Summary
- Market Overview: The S&P 500 gained +2.41% in Q4, reaching new highs, though performance was driven by a narrow group of mega-cap stocks.
- Sector Dispersion: Consumer Discretionary, Communication Services, and Financials led, while Materials and Health Care declined sharply; the average stock fell -1.9%.
- Performance: The Johnson Equity Income Composite returned -1.35% net, lagging the S&P 500.
- Primary Headwind: Underweights and diversified positioning in Technology and Consumer Discretionary drove most of the relative shortfall, accounting for 3.10% of the gap.
- Other Impacts: Positive contributions came from Energy, Materials, Financials, and Real Estate, while Industrials, Consumer Staples, Health Care, Communication Services, and Utilities detracted.
- Outlook: With index concentration and valuations elevated, the strategy remains focused on diversified, bottom-up, quality investing to protect capital across market cycles.
Video Transcript
Hello, I'm Charles Rinehart, Chief Investment Officer of Johnson Asset Management.
The S&P 500 increased 2.41% during the fourth quarter, reaching new all-time highs in December.
There was a significant dispersion in sector returns in the quarter.
Consumer discretion, communication services, and financials led the way, up 14.3%, up 8.9% and 7.1% respectively, while several sectors, notably materials and health care, declined meaningfully, down 12.4% and 10.3%.
Beneath the surface, the market showed a strong preference for mega-cap stocks.
The average stock in the index fell 1.9% in the quarter.
For the fourth quarter, the Johson Equity Income Composite posted a return of -1.35%, net of fees, lagging the aforementioned 2.41% return of the S&P 500 index.
The primary driver of the underperformance was the combination of the composite’s underweight allocation and more diversified security selection in technology and consumer discretion.
Those sectors are among the most impacted by the current concentrated nature of the index.
Fourth quarter returns in these sectors were driven by a handful of large, richly valued companies with low or no dividend yields.
In total, the composite’s relative positioning in technology and consumer discretion accounted for 3.10% of the total gap in performance vs. the benchmark in the quarter.
Outside of technology and consumer discretion, portfolio positioning had mixed effects.
The composite outperformed through combined allocation and selection effects in energy, materials, financials, and real estate; while underperforming in industrials, consumer staples, health care, communication services, and utilities.
Quarter-to-quarter relative performance continues to be dominated by the waxing and waning of mega-cap outperformance.
As a matter of discipline, the composite maintains a more diversified portfolio construction than the current iteration of the S&P 500.
There are indications of heightened risk in the index, indicated by valuations that are stretched by historical standards.
Diversification is critical to protecting shareholder capital 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 01/27/2025
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 wide 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.
