Global Equity portfolio positioning intra-quarter update as of 9/03/2020

Increased the economic sensitivity of U.S. large-cap exposure while reducing the overweight of U.S. large-cap equities to fund an overweight of Asian emerging markets

September 3, 2020

We see continued economic progress in this recovery, which we believe will benefit Industrials companies and present a headwind for the relative performance of Consumer Staples. Additionally, Industrials stocks have lagged substantially year-to-date, while Staples stocks, despite their typically defensive nature, have largely kept pace in Q3’s continued market rally due, in part, to demand factors that we believe will prove temporary. Thus, we see more opportunity looking forward in the more economically-sensitive Industrials sector.

In addition to adjusting sector allocations within the strategy’s U.S. equity exposure, we have reduced our overweight to large-cap U.S. equities as a whole and increased exposure to Asian emerging markets, which we expect to do well as the economic recovery continues. Asia has made significant progress in containing COVID-19 and emerging Asia’s sector mix is favorable, in our view, in the current environment. Even after reducing exposure to large-cap U.S. equities, our U.S. equity allocation remains a significant overweight, but the shift has helped reduce the portfolio’s valuation profile.
We have also taken this opportunity to rebalance the portfolio.

Increased economic sensitivity of U.S. sector exposure: We have added to the portfolio’s large-cap U.S. Industrials equity allocation. We are seeing a pickup in economic activity that we believe should benefit Industrials, e.g., improved machinery orders, increased shipping activity, and strong consumer spending on durable goods. Cost cutting should enhance the cyclical earnings recovery for Industrials, in our view, and new fiscal stimulus and/or a post-election infrastructure bill could offer further upside. Industrials should have some of the strongest U.S. sector earnings growth amongst all U.S. sectors in 2021, which, along with a market-like valuation, makes the sector increasingly attractive, in our view, at this stage of recovery.

We have trimmed the portfolio’s large-cap U.S. Consumer Staples equity allocation. The pandemic has created an unprecedented jump in demand for various Consumer Staples products, which we believe is likely to reverse when consumers feel safer and resume leisure activities like dining out and travel. Despite defensive characteristics, Consumer Staples had strong Q3 returns supported by positive earnings, but now elevated investor expectations could set up the sector for disappointing results going forward.

Moved to an overweight of Asian emerging markets funded by a reduction of the U.S. overweight: We have increased the portfolio’s allocation to Asia ex-Japan equities. Emerging Asia has largely contained Covid-19 and could post positive GDP and earnings growth in both 2020 and 2021, while most other regions are expected to see GDP and earnings declines in 2020 with mixed results in 2021. Sector mix in emerging Asia is favorable from a cyclical and secular perspective, in our view, with large weightings of Tech, Comm. Services, and Financials, that trade at a discount to U.S peers.

We have reduced the portfolio’s overall allocation to large-cap U.S. equities proportionally across our updated sector exposure targets. U.S. equities have rebounded more quickly than other regions, and trimming U.S. large-cap exposure to fund increased emerging Asia exposure reduces overall portfolio valuation, but we still view our U.S. exposures favorably and maintain a substantial overweight of the U.S.

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 Equity 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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