Clark Capital’s Bottom-Up, Fundamental Strategies

Ongoing headwinds including persistent inflation, tightening monetary policy, lockdowns in China, and war in Ukraine resulted in sharp losses across asset classes in April. The S&P 500 Index suffered its biggest monthly loss since March 2020, declining 8.8%. The Nasdaq composite posted its worst monthly performance since the start of the pandemic, declining more than 13.0%, as Technology companies have taken the brunt of the selling pressure due to weaker than expected first quarter earnings and higher interest rates.

The Federal Reserve has shifted from dovish, patient, and jawboning to hawkish and aggressive. Expectations of rate hikes have increased with several 0.50% hikes priced into expectations. Across our equity portfolios, we continue to shift portfolios away from beta, duration, fragility and labor intensity.

Below are strategy updates from April:

All Cap Core U.S. Equity

• Navigator® All Cap is positioned with 66.4% in large-cap stocks and the remainder in mid/small-cap companies and cash.
• During the month, we added an insurance company, a financial services company, an entertainment and media conglomerate, a multinational technology company, and an automotive and clean energy company to the portfolio.
• We exited our positions in a digital financial services company, a home and security consumer products company, a healthcare facilities company, two semiconductor companies, and an investment banking company.
• Albeit underweight to the benchmark, Information Technology remains the largest sector weight in the strategy at 19.8%.

High Dividend Equity

• The portfolio is positioned with 89.5% large-cap exposure, 9.1% in mid-caps, and the remainder in cash.
• The largest portfolio weight is in Healthcare at 18.0%, followed by Financials and Technology with portfolio weights of 17.9% and 10.8%, respectively.
• We further diversified our Utility exposure with the addition of an electric and gas company with infrastructure and renewables exposure.
• We believe the Energy sector remains attractively valued. As such, we realized a capital gain in a drilling company and purchased a natural gas liquids company, which projects rising earnings and revenue growth into 2023.
• We continue to diversify from our bank exposure into diversified Financials, which we believe may benefit in a rising rate environment.
• Top contributing sectors during the month were Industrials, Consumer Staples, and Energy. Detractors included Financials, Consumer Discretionary and Utilities.

International Equity ADR

• The portfolio is positioned with 16.7% in emerging markets with the balance in developed economies and cash.
• Britain, Canada, and Japan are the strategy’s largest country weights, all ranging between 11% and 16%.
• During the month, we added a Chinese bank, a biopharmaceutical company, a Spanish multinational electric company, and a Japanese trading company to the portfolio. We exited our positions in a Chinese multinational technology company, a German mail and parcel company, and a French utility company.
• Financials, Healthcare, Industrials, and Information Technology remain our largest sector weights.

Taxable Fixed Income

• Within the portfolio, we maintain the position of shorter, higher yielding bonds that will mature off coupled with what we believe are high quality longer bonds, which we believe are trading cheap compared to intermediate bonds.
• We continued to add to our position in Financials and moved up in quality in Technology holdings.
• On the other side, we added to our position in a digital financial services company and sold a shorter duration pharmaceutical bond.
• Overall, these themes increased the portfolio’s yield to worst by 67 basis points while also improving the current yield by 8 basis points. We believe that this barbell approach will help provide the best total return moving forward.

Tax-Free Fixed Income

• The pain in the municipal market did not abate in April, a month typically characterized by low organic demand and elevated new issue supply.
• Further fuel was added by fund outflows, which continued in earnest all month, with Lipper reporting 11 straight weeks as of 4/29 and a total year-to-date drawdown of -$28 billion.
• The accelerated selling has pushed 4% coupons to discount levels in the long end, regardless of call features, such that “cushion bonds” have lost any semblance of defensive structure.
• We have been selling the structure aggressively for the last two months to limit exposure should the curve steepen in earnest, which we believe is perhaps the greatest risk right now.
• We believe one silver lining has been the flatness of the curve combined with historically high relative value of munis versus Treasuries. This has created opportunity not seen in decades.

Clark Capital’s Top-Down, Quantitative Strategies

The market entered May tactically oversold, with the Technology and Consumer Discretionary sectors at the heart of the selling pressure. The S&P 500 has declined 12.9% year to date, which is in-line with our annual outlook and expectations of a 10-15% correction in the first half of the year.

Given the persistent market declines and negative headlines about inflation and Fed rate hikes, many measures of investor sentiment have turned extremely pessimistic. For example, the American Association of Individual Investors (AAII) sentiment poll recently showed on 16% of individual investors were bullish. That is the lowest level since September 1992! We continue to manage risk across the tactical portfolios by limiting beta. The Fixed Income Total Return and Global Tactical portfolios remain defensively positioned with 50% of the portfolios holding cash equivalents.

Below are strategy updates from April:

Alternative

• The portfolio has been led by a 20% position in managed futures, and the three funds we own have generally been long commodities and short interest rates.
• We have been reducing our exposure to commodity-oriented equities and gold and silver.
• The portfolio has also been focused on mimicking private equity returns, and we have added a small position in long Treasuries and closed-end municipals after bonds and duration-oriented vehicles took such a beatdown in Q1.
• Overall, the portfolio remains underweight fixed income vehicles.

Fixed Income Total Return

• The portfolio owns 50% in high yield with 50% in cash.
• U.S. Treasuries and long duration rank lowest in our relative strength models, and are to be avoided.
• Our models comparing high yield to Treasuries are slowly weakening, but we are not yet close to going 100% defensive into cash.
• We believe corporate balance sheets remain stable; the Barclays High Yield Index now produces a 6.98% yield to worst, its highest level since May 2020.

Global Tactical

• Our credit-based models have moved us into a 50% equity and 50% cash position, with Treasuries least favored in our relative strength models.
• Our models have weakened slightly, but we are not close to turning 100% defensive.
• Credit spreads remain contained, and we believe extremely pessimistic investor sentiment portends strong equity returns for the next 6-12 months.

Sector Opportunity

• The portfolio favors Consumer Staples, Energy, Materials, and Utilities.
• We are avoiding Consumer Discretionary, Technology, and Financials.
• Lately, as leadership trends have neutralized, we have used the S&P 500 as a placeholder position.

Style Opportunity

• The portfolio maintains a modest defensive and value-oriented tilt, owning large-cap value, high dividend, and minimum volatility.
• We have seen value’s outperformance versus growth slow in recent weeks, and as a result, we have taken an over 30% position in the S&P 500 since leadership trends are more neutral.
• The portfolio is avoiding mid and small-caps.

U.S. Strategic Beta

• The portfolio has been neutral regarding value versus growth since mid-February, and in early April, we reduced our exposure to small-caps and mid-caps and added to large-cap value.
• As we move into the second half of 2022, we would expect to overweight growth stocks and become more aggressive.