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February 2023

Staying Focused on True North

Key Points

  • Remaining cautious near term but expecting more positive returns in 2023
  • Continuing to focus on quality US stocks
  • Portfolio positioned with blend of defensive and offensive stocks

As 2022 unfolded and recession risk rose, our strategic thinking shifted to Higher for Longer and we proactively lowered our exposure to cyclical companies and industries most at risk from an economic downturn.

Conversely, we increased our exposures to industries that are more steady and stable growers. Exiting 2022, we increased our exposure to consumer staples and health care services companies. While spending by consumers in these areas can fluctuate during recessions, spending on everyday necessities and caring for one’s health tend to be less cyclical and more durable. We have also lowered our exposure to more cyclically oriented sectors such as energy, materials, industrials and technology that would face earnings challenges in a recession.

When it comes to stocks, we believe it is vitally important to keep our compass pointed to True North, if you will. Our focus remains on holding high-quality companies with strong management teams and durable franchises that are selling at reasonable prices. We seek to own stocks that have the right blend of defense to manage their way successfully through a recession, and offense to outperform over a multiyear time period when the recession ends.

Given this, we believe our defensive repositioning last year will help us weather the downward earning revisions that are likely to unfold in the months ahead for equities on a global basis. Using our proprietary CNR quality ranking system, we believe our US Core Equity portfolio has a superior weighted average positioning compared to the S&P 500 from both a revenue and earnings stability perspective. On the offense side of our playbook, we have a superior three to five year expected EPS growth rate and higher ROE compared to the S&P 500, which should serve us well when the economy rebounds.

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