Clark Capital’s Bottom-Up, Fundamental Strategies

Second quarter earnings have supported the market rally and broader market participation since May. The Dow Jones Industrial Average had its longest winning streak since 1987, moving higher for 13 consecutive days.

The S&P 500 Index’s second quarter earnings projections were cut significantly ahead of the reporting season providing support for the market. So far, 83% of U.S. companies reporting have beaten earnings estimates. On a sector basis, much of the earnings strength has been in Consumer Discretionary and Technology, which have outperformed this year.

The Federal Reserve restarted the hiking cycle after pausing in June, hiking 0.25% at the July FOMC meeting. They remained data dependent on the pace and number of hikes moving forward. Treasury yields have crept higher into the top end of their recent range with the 10-year Treasury hovering around 4.0%.

During July, municipal bonds outperformed most fixed income indices, including the Bloomberg U.S. Aggregate Index and the U.S. Treasury Index. Looking ahead, August is typically seasonally positive for municipal bonds with reinvestment from July’s called and matured bonds normally providing a strong demand tailwind.

Below are strategy updates from July:

All Cap Core U.S. Equity

• Navigator® All Cap is fully invested with approximately 67.6% in large-cap stocks and the remainder in mid/small-cap companies and cash.
• During the month, to benefit from improving business fundamentals, we added a composite materials company and a multinational pharmaceutical company. We exited our position in a consumer goods packaging manufacturer.
• Albeit underweight to the benchmark, Information Technology remains the largest sector weight in the strategy at 22.9%.

High Dividend Equity

• Large-cap companies represent 91.2% of the portfolio, 7.0% is in mid-cap, and the remainder is in cash.
• Financials represent the largest sector weight at 20.5%, which is below the benchmark weight 20.7%. The next three largest sector weights are Healthcare, Industrials, and Information Technology at 15.6%, 12.5%, and 11.0%, respectively.
• On a relative basis, our positioning in Consumer Discretionary and Consumer Staples helped relative performance while Financials and Energy underperformed.

International Equity ADR

• Navigator® International Equity/ADR is positioned with 12.3% in emerging markets with the balance in developed economies and cash. Britain, France, Japan, and Switzerland are the strategy’s largest country weights, all ranging between 8% and 13%.
• During the month, to benefit from improving business fundamentals, we added a Chinese multinational technology and entertainment conglomerate to the portfolio. The three most recent exits were a Chinese internet company, a Canadian bank, and a Canadian freight railway company.
• The strategy’s exposure to China is now ~6.1% and below its ~7.8% weighting in the All-Country World less U.S. benchmark.
• Consumer Discretionary, Financials, Healthcare, Industrials, and Information Technology are our largest sector weights.

Taxable Fixed Income

• Within the portfolio, the focus was on taking advantage of moves in credit spreads to rotate out of companies that had outperformed the overall market and into names that had lagged, but reported solid earnings and had a positive outlook toward next year’s earnings.
• During the month, we sold a multinational Technology company and two regional bank holdings. On the buy side, we added a Telecommunications company.
• The other theme in the portfolio was to move into bonds that mature in 2029-2031 as this portion of the yield curve has underperformed. These bonds are cheaper than longer bonds and do not sacrifice yield.

Tax-Free Fixed Income

• As an asset class, municipal bonds outperformed most fixed income indices, including the U.S. Aggregate Index and U.S. Treasury Index.
• Tax-exempt issuance for the month was steady compared to the prior month. Flow as reported by the Investment Company Institute (ICI), turned positive, with investors depositing over $540 million into the municipal bond asset class during July (as of 07/19/2023).
• During the spring, we started investing excess cash, taking advantage of seasonal market weakness, not only to benefit from higher rates, but to also negotiate better coupons.
• More recently, we’ve selectively added to credits in sectors that we believe have strong upgrade potential and away from those that we view as troubled credits with higher downgrade risk.

Clark Capital’s Top-Down, Quantitative Strategies

The march higher for the market has been relentless with the S&P 500 hitting new bull market highs in July, albeit still about 5% below its all-time high. Second quarter GDP surprised to the upside, with the economy expanding at a 2.4% annualized growth rate. Recent data on the overall economy, and particularly the labor market, has eased fears over a hard landing. A resilient economy, strong labor market, declining inflation, and rising stocks… it sounds like Goldilocks!

Our tactical portfolios remain fully invested in risk-on vehicles and are allocated to high yield and global equity; in addition, they are overweight growth versus value.Credit has performed well even as Treasuries have declined. The benign credit environment has been supportive of risk assets. However, seasonality is now likely to provide a modest headwind as we enter the weakest seasonal period of the year.

Below are strategy updates from July:

Alternative

•  The portfolio has been reducing risk slowly as markets have advanced, selling growth stocks and establishing positions in short-term fixed income, gold, and silver miners.
• We expect to add to precious metals in the coming months, and eventually would like to re-enter equity positions after a potential correction.

Fixed Income Total Return

• High yield credit spreads have slowly and steadily contracted, hitting the their lowest levels since April 2022, indicating a robust demand for high yield corporates. That demand has been magnified by limited issuance.
• Our models continue to favor a risk-on position in high yield, which should continue for the foreseeable future.

Global Tactical

• Our credit-based models indicate a solid underlying economic backdrop that is driving 2023’s equity rally.
• Our risk-on positions are backed by our model indications. We have moved to neutral with regard to international equity versus U.S. equity.

Sector Opportunity

• Favored sectors include Industrials, Discretionary, and Technology, but we have been reducing our Technology bias.
• We recently added regional banks to the portfolio, which represents our first foray into the value area in many months. Defensive sectors including Utilities, Healthcare, and Staples are least favored in our rankings.

Style Opportunity

• Our style and factor-driven models have been stable, favoring mega-cap growth names via the NASDAQ 100 and Russell Top 200 Growth.
• The S&P 500 itself continues to rank highly and is well represented in our models.
• Small-cap performance has improved since June, but the trend strength has not been impressive enough to drive them higher in our rankings.

U.S. Strategic Beta

• The portfolio had been overweight growth for much of 2023, but trades in early July shifted to a modest value bias, with a position in minimum volatility.
• Technical and seasonal indicators point towards a one to three month consolidation— a move that if it occurs, would present a buying opportunity for growth stocks.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.