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November 2023

Core Equity: Investing in Volatile Times

Key Points
  • Quarterly returns have been volatile this year.
  • Focused on quality.
  • Defensively positioned for mild recession.

2023 has proven to be a challenging year for successful equity investing. While the S&P 500 has returned 13.1%, the S&P 500 Equally Weighted Index has returned 1.8%, the S&P 400 has returned 4.3% and the Russell 2000 has returned 2.5% through September.

The pattern of quarterly returns has been volatile as well. Returns for the S&P 500 were 6.0% in Q1 and 10.3% in Q2. In Q3, the S&P 500 declined 3.3%, as concerns about Fed policy supporting our “higher for longer” thesis accompanied by a rise in yields was embraced by the market, negatively impacting equity returns. Our strategy modestly outperformed, narrowing the performance gap we experienced earlier this year. Should the two tech titans we didn’t own, NVDA and TSLA, have been excluded from the benchmark, our strategy would have outperformed year to date.

During Q3, strategy outperformance came from Industrials, where our stock selection in capital goods and transportation contributed positively. In Consumer Staples, our holdings in club warehouse and an Every Day Low Prices (EDLP) retailer benefited from late-cycle consumer value-seeking behaviors. In Financials, underweights in banks continued to serve us well. Underperforming sectors were Tech, particularly in semiconductors, and Utilities, as the sector was negatively affected by rates and concerns about growth potential for renewable projects.

A few portfolio adjustments were made to address recent events and take advantage of market dislocation. We established a new position in a leading energy company with expertise in offshore oil exploration and international markets. Within our Digital Revolution theme, we bought a cellular tower company that provides critical internet-related services after the stock declined 40% significantly from its peak. Additionally, we took profits in a few tech stocks that had appreciated and upside appeared limited, and added to other high-quality names in an effort to lower our tracking error. Following our Healthcare Innovators theme, we added a biopharma company with, in our view, a promising weight loss drug under development. To bolster our Clean Climate theme, we added a global leading EV maker. Lastly, we increased weights in what we believe is an undervalued stock in media and entertainment.

These changes resulted in a lower tracking error and what we believe is better return potential from individual stocks, while maintaining our quality emphasis, higher expected EPS growth and lower risk profile versus the benchmark. They also match up nicely with our lowered recession risk forecast, which together gives us confidence the portfolio is properly positioned for the long term.

Chart 1: Higher Quality, Lower Risk

Source: CNR Research, Bloomberg, Factset, October 2023.



Chart 2: Higher Expected EPS Growth

Source: CNR Research, Bloomberg, Factset, October 2023.

Information, including expected EPS, is subject to change and is not a guarantee of future results.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

City National Rochdale Proprietary Quality Ranking is the weighted average sum of securities held in the strategy versus the S&P 500 at the sector level using the below footnoted formula. City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings),15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).

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