Summary
- Market Overview: The S&P 500 rose +4.28% in Q2 to new highs, while small- and mid-caps declined as economic data weakened and rate-cut expectations moved out.
- Index Concentration: Large-cap concentration intensified, with the top 10 stocks representing over one-third of the S&P 500—levels not seen in 25 years.
- Sector Leadership: Only Technology, Communication Services, and Utilities outperformed, while cyclical sectors such as Materials, Industrials, and Energy lagged.
- Performance: The Johnson Equity Income Composite returned -0.30% net, trailing the S&P 500.
- Attribution: Underweights in Technology and Communication Services and overweights in Financials and Energy weighed on results, partially offset by underweights in Materials and Consumer Discretionary.
- Stock Selection: Mega-cap tech names were notable detractors, while holdings in semiconductors, IT infrastructure, Communication Services, and Energy contributed positively.
- Outlook: With historic index concentration and signs of economic slowing, the strategy remains focused on diversification, quality, and bottom-up discipline to navigate potential volatility across the market cycle.
Video Transcript
Hello, I’m Charles Rinehart, Chief Investment Officer at Johnson Asset Management.
The S&P 500 increased +4.28% during the second quarter, marking an all-time high for the index.
Despite this strength, the Russell 2000 and Russell Mid Cap indices declined during the quarter as economic data weakened and expectations of rate cuts moved outward.
Index concentration remained the key theme among large-caps, with the 10 largest stocks in the S&P 500 accounting for greater than a third of the index at quarter end, the highest over the last 25 years.
The concentration of returns could also be seen in sector performance, as the only sectors in the S&P 500 to outperform were Technology (+13.81%), Communication Services (+9.37%), and Utilities (+4.66%).
Although the Utilities sector was a new addition to the top performers this quarter, the sector benefited from the same Artificial Intelligence-driven sentiment that has propelled the Technology and Communication sectors since the start of 2023.
The worst performing sectors were more cyclical, which included Materials (-4.50%), Industrials (-2.90%), and Energy (-2.42%).
The Johnson Equity Income Composite posted a return of -0.30%, net of fees, trailing the aforementioned +4.28% return of the S&P 500 index.
Both sector allocation and security selection negatively impacted the composite’s relative performance during the quarter.
The composite was meaningfully underweight both Technology and Communication Services, which were among the top performing sectors as mentioned above. Overweight positions in Financials and Energy were also a drag to relative performance.
This was partially offset by underweight positions in Materials and Consumer Discretionary.
The impact from security selection was most pronounced in the Technology sector, with NVIDIA and Apple representing the largest drags to relative performance.
Estee Lauder was also a notable detractor within Consumer Staples following a lowered guidance and weakness in China.
Zimmer and Nordson negatively contributed to their sectors as well following skepticism around management’s long-term earnings target and light revenue guidance, respectively.
Concurrently, the composite benefitted from standout performers.
Technology holdings Taiwan Semiconductor and Analog Devices were positive contributors following a strong start for the semiconductor industry in the first half of the year.
Amphenol also performed strongly on expectations of a robust ramp in the IT and Datacom business from increased datacenter connections.
Alphabet was also a top contributor for the composite on better-than-expected advertising and Google Cloud results, in addition to a surprise dividend.
Finally, bullish commentary from Williams’ management team regarding both the near-term and long-term opportunities for increased natural gas volume demand helped the stock outperform the Energy sector during the quarter.
As the S&P500 experiences historical levels of concentration, risks of disappointment are heighted at the index level.
Any disappointment among the largest stocks is likely to have a significant impact on index returns.
Diversification is critical in these periods.
While the jury is still out, economic data has been weakening as the economy digests the lagged effects of the Fed’s tightening cycle.
Our discipline is well positioned if the market’s current optimism proves overly exuberant.
We will maintain our bottom-up, diversified, quality discipline with the goal of providing positive shareholder value over the entire market cycle.
Published 07/23/2024
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.
