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.
Key Takeaways
- Markets are off to a good start to the year, as the underlying fundamental factors of the economy remain strong. Inflation is still above the U.S. Federal Reserve targeted mandate but has fallen sharply from its 2022 highs, and U.S. gross domestic product (GDP) has significantly outpaced that of other developed economies.
- For the quarter ended March 31, 2024, the Strategy outperformed the Russell 1000 Value Index (the Index) on net asset value (NAV) basis, due to strong stock selection. The health care, information technology and industrials sectors contributed the most to performance. Conversely, the selection in consumer staples, materials and communication services sectors detracted from performance.
- Markets have thus far shrugged off any uncertainty brought on by it being an election year, although it remains to be seen if that will continue. Artificial intelligence continues to be a catalyst for growth, and markets are anticipating rate cuts to begin before year-end, which is all good news for equities.
Portfolio Review
U.S. stocks enjoyed a strong first quarter as inflation’s downward trend continued and U.S. economic growth beat expectations. The S&P 500 Index reached a new high and advanced by 10.56% on a total return basis during the quarter and the Nasdaq Composite had a price return of 9.11%. The communication services, energy and information technology sectors led, while real estate and utilities lagged. Large-cap stocks outperformed small caps and growth beat value. The Federal Open Market Committee voted to hold interest rates steady for the fifth consecutive time at its March meeting; however, three rate cuts are still expected this year, with the first likely to happen in June.
U.S. bonds slipped during the quarter amid persistently tight credit spreads and a rising U.S. Treasury yield curve. The Bloomberg U.S. Aggregate Bond Index fell –0.78%. The 10-year U.S. Treasury yield rose from 3.95% in January to 4.20% by quarter end on early concerns that lingering high inflation could change the Fed’s rate cut plans; however, it remained essentially flat in March following favorable comments from Fed Chair Powell.
For the quarter ended March 31, 2024, the Strategy outperformed the Index due to favorable stock selection. The health care, information technology and industrials sectors contributed the most to performance.
At the individual stock level, overweight positions in Hartford Financial Services Group, Inc., Valero Energy Corp. and Saia, Inc. added the most to performance.
An overweight position in Hartford Financial Services Group, Inc. (HIG) contributed to performance. The company reported better-than-expected results during the period and management provided a strong 2024 outlook, including underwriting tailwinds that support a return on equity (ROE) floor of 15%.
An overweight position in Valero Energy Corp. (VLO) contributed to performance. The company reported strong earnings during the period, exceeding even the highest expectations, driven by outperformance across every business segment.
An overweight position in Saia, Inc. (SAIA) contributed to performance. The company reported another strong quarter with a big increase in shipments and relatively good cost control. Net capital expenditures are expected to double in 2024, setting the stage for continued growth.
Not owning a position in Berkshire Hathaway Inc. and overweight positions in Philip Morris International Inc. and Dropbox, Inc. were the biggest individual detractors.
Not owning Berkshire Hathaway Inc. B (BRK.B) detracted from performance. The property and casualty (P&C) stocks outperformed during the period due to lower catastrophe losses along with increased premiums industrywide.
An overweight position in Philip Morris International Inc. (PM) detracted from performance. The company reported strong earnings during the period, including over 8% organic revenue and operating income growth.
An overweight position in Dropbox, Inc. (DBX) detracted from performance as the company reported a challenging quarter and reset expectations. Ongoing economic challenges, strategic decisions and mixed execution led to declines in customer contract value and new customer additions.
Current Strategy and Outlook
The U.S. economy remains strong, with positive gains in payrolls and productivity. Consumer spending momentum appears soft but stable. Household net worth has increased significantly since the pandemic, but consumer confidence remains below long- term averages due to the lasting negative impact of higher prices on consumers’ psyches. The U.S. labor market remains robust but shows signs of softening. While inflation has fallen to more manageable levels, concerns about overheating persist. Interest rates may remain higher for longer than some participants expect.
The economic soft landing and easier financial conditions, coupled with anticipated rate cuts, should create favorable conditions for U.S. stocks. Although a lot of price appreciation has already taken place and a near-term pullback is possible, there is significant potential for further rally once the Fed starts cutting rates
Holdings Detail
Companies mentioned in this report – percentage of Strategy investments, as of 03/31/24: Hartford Financial Services Group, Inc. 1.69%, Valero Energy Corp. 1.02%, Saia, Inc. 0.79%, Berkshire Hathaway Inc. 0%, Philip Morris International Inc. 3.13% and Dropbox, Inc. 0.99%, 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.
Key Takeaways
Markets are off to a good start to the year, as the underlying fundamental factors of the economy remain strong. Inflation is still above the U.S. Federal Reserve targeted mandate but has fallen sharply from its 2022 highs, and U.S. gross domestic product (GDP) has significantly outpaced that of other developed economies.
For the quarter ended March 31, 2024, the Strategy outperformed the Russell 1000 Value Index (the Index) on net asset value (NAV) basis, due to strong stock selection. The health care, information technology and industrials sectors contributed the most to performance. Conversely, the selection in consumer staples, materials and communication services sectors detracted from performance.
Markets have thus far shrugged off any uncertainty brought on by it being an election year, although it remains to be seen if that will continue. Artificial intelligence continues to be a catalyst for growth, and markets are anticipating rate cuts to begin before year-end, which is all good news for equities.