Monthly Moves: Charting Our Strategies, November 2024

Clark Capital’s Economic Gauges

Clark Capital’s Bottom-Up, Fundamental Strategies

Post the U.S. presidential election, U.S. equities experienced their strongest month of the year and are on track to deliver the strongest annual performance for the S&P 500 in 25 years, with investor sentiment at the upper end of the historical range. Momentum continues to lead across market caps as investors focus on quality companies with strong margins and profitability.

In third-quarter S&P 500 Index earnings, with 97% of companies reporting, 77% have beaten estimates by a median of 6%. The bifurcation of earnings across large and small companies remains evident, with the largest dispersion of earnings in small caps.

Below are strategy updates from November:

All Cap Core U.S. Equity

• Navigator® All Cap is fully invested with approximately 74% in large-cap stocks and the remainder in mid- and small-cap companies and cash.
• In order to benefit from improving business fundamentals, the two most recent additions to the portfolio this month were an automotive and renewable energy manufacturer and a data management and cloud storage company.
• The two most recent exits were a health insurance and managed care company and a homebuilder.

High Dividend Equity

• Navigator® High Dividend Equity is positioned with approximately 98% in developed countries with the remainder in cash.
• The United States is the largest country weight at 91.3%, followed by Britain at 3.5% and Ireland at 2.0%. Approximately 91% of the portfolio is large cap, 7% of the portfolio is mid cap, and the remainder is in cash.
• Financials represent the largest sector weight at 26.2% and above the benchmark weight. The next three largest portfolio weights are Industrials, Healthcare, and Information Technology at 15.5%, 12.2% and 8.0%, respectively.
• To benefit from improving business fundamentals, recent additions to the portfolio were a REIT focused on office property management, a technology conglomerate, and a data management and cloud storage company.
• Recent portfolio sales were a REIT focusing on wireless and broadband communications infrastructure, a semiconductor and electronics manufacturer, and a biotech.

International Equity ADR

• Navigator® International Equity/ADR is positioned with roughly 15% in emerging markets, with the balance in developed economies and cash. Britain, Ireland, Japan, and Switzerland are the strategy’s largest country weights, all ranging between 9% and 23%.
• Its exposure to China is now approximately 7.5%, which is slightly above its weighting in the MSCI All-Country World ex USA Index.
• Consumer Discretionary, Financials, Industrials, and Information Technology are the portfolio’s largest sector weights.
• To benefit from improving business fundamentals, the two most recent additions to the portfolio this month were a global tobacco company and a multinational energy company.
• The two most recent exits were an automotive manufacturer and an electrical equipment and solutions manufacturer.

Taxable Fixed Income

• As rates neared 4.5% during the month, the portfolio continued to add to its position in 5-year bonds.
• Building materials and banks were two of the sectors that were added. In our opinion, both sectors should see outperformance under a Republican Congress, especially banks, as regulations are expected to be eased.
• Mortgage-backed securities were also added to the portfolio during the month. Mortgage-backed securities have the implicit guarantee of the government and are thus rated AAA; however, due to the rise in interest rates, they underperformed over the last few months.
• Bonds with 5.5% coupons and slightly over 5.5% yields were added to increase the overall yield of the portfolio while also improving the credit quality. Looking ahead to 2025, the main focus will continue to be on adding names in the 5-year portion of the curve as we believe they will have the best total return potential in the rate-cutting scenario that is expected to continue throughout the year.

Tax-Free Fixed Income

• Last month, we discussed the fact it was all about supply. Instead of derailing the market, the supply aided price discovery and established the base of a rally. November’s issuance was $26B, down 24% year over year (JPMorgan research), as the election and FOMC meeting took center stage.
• Buyers were left with full coffers due to favorable seasonal return of principle and coupons, but narrower selections to choose from for reinvestment. The demand side of the market continued to be robust.
• With lower supply and demand side technicals remaining strong, munis performed well when compared with their taxable counterparts.
• We have monetized some of the performance seen in positions in the 15-year area, as 5-year munis have flattened versus 15-year munis.
• We have redeployed investment into 3–6-year effective duration via high-grade state and local obligations as well as industrial development revenue bonds, pollution control revenue bonds, and pari-corporate municipal bonds that we feel have performance upside and sustainable spreads.

Clark Capital’s Top-Down, Quantitative Strategies

Eleven months down, one to go… The market is trading at new all-time highs. High-yield indices are also at new all-time highs, credit conditions are firm, the economy is robust, unemployment is low, and inflation continues to moderate.

As we look toward year-end, the market typically pauses slightly in the first half of December before advancing in the latter half of the month — a pattern known as the “Santa Claus Rally.” The Federal Reserve meets on December 18th, and the market is currently pricing in a 65% chance of another rate cut. If they cut again, it would mark the equivalent of a fourth 25-basis-point cut this year, aligning with our expectations entering 2023.

Below are strategy updates from November:

Alternative

• The portfolio sold out of a long/short real estate fund and purchased a hedge fund-like multi-strategy fund.
• While we reduced more growth-oriented equities, we added energy MLPs and natural resources.
• Managed futures remain the largest detractor due to a trendless environment, while precious metals, options-based strategies, and event-driven investments are contributors.

Fixed Income Total Return (MultiStrategy Fixed Income)

• Credit continues to fare quite well in our models, with spreads probing all-time lows. The fundamental backdrop remains strong, and now interest rates appear to have reached a short-term peak.
• As long as inflation and interest rates remain tame, credit fundamentals indicate a favorable background for high yield.

Global Risk Management

• In mid-October, both the Global Risk Management and Global Tactical portfolios reduced international equities to a modest underweight, as the dollar began to strengthen, and the political environment became clear.
• Europe, in particular, is struggling compared to the U.S., and while we believe valuations abroad are much more compelling, economic momentum appears unable to reach escape velocity.

Global Tactical

• Our credit-based models continue to indicate a strong fundamental backdrop for risk assets. While stocks have advanced considerably in 2024 and become quite richly valued, we do not see any fundamentally driven catalysts to change the favorable picture.
• We believe that inflation remaining under control and interest rates rolling over further enhances the risk-on sentiment.

Sector Opportunity

• Cyclical sectors and industries dominate the portfolio, with Industrials, Consumer Discretionary, and particularly Financials (banks, broker dealers) contributing performance.
• Our Technology positions include cloud computing, software, and internet, but we are avoiding overweighting mega-cap Tech.
• Defensive and less cyclicals sectors like Energy, Healthcare, and Staples rank lowest in our matrix.

Style Opportunity (MultiStrategy Equity)

• The portfolio has increased mid-caps (both mid-cap value and mid-cap momentum) to 43% of the portfolio.
• Large-cap growth remains highly ranked and is our largest holding at 55%.
• Minimum volatility, quality, and large-cap value rank lowest and are to be avoided.

U.S. Strategic Beta

• Improved mid- and small-cap performance has given the portfolio a boost, but overall, the portfolio remains neutral with regard to growth vs. value.
• With investor sentiment quite lofty, we maintain a modest position in low volatility, and we would anticipate re-investing in more aggressive market segments upon a correction.