Summary
- Market Environment: SMID Cap returns were muted as a post-election rally faded into December profit-taking, with policy and rate uncertainty weighing on sentiment.
- Market Leadership: Technology led performance, with Financials and Energy also strong; lower-quality, higher-risk stocks outperformed as risk appetite increased.
- Performance: The SMID Cap Core Strategy returned -3.12% net, trailing the Russell 2500’s +0.62% gain, with most underperformance occurring during November’s risk rally.
- Style Headwinds: The strategy’s quality focus lagged in an environment favoring high-volatility stocks, with negative selection in Technology, Real Estate, and Materials.
- Positive Contributors: Financials added value, supported by a steepening yield curve and expectations for lighter regulation.
- Positioning & Outlook: The team reduced exposure to government-dependent businesses and added quality cyclicals. With SMID Cap valuations attractive versus large caps, the strategy remains focused on quality and long-term opportunity amid ongoing policy uncertainty.
Video Transcript
Hello, I am Brian Kute, Managing Director of Research and Senior Portfolio Manager.
Welcome to our SMID Cap Core Equity fourth-quarter 2024 review.
Returns for SMID Cap stocks were muted this quarter.
A November post-election rally gave way to December profit-taking, with the Russell 2500 Index dropping over 7%, its worst month of the year.
This decline reflected Federal Reserve guidance that dampened expectations for 2025 rate cuts.
Fiscal policy uncertainty also increased ahead of a new administration, with inflationary risks from potential tariff increases looming.
Technology stocks led the way as the top-performing sector, with Financials and Energy also benefiting from expectations of reduced regulatory pressures under a Trump presidency.
Lower-quality, high-risk stocks performed particularly well, as investors embraced risk during the quarter.
Our SMID Cap Core strategy posted a net return of -3.12% this quarter, underperforming the Russell 2500’s modest 0.62% gain.
Most of this underperformance occurred in November, when riskier stocks rallied after the election.
Our focus on quality investing worked against us in this environment, where lower-quality, high-volatility stocks led the charge.
While Technology was the top-performing index sector, negative security selection there and in sectors including Real Estate and Materials weighed on results.
In contrast, Financials was a bright spot, benefiting from a steepening yield curve and optimism for easier regulation.
Looking ahead, policy uncertainty remains elevated.
Rising bond yields pose a key risk, as they could pressure valuations for long-duration, low-yielding growth stocks and stress balance sheets for financially weaker companies.
Within the portfolio this quarter, we reduced exposure to companies heavily reliant on government contracts and added positions in quality cyclical stocks, reflecting the potential for economic recovery and improving corporate profits.
SMID Cap stocks now offer compelling valuations and faster earnings growth potential versus large caps.
Our focus on quality investing positions us to navigate the macro challenges while capitalizing on opportunities within the SMID Cap asset class.
Thank you for your interest. We look forward to updating you as we progress through 2025.
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.
