Remaining Defensive

 
Asset Management, Companies and Industries, Investment Themes, The Economy October 17, 2023

Remaining Defensive

Nelson Capital remains diligent about investing in high quality companies with attractive valuations in defensive sectors.

We sold our position in US Bancorp (tkr: USB) over concerns it could experience further collateral damage from rising interest rates. Earlier this year, we saw three other regional banks fail from the same pressures. The March bank failures occurred primarily due to a duration mismatch on bank balance sheets. Over the preceding years, banks had loaded up on long-dated fixed income securities, and the Federal Reserve’s subsequent aggressive interest rate hike campaign resulted in huge unrealized losses on these banks’ balance sheets. Though these are not actual realized losses if the banks hold the securities to maturity, fears over bank’s liquidity sparked panic over regional banks’ liquidity. We opted to reinvest the proceeds from the sale of US Bancorp into JPMorgan Chase (tkr: JPM), which was a beneficiary of the flight to quality. As the largest financial institution in the U.S., JPMorgan’s scale and multiple revenue streams enable the bank to generate more revenue per risk-weighted asset than its smaller peers.

Further changes to the financial sector included adding to our position in Visa (tkr:V) and initiating a position in Chubb (tkr: CB). Visa maintains strong profit margins and dominant market share, while the resumption of travel has helped Visa earn higher margins with more cross-border transactions. Growth in digital payments is also benefitting Visa as it partners with new entrants to the payments industry rather than directly competing with them.  We also purchased a position in Chubb to gain diversified exposure to the insurance industry through a company with a low valuation, relatively high dividend relative to its peers, and double-digit profit margins. Insurance costs are generally seen as a non-discretionary expense, especially for commercial clients, given that customers typically pay their premiums even when economic conditions deteriorate. Although Chubb is exposed to catastrophe losses stemming from wildfires, hurricanes and other natural disasters, these may be a potential benefit, as insurers can often raise premiums in the wake of these catastrophes. Regardless, Chubb is limiting its coverage to high-risk regions to minimize catastrophe losses, a move we find to be prudent.

Within the technology sector, we purchased TE Connectivity (tkr: TEL) to gain exposure to the electrical equipment industry and add to our technology allocation at a reasonable valuation with a strong growth opportunity. TE Connectivity is a leading global technology company specializing in the design and manufacturing of a wide range of connectivity and sensor solutions. Its products are often used in mission-critical applications and therefore customer relationships tend to be very sticky as switching costs are high. TE Connectivity offers solutions across multiple industries and its diverse end markets and geographic exposure enable the company to have less cyclicality in its results. The company’s financial results tend to be more resilient than other technology companies as its diverse end markets and geographic exposure increase stability. Reindustrialization, automation, and electrification are key growth drivers over the coming years.

Lastly, in our international exposure, we sold a portion of the Vanguard Emerging Markets ETF (tkr: VWO) and initiated a position in the iShares MSCI Emerging Markets ex China ETF (tkr: EMXC), reducing our exposure to China amidst the country’s significant economic headwinds. Long-term demographic issues, a crisis in the property sector, slowing growth, geopolitical tensions and lower foreign investment have the power to suppress the Chinese economy in both the near and distant future. Furthermore, the lack in transparency from the Chinese government sparks skepticism over the accuracy of any reported data.

 

 

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.

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