Clark Capital’s Bottom-Up, Fundamental Strategies

Coming into the year, we expected 2022 to be a more volatile year with a correction in the first half of the year, and we certainly got that right off the bat. The recent decline could reset the market for a move higher, with the American Association of Individual Investors bears peaking at 52.9%, its highest level since April 2013. When the indicator is that bearish, it is often followed by strong returns. After 22 months focused primarily on price growth, we expect earnings to normalize at 10-12%.

We believe that tightening monetary policy and higher volatility may benefit lower beta dividend payers, reversing the trend of non-dividend payers and dividend cutters outperforming. We believe dividend growers may also drive performance with sustainable free cash flow and profitability as rates rise.

Below are strategy updates from January:

All Cap Core U.S. Equity

• Navigator® All Cap is positioned with approximately 66.3% in large-cap stocks and the remainder in mid/small-cap companies and cash.
• During the month, we added a financial services company and a consumer goods corporation to the portfolio. We exited our positions in a subscription streaming service and an investment banking company.
• Albeit underweight to the benchmark, Information Technology remains the largest sector weight in the strategy at 20.7%.

High Dividend Equity

• During the month, we purchased a technology solutions company, which we believe is undervalued relative to its strong business model and rising earnings growth.
• The portfolio’s exposure to three financial services companies was reduced due to faster than expected capital market normalization and we increased exposure in rate sensitive banks.
• Financials remain the largest sector weight at 19.7% versus the benchmark of 21.4% followed by Healthcare and Information Technology at 15.8% and 11.3%, respectively.
• Top contributing sectors during the month were Industrials, Energy, and Communications versus detractors Utilities, Consumer Discretionary, and Information Technology.

International Equity ADR

• Navigator® International Equity/ADR is positioned with 16.8% in emerging markets with the balance in developed economies and cash.
• Britain, France, Ireland, and Japan are the strategy’s largest country weights, all ranging between 8% and 16%.
• During the month we added a French tire manufacturer, a Swiss pharmaceutical company, and an Indonesian multinational telecommunications company to the portfolio. We exited our positions in a Japanese multinational auto and truck parts manufacturer and a British multinational retailer company.
• Consumer Discretionary, Financials, Healthcare, Industrials, and Information Technology remain our largest sector weights.

Taxable Fixed Income

• During the month, the market saw higher rated, more liquid names outperform as investors looked for more stable names to invest in.
• Within the portfolio, positions were added to U.S. banks to take advantage of rising interest rates.
• Laggards in the portfolio continued to be our positions in M&A driven Tech holdings. These holdings were reduced during the month as details of their acquisitions and subsequent expected ratings changings became clearer.

Tax-Free Fixed Income

• The muni/Treasury ratio curve was quite active, as municipal bonds underperformed Treasuries in all maturity tranches.
• Inflows into the asset class trailed during the month and culminated in -$1.4B in outflows as of 1/26.
• The Build Back Better legislation was shelved for a later date and as it stands, it appears SALT will not be changed, which we believe to be a positive for municipal bonds.
• Perceived cracks in the armor that munis enjoyed throughout 2021 may have been an impetus for decaying flows (the declining talk of higher taxes and limited supply, among others). We have said that drifting muni markets drift higher in yield, so regardless of what was the prime mover, we are now at rates and ratios that we believe are clear indications of value.
• We will stay active and favor barbells as we believe relative value is very compelling.

Clark Capital’s Top-Down, Quantitative Strategies

Geopolitical tensions, the highest inflation levels in 40 years, the end of Federal Reserve bond purchases, and upcoming interest rate hikes have resulted in market volatility and expectations of a hawkish Fed. Credit had remained very resilient in the face of rising interest rates, but it has recently weakened a bit as rising rates have begun to take a bite out of risk assets.

Our credit-based risk management models that drive the allocation of our Fixed Income Total Return, Global Tactical, and Global Risk Managed strategies turned cautious at the end of the month. As a result, those strategies were reallocated, with half of their allocations de-risked into cash equivalents.

Below are strategy updates from January:

Alternative

• Market neutral income and long/short commodities were some of the portfolio’s strongest performers over the month. Gold and equities were the top detractors.
• Near the end of January, we added listed private equity and micro-caps as the market sell-off deepened in an attempt to mimic private equity returns.

Fixed Income Total Return

• The Navigator® Fixed Income Total Return portfolio moved from 100% high yield to a split allocation of 50% high yield and 50% cash on January 31st.
• Interest rates increased dramatically in January, particularly on the short end of the curve as investors have priced in four or more Fed rate hikes this year.
• Credit markets held firm until mid-January. When they slowly began to weaken, until our models recommended risk reduction at the end of the month.
• High yield still ranks above Treasuries in our models, and the portfolio still owns high yield (50% position). What has changed is the growing standing of cash for capital preservation – a situation that is not surprising given high inflation and persistent rising rates.

Global Tactical

• The portfolio sold half of its equity exposure on January 31st as rising interest rates drove sizeable losses in stocks and Treasuries.
• Credit markets held their own for part of January, but finally cracked in late January, leading our models to signal a risk reduction.
• Our credit-based models are now neutral and not fully defensive with regard to risk. With stocks now in their most oversold conditions since the COVID crash, we believe our 50% equity position allows for some further upside.

Sector Opportunity

• After overweighting Technology for most of the past few years, the portfolio has completely exited Tech. Over half of the portfolio owns the S&P 500 Index, as the Index remains hard to beat.
• The portfolio now owns cyclically-oriented value sectors such as Energy and Real Estate as well as bank holdings.
• The portfolio is avoiding the Healthcare sector and biotechnology holdings.

Style Opportunity

• The portfolio fully exited large-cap growth, and now only large-cap value ranks ahead of the S&P 500 Index. The portfolio is equally split between large-cap value and the S&P 500.
• With markets now deeply oversold, we will look to follow new trend leadership as it develops.
• We are avoiding mid-caps and small-caps, which stand at the bottom of our rankings.

U.S. Strategic Beta

• In January, the portfolio reduced its growth and small-cap exposure, adding to large-cap value and purchasing minimum volatility.
• The portfolio is now overweight large-cap value and is avoiding small-cap growth.