Summary
- Market Overview: The S&P 500 rose +5.9% in Q3 to new highs, with market leadership rotating away from Technology toward Utilities and Real Estate.
- Style Shift: Value outperformed growth, and small- and mid-cap stocks outperformed large-cap, reflecting broader market participation.
- Sector Breadth: 8 of 11 sectors outperformed the index; Energy, Communication Services, and Technology were the weakest performers.
- Performance: The Johnson Equity Income Composite returned +6.6% net, outperforming the S&P 500.
- Sector Allocation: Underweights in Technology and Communication Services and overweights in Utilities and Financials drove relative outperformance, partially offset by a Real Estate underweight and Energy overweight.
- Stock Selection: Results were mixed as mega-cap tech performance diverged, with benefits from strong company execution across several holdings.
- Outlook: With Fed policy shifting toward employment and benchmark concentration remaining elevated, the strategy continues to emphasize diversification, quality, and bottom-up discipline across market cycles.
Video Transcript
The S&P 500 increased +5.9% during the third quarter, marking an-all time high for the index.
In a meaningful reversal, leadership by Technology and Communication Services faded and Utilities and Real Estate, both up over 17%, took the reins during the quarter.
This reversal was also seen at a style and size level, with value outperforming growth and small and mid-cap outperforming large-cap.
Sector participation was far broader this quarter, with 8 out of the 11 sectors outperforming the index versus 3 in the prior quarter.
The worst performing sectors were Energy (-2.3%), Communication Services (+1.7%), and Technology (+1.6%).
The Johson Equity Income Composite posted a return of 6.6%, net of fees, beating the aforementioned +5.9% return of the S&P 500 index.
Sector allocation was the largest contributor to relative performance as the composite was meaningfully underweight Technology and Communication Services, which were among the worst performing sectors.
Overweight positions in Utilities and Financials were also beneficial to relative performance.
This was partially offset by a Real Estate underweight and Energy overweight, with the latter being the only sector to decline during the quarter.
Security selection impacts were mixed, as the performance of the formerly lock-step Mag 7 has started to differentiate meaningfully.
The portfolio benefited from good underlying portfolio company execution in several sectors, with mixed impacts from AI exposed companies – both those we own and several large benchmark positions we do not.
The shift in market leadership accompanied a transition in the focus of the Federal reserve from inflation to employment, leading to the Fed’s 50bps rate cut decision during the quarter.
While rates remain elevated, the move by the Fed indicates a commitment to supporting growth and should benefitnames outside the mega-cap group.
The large impact to the benchmark from relatively modest intra-quarter declines in several mega-cap stocks highlight the risks of the highly concentrated benchmark construction we witness today.
Diversification is critical in these periods.
We will maintain our bottom-up, diversified, quality discipline with the goal of providing positive shareholder value over the entire market cycle.
Published 10/22/2024
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 September 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.
