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April 2024

Core Equity: Increasing Cyclical Exposure in Response to Improved Economic Outlook

Amy Chen Director

Key Points

  • Continue to focus on beneficiaries of key Digital Revolution theme.
  • Proactive steps taken increase quality and upside return potential.

Since last fall, our confidence in the outlook for the U.S. economy has improved, as a resilient consumer and prospects for a normalization of monetary policy materially lower recession risk. Given this backdrop, the outlook for corporate profit growth has improved as well, and we have been methodically lowering our defensive tilt in core equity portfolios while increasing our exposure to stocks that would benefit from prospects of better and more sustained economic growth. We have also narrowed our focus on stocks in our digital revolution theme to those that are best positioned for spending on artificial intelligence.

The nonstop upward momentum in the equity markets from the October lows continued over the first quarter, with the S&P 500 rising 10.5%. Our Core Equity Strategy increased 8%, net of fees, while our Aggressive Core Strategy increased 9.6%, net of fees. As we exited Q1, our largest industry group overweights were in Financial Services +3.5% and Semiconductors +2.1%, and our largest underweights were Tech Hardware -2.7% and Health Care Equipment and services -1.9%. Performance lagged in the Core strategy as a result of negative stock selection in semiconductors, healthcare and pharmaceutical stocks that more than offset outperformance in Capital Goods, Financial Services and Consumer Staples.


Chart 1: CNR Core Equity Strategy
Defensive vs. Cyclical Tilt

Source: FactSet, CNR Research, as of March 2024.
Information is subject to change and is not a guarantee of future results. 

In addition to increasing cyclical exposure in strategies, we have taken proactive steps to lower our tracking error, raise our quality rank and increase the upside potential of the portfolio by either taking profits in stocks that did very well in 2023 or selling stocks with fundamental disappointments. We are optimistic these adjustments will enhance the return potential of the strategy on both an absolute and relative basis.

Chart 2: Quality Rank

Source: FactSet, CNR Research, as of March 2024.
Information is subject to change and is not a guarantee of future results. Indices are unmanaged, and one cannot invest directly in an index.

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