adding to Treasury exposure.