Commentaries

Global Growth

For the Period Ending: 9/30/2018

Portfolio Manager:
Sarah C. Ross, CFA

Market Update

Global equity markets rose a strong 5% in the third quarter. In a continuation of recent trends, developed markets significantly outperformed emerging markets in the period, with the U.S. being a standout driver of returns.

China was a significant underperformer in the period, hard hit by a slowing economy and the addition of new U.S. tariffs targeting Chinese imports. With the exception of Brazil and Mexico, which saw equity markets rebound in the quarter, it was a generally tough period for emerging-market equities and currencies. In developed markets, Europe and Japan both underperformed the U.S. in the period.

On a sector basis, health care and information technology were large outperformers, both posting double-digit returns in the quarter. Materials, financials and consumer staples underperformed.

Portfolio Review

During the quarter, the Portfolio outperformed the benchmark driven primarily by sector allocation and performance in U.S. holdings. The Portfolio’s overweight allocation to information technology and underweight to materials as well as real estate benefited performance in the period. Stock selection was a modest drag to performance, with weak stock selection in consumer staples, communication services and information technology only partially offset by positive selection in industrials, consumer discretionary and health care.

During the period, we continued to reduce the Portfolio’s exposure to emerging-market equities following a significant reduction in Chinese exposure in the second quarter. Concerns around not only the U.S. and China trade war, but also emerging-market currencies and possible demand destruction on slowing emerging-market growth, drove the further reduction. We have reallocated capital to more defensive holdings with less cyclicality around earnings and cash flow streams. We also reduced exposure to our more cyclical information technology holdings.

Outlook

U.S. economic growth remains solid with particularly strong labor markets. High employment is likely to have positive impacts on wage inflation going forward.

However, despite the strong U.S. gross domestic product growth environment, there are a number of factors that temper our view both in the U.S. and globally. The rise in nationalism driving more protectionist trade policies could be a sign of peaking margins. Increased costs in the form of duplicative manufacturing facilities and higher capital expenditure risks, lower margins and returns on capital over time. It is still early in terms of assessing longer-term implications, but we believe it is unlikely the trade disputes are quickly resolved.

We have been proactively reducing our exposure to firms we believe are most at risk to dislocations as a result of these trends. We are adding to positions in health care where we are now overweight, while substantially reducing the overweight in information technology that we have had in the portfolio for the last couple of years.

The opinions expressed are those of the portfolio manager(s) and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018 and are subject to change due to market conditions or other factors. Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted.
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Investment Team

Sarah C. Ross, CFA

Senior Vice President, Portfolio Manager

Ms. Ross is portfolio manager for the firm’s Global Growth investment style. She was appointed portfolio manager of the firm’s International Growth style (later broadened to a Global Growth style) in 2014. From 2006 to 2014 she was a member of the firm’s Large Cap Growth team as an assistant portfolio manager. She had been portfolio manager of the firm’s Tax-Managed Equity mutual funds from 2009 to 2014. She joined the firm in 2003 as an investment analyst, covering the health care sector.

Prior to joining the organization, Ms. Ross was a senior health care analyst and vice president for Banc of America Capital Management from 2001 to 2003. From 1995 to 2001 she was with Edward Jones, during which time she was a senior health care analyst and limited partner.

Ms. Ross earned both a BS in Business Administration and a BA in French in 1995 from John M. Olin School of Business, Washington University, St. Louis, MO.

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