Actively managed portfolio aiming to achieve a dividend yield that exceeds the average dividend yield of the companies included in the Russell 1000® Value index.
- Markets bounced back in March after retreating in February, finishing off a mostly positive quarter. The banking crisis triggered fears of a global banking contagion which caused a flight to safety, with mega cap stocks leading the overall market for the quarter.
- For the quarter ended March 31, 2023, the Strategy outperformed the Russell 1000 Value Index (the Index) on net asset value (NAV) basis, due to stock selection and allocation effects. The selection in health care, consumer discretionary and financials sectors contributed the most to performance. A favorable allocation to communication services also added value. Conversely, selection in the communication services, consumer staples and material sectors detracted from performance.
- Although the US Federal Reserve hiked another quarter point in March, the market seems to be weighing if that could be the final rate hike of the year. The unprecedented rise in yields over the last year contributed to the recent bank failures, making a soft landing less likely, and increasing the likelihood of a recession.
The financial markets were positive in the first quarter, but volatile as concerns with inflation and interest rates tugged asset prices up and down. At its first 2023 policy meeting, the Federal Reserve raised interest rates by 25 basis points (bp), driving market rates higher while pulling down bond prices and crimping the values of rate-sensitive technology stocks. Market focus shifted dramatically in March as the sudden failure of several US regional banks and the collapse of Credit Suisse shook the banking sector. Markets regrouped after the government intervened to protect depositors. The Fed, seeking to avoid further “accidents” tied to higher rates, took a restrained step and increased the Fed funds rate by just another 25 bp at its March policy meeting.
The 10-year US Treasury yield fell from nearly 3.9% in early January to less than 3.5% by quarter-end. Falling rates helped both stocks and bonds. The S&P 500 Index gained 7.50% and the Bloomberg US Aggregate Bond Index gained 2.96%. Easing rates also gave growth stocks an advantage over value stocks ― across the capitalization spectrum, growth styles posted gains significantly greater than those of value styles.
For the quarter ended March 31, 2023, the Strategy outperformed the Index due to stock selection and allocation effects. The health care, consumer discretionary and financials sectors contributed the most to performance. A favorable allocation to communication services also added value.
Owning a non-benchmark position in Broadcom Inc. (AVGO) and not owning positions in Pfizer Inc. (PFE) and Johnson & Johnson (JNJ) added the most to performance.
Owning a non-benchmark position in Broadcom Inc. (AVGO) contributed to performance. The company reported strong results and increased guidance in what remains an uncertain environment. AVGO indicated that it was seeing a small number of pushouts but remains booked for fiscal year 2023.
Not owning a position in Pfizer Inc. (PFE) contributed to performance. PFE reported solid results during the period but guidance was light. Newly issued 2023 sales and earnings guidance were both well below expectations due to lower Covid revenues and higher operational expense.
Not owning Johnson & Johnson (JNJ) contributed to performance. The company reported underwhelming quarterly results, with both MedTech and pharmaceutical sales coming in below consensus estimates. JNJ has also been in the midst of a legal battle alleging that its talc products caused cancer.
Conversely, the communication services, consumer staples and material sectors detracted from performance.
Not owning a position in Meta Platforms Inc., and overweight positions in Truist Financial Corp. and ConocoPhillips were the biggest individual detractors.
Not owning a position in Meta Platforms Inc. (META) detracted from performance. After a tough year for the company in 2022, META announced solid quarterly results to start the year. Management iterated a focus on cost cutting efforts and efficiency as a focus for 2023. They recently announced in an 8-K that they are restructuring plans focused on flattening its organizational structure, canceling lower priority projects, and reducing headcounts in an effort to increase efficiencies and bring costs down.
An overweight position in Truist Financial Corp (TFC) detracted from performance. The company reported earnings that were in-line with expectations during the period. Higher than expected credit losses were partially offset by stronger than expected noninterest income. However, the banking crisis weighed heavily on financial sector with a broad sell-off during the period with uncertainty and volatility.
Current Strategy and Outlook
Strains in parts of the financial system have prompted the Fed to trim its tightening plans. We believe quick action by regulators has largely addressed concerns of systemic risk in the banking system. In our view, bank balance sheets are healthy, and the lack of fundamental consumer and corporate imbalances should limit the severity of any sort of economic downturn that may materialize.
The long game still needs to play out: a higher cost of capital for banks will raise borrowing costs for companies and consumers, increasing the potential for a longer but still shallow recession. Since the challenges to the banking system are likely to be disinflationary, further Fed rate hikes may not be necessary. The focus now shifts to when the Fed might begin lowering rates. For that to happen, we believe labor markets and economic growth would need to weaken substantially — and that is not happening yet. Employment data remain vibrant despite an uptick in the unemployment rate, and the economy has remained remarkably resilient, supported by strong consumer spending.
Companies mentioned in this report – percentage of Strategy investments, as of 03/31/23: Broadcom Inc. 0%, Pfizer Inc. 0%, Johnson & Johnson 0%, Meta Platforms Inc. 0%, Truist Financial Corp 2.11%, and ConocoPhillips 1.71%. 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.