Clark Capital’s Bottom-Up, Fundamental Strategies

The first rate cut of the new monetary easing cycle took place on September 18th. Since then, the economy has performed well. Contrary to typical expectations, however, yields have risen, reflecting concerns over the federal debt and deficit, as well as fears that inflation will edge higher. The 10-year U.S. Treasury yield climbed from a low of 3.6% on 9/16 to 4.28%, a rise of 68 basis points in just a month and a half.

Equity markets hit new highs during the month before selling off slightly in advance of the Presidential Election. For the month, the S&P 500 ended lower by 0.92%, the Russell 2000 lost 1.44%, and the MSCI ACWI ex-US Index lost 4.91%.

Below are strategy updates from October:

Navigator^® All Cap Core U.S. Equity

• Navigator^® All Cap is positioned with approximately ~74% in large-cap stocks and the remainder in mid/small-cap companies and cash.
• Albeit underweight to the benchmark, Information Technology remains the largest sector weight in the strategy at 24.1%.
• During the month, to benefit from improving business fundamentals, the two most recent additions to the portfolio were a ride share company and an athletic shoe and apparel company. The two most recent exits were a distilled spirits and food ingredients producer and a pharmaceutical company.

Navigator^® High Dividend Equity

• Navigator^® High Dividend Equity is positioned with approximately 98.6% in developed countries with the remainder in cash. The United States represents the largest country weight at 91.7%, followed by Britain at 3.5%, and Ireland at 1.8%. Large-cap stocks represent 91.8% of the portfolio, mid-caps represent 6.8%, and the remainder is in cash.
• Financials represent the largest sector weight at 24.0% and above the benchmark weight. The next three largest portfolio weights are Industrials, Healthcare, and Information Technology at 14.7%, 14.6% and 8.7%, respectively.
• Portfolio positioning in the Consumer Staples, Energy, and Industrial sectors helped relative performance while REITs, Utilities, and the Communication sectors underperformed.
• During the month, we reduced our position in an American health insurance provider due to declining business momentum.

Navigator^® International Equity ADR

• Navigator^® International Equity/ADR is positioned with ~15% in emerging markets with the balance in developed economies and cash. Britain, China, Ireland, Japan, and Switzerland are the strategy’s largest country weights, all ranging between 8% and 21%.
• ADR’s exposure to China is now ~9.4% which is above its weighting in the All-Country World less US benchmark.
• Consumer Discretionary, Financials, Industrials, and Information Technology are our largest sector weights.
• During the month, to benefit from improving business fundamentals, the two most recent additions to the portfolio were a global professional services firm and a medical device company. The three most recent exits were an offshore drilling company, an Irish-American automotive technology supplier, and a Chinese multinational technology company.

Navigator^® Taxable Fixed Income

• As rates moved higher during the month, the portfolio added slightly longer 5 to 7-year bonds to increase the overall yield when possible. The proceeds from maturing bonds were also moved out to this portion of the curve.
• Higher-quality bank names were added as we believe they continue to show solid results and perform well.
• A natural gas company was also added to the portfolio as they continue to improve their balance sheet and overall credit quality. This was demonstrated by their upgrade from high yield to investment grade (BB+ to BBB- at S&P and Fitch, respectively).
• Our focus going forward will be to continue adding bonds in the 5-year portion of the curve while also buying names that are viewed as credits that will be improving throughout 2025.
• Maintaining some added liquidity to take advantage of the expected increase in volatility around the election and Federal Reserve meeting in November will also be a focus.

Navigator^® Tax-Free Fixed Income

• Inflows into muni funds were robust (+$3.3B as reported by Lipper). These flows helped offset the positive supply overhang as well as the above-average bids wanted volume.
• Forecasts call for reasonably heavy supply in late November and early December.
• Fortunately, the available cash for reinvestment should be higher and set the market up for a net negative supply scenario of -$16B going into the New Year (JPMorgan research).
• The coming month’s uncertainty and stubbornly higher rates have led us to take some longer duration off the table and redeploy in the 2 to 5-year area of the curve.

Clark Capital’s Top-Down, Quantitative Strategies

Last month, we said, “Polling suggests a very tight race that likely will come down to the wire. We expect some level of heightened election volatility. As long as credit trends remain resilient and supportive, which they have all year, we would view any volatility and associated market weakness as a buying opportunity and a pause that refreshes.”

Our primary credit risk management models have remained bullish on the markets and risk-on since 11/6/2023. As a result, our Fixed income Total Return strategy has remained invested in high yield and our Global Tactical strategy has remained invested in global equity. From 11/6/23 to 10/31/24, just shy of one year, the S&P 500 advanced 32.5%, the Russell 2000 Index advanced 28.2%, the MSCI ACWI ex-US Index advanced 18.2%, the Bloomberg US Corporate High Yield Index advanced 13.7%, and the Bloomberg 7-10 Year Treasury Index is up 7.2%. It has been a good period to remain fully invested as our models have done so.

Below are strategy updates from October:

Navigator^® Alternative

• As markets have rallied through the fall, the portfolio has taken gains in equities and precious metals, raising a bit of cash in anticipation of a tactical buying opportunity.
• Energy was a recent add to the portfolio, and in fixed income, the portfolio favors bank loans and aggressive credit like preferred credit and convertible ETFs.

Navigator^® Fixed Income Total Return (MultiStrategy Fixed Income)

• Our credit model will soon reach one year of being risk-on, and spreads have moved near historically low levels — levels at which they can remain near for a number of years.
• High yield, and credit broadly, stands out as the winner over both Treasuries and cash, with very little weakness indicated in our models.

Navigator^® Global Risk Management

• Our credit-based models maintain their strong risk-on stance, and we expect that to continue for the foreseeable future.
• Cash is favored over Treasuries if we were to turn defensive. Greater market participation by small-caps and international equities further underscores the positive risk environment.

Navigator^® Global Tactical

• Our credit-based models indicate that one year after buying equities, the fundamental risk backdrop remains attractive.
• Credit ranks very strong, particularly against Treasuries and cash. We find broader U.S. equity market leadership encouraging, as market gains are less dependent on a few mega-cap names.

Navigator^® Sector Opportunity

• Markets do not have a clear and outstanding segment of sector leadership. Financials, Utilities, and Industrials continue to be our largest overweights. Though they remain near relative highs, they are no longer surging ahead.
• Energy, Consumer Staples, and Healthcare are weakest in our rankings and are to be avoided.

Navigator^® Style Opportunity (MultiStrategy Equity)

• The portfolio favors large-caps, and as market leadership has expanded, our exposure has become more diversified.
• Currently, we overweight growth vs. value, but ETFs with more concentration rank lower on our list.
• Mid-caps and small-caps, particularly on the growth side, rank lowest.

Navigator^® U.S. Strategic Beta

• The portfolio remains neutral with regard to value vs. growth and has a modest defensive tilt heading into the election.
• We continue to look for an opportunity to add to growth, mid-caps, and small-caps upon a market correction, but sentiment remains too optimistic for that to happen.