Diversification and Defensive Positioning

Asset Management, Companies and Industries, Investment Themes, The Economy April 21, 2023

Diversification and Defensive Positioning

Nelson Capital had a busy quarter as we made several changes to our portfolio. We trimmed positions in Verizon (tkr: VZ) and Comcast (tkr: CMCSA) to bring our large overweight to the Communication Services sector down to a market weight.  

In the Healthcare sector, we sold Zoetis (tkr: ZTS), a leading animal pharmaceutical company serving both production animals and pets. It was a great holding for us since we bought it in October 2018, boasting a total return of ~87% over our holding period. However, as Zoetis’ stock valuation crept higher, we decided to exit the position, especially as future growth prospects diminished. We used the proceeds to purchase Abbvie (tkr: ABBV) which has several interesting drugs in its pipeline, pays a high dividend yield of 3.6% and boasts a cheap valuation. Previously, we had concerns over the company’s reliance on Humira, a drug used to treat autoimmune arthritis, psoriasis, and Crohn’s disease, to drive their revenues and profits. Humira is also coming off patent in 2023 in the US, opening it up for competition from other generic biosimilar drugs. However, the company has released two additional immune modulation drugs over the past couple years, Skyrizi and Rinvoq. These drugs have the potential to not only replace the revenue lost from Humira coming off patent, but also drive long term revenue and profit growth.  

In the Industrials sector, we sold our position in Trane Technologies (tkr: TT), locking in the gain we had in the position. Trane’s total return was 55%, over double that of the S&P 500 during our holding period. Additionally, we trimmed our position in Masco (tkr: MAS) alongside softening in the housing market and slowing repair and remodel demand due to higher interest rates. We also implemented a core-satellite approach by retaining companies that we have conviction in while leveraging diverse exposure to the sector through the purchase of The Industrial Select Sector SPDR Fund (tkr: XLI). This sector exchange-traded fund (ETF) has an expense ratio of just 0.10% and will enable us to benefit from more broad exposure across the sector.  

Given the uncertainty in specific areas of the real estate market, we sought more diverse industry exposure in the sector through the purchase of The Real Estate Select Sector SPDR Fund (tkr: XLRE). XLRE gives us the wider industry exposure we sought, especially as recent Global Industry Classification Standard (GICS) changes provided greater granularity in the classification of Real Estate Investment Trusts (REITs). We sold our position in Equity Residential (tkr: EQR) as technology sector layoffs disproportionately impacted Equity Residentials’ target markets. We also sold our position in Digital Realty (tkr: DLR) due to concerns over enterprise customers cutting costs and limiting their IT spending. Furthermore, many of its customers are unprofitable tech companies which have been disproportionately impacted by higher interest rates and tightening lending standards.  

In the Financials sector, we trimmed our overweight in Charles Schwab (tkr: SCHW) as the banking turmoil has caused ripples throughout the sector. Our concerns about Schwab mainly lie in the uncertainty over future revenue stream as people move cash balances into US Treasurys and money market funds. Zero trade commissions became the norm in October 2019, resulting in a loss in trading revenue, though payments for order flow helped retain profitability. As regulators crack down on payment for order flow, Schwab could see its trading revenue further dwindle and may be forced to bring back some sort of account fee or trade commissions to generate revenue. Additionally, the company has large unrealized losses on its balance sheet, although the company said that even if all its depositors withdrew their funds, they would not have to sell any of their investment portfolio. While Schwab reevaluates its future revenue streams and the banking system works to restabilize, we reduced our exposure to the company.  

Nelson Capital continues to implement changes to diversify our industry exposure within the sectors, making our portfolio more defensive against this challenging macroeconomic environment.


Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

Receive our next post in your inbox.

More from the Blog

What Could Go Wrong? Presentation

Read More