Summary
- Market Overview: Q2 gains in large caps were driven by a narrow group of mega-cap tech stocks, while most small and mid-cap stocks declined.
- Sector Trends: Ten of eleven Russell 2500 sectors fell, with Utilities the lone gainer, supported by AI-related data center demand.
- Market Pressure: Delayed rate-cut expectations and uncertain economic data weighed on SMID Caps, with Consumer Discretionary, Materials, and Industrials leading declines.
- Performance: The SMID Cap Core Strategy returned -4.75% net, modestly underperforming the Russell 2500’s -4.27% return.
- Attribution: Weakness in several holdings—particularly in Health Care—weighed on performance, partially offset by select growth and defensive names.
- Outlook & Positioning: The strategy continues to outperform over longer time horizons and remains focused on quality investing, while selectively evaluating attractively valued Small Cap opportunities that meet strict quality criteria.
Video Transcript
Hello, I am Brian Kute, Senior Portfolio Manager for Johnson Asset Management, with a brief quarterly update for our SMID Cap Core strategy.
While a concentrated group of mega cap technology stocks helped drive the large cap S&P 500 Index to all-time highs in the 2nd quarter, most small and midcap stocks declined.
In fact, ten of the eleven sectors in the Russell 2500 Index fell – only the Utilities sector was able to muster any gains, driven by AI-related demand for data center power.
The broad weakness within small and midcap stocks was in response to delayed hopes for interest rate cuts and uncertain trends in economic data.
And the worst-performing sectors in the quarter were cyclical ones—Consumer Discretionary, Materials, and Industrials.
The SMID Cap Core strategy posted a net return of -4.75%, underperforming the Russell 2500 Index's -4.27%.
Several stocks in the portfolio fell 20% or more in the quarter.
Four of the ten worst contributors were in Health Care, a sector that continues to work through a bumpy growth path following the COVID pandemic disruption.
Mostly offsetting the disappointments, though, were high-performing growth stocks that continued to execute ahead of earnings expectations as well as more defensive stocks positioned well to outperform if macro conditions worsen.
The SMID Cap Core strategy, focused on quality investing, continues to outperform its Russell 2500 benchmark, net of fees, over longer periods, including year-to-date, one-year, three-years, five-years, and ten-years.
Over its history, the team has found more appealing quality stocks in the midcap area, but a valuation cheapness has built up in small cap relative to its larger cohorts that could be unlocked if the market’s risk appetite increases in a pro-cyclical rally.
While an early cycle rally is not our base case, the team has been considering more small cap companies with valuation appeal, which could benefit more in such a recovery as relative growth and valuation improve.
Of course, these opportunities will only be pursued if such companies also meet our high quality evaluation criteria.
We thank you for your interest in our strategy and I am happy to provide more detail if needed.
Published 07/22/2024
Johnson Asset Management (JAM) is a division of Johnson Investment Counsel, Inc. (“JIC”), an independent and privately owned Midwestern based investment advisory firm registered with the Securities and Exchange Commission. Johnson Asset Management manages institutional separate account portfolios for a variety of for-profit and nonprofit organizations, public agencies, public and private retirement plans, and personal trusts of all sizes. It may also serve as sub-adviser for mutual funds. JIC’s fees are available upon request and may be found in our Form ADV Part 2A. Performance data quoted herein represents past performance. Past performance does not guarantee or indicate future results. All data is current as of June 30, 2024 unless otherwise noted. Returns and net asset value will fluctuate. To determine if this strategy is appropriate for you, carefully consider the investment objectives, risk factors, and expenses before investing. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing JIC’s strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by any Bank or any Bank affiliate, and MAY lose value, including possible loss of principal. Johnson Asset Management claims compliance with the Global Investment Performance Standards. The Institutional Core composite includes all fee paying, fully discretionary, actively managed institutional fixed income portfolios with a minimum value of $500,000 and an investment objective of broad investment grade, taxable fixed income, benchmarked against the Bloomberg U.S. Aggregate Index. The US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market.
JAM’s policies for valuing portfolios, calculating performance and preparing compliant presentations, as well as a complete list of composite descriptions are available upon request. Please contact our office at 513.389.2770 or 3777 West Fork Road, Cincinnati, OH 45247. All returns reflect the reinvestment of investment income (dividends and/or interest) and capital gains. Valuations and returns are stated in U.S. dollars. Trade date accounting is used. Portfolio returns are calculated using time weighed return methodology on a monthly basis. Net returns shown reflect gross performance less the highest fee schedule for this strategy. Actual client returns would also be reduced by brokerage commissions, custodial fees, and other client paid expenses detailed in JIC’s Form ADV Part 2A.
