Against a backdrop of improving global growth, equity markets have rallied quite sharply this year, even as volatility remains low. But while there are reasons to think that the rally can continue, there are also heightened geopolitical risks and concerns that we may be hitting frothy territory. What can active investors do?

State Street Global Advisors’ deputy global chief investment officer Lori Heinel and three of its active investment specialists survey the landscape and discuss how they are positioning their respective portfolios in this challenging environment and the opportunities they see in 2018.

Heinel is joined by Olivia Engel, deputy CIO, active quantitative equities; David Carlson, CIO, fundamental US equities; and Jessica Wasserman, business development strategist, fundamental value.

Lori Heinel: Let’s start with you, Olivia. What are you seeing in the marketplace today and how are you positioning your portfolios to help investors capture that growth opportunity but be mindful of the risks?

Olivia Engel: When you look at the global equity market broadly, from a top-down level, you really see that sectors like utilities and particularly tech and health care are really coming at very high levels. So where do we find opportunities here? We have really been able to position our portfolio quite meaningfully in the health care sector—not so much in the pharmaceuticals area; but much more so in the supplies and equipment segments of the sector. We've really been able to see reasonable valuation, but also stable proven earnings growth in those segments.

It really is a secular growth part of the market, but not all of it is at the lofty valuations you see from a top-down perspective.

Heinel: Jessica, can you talk about what you're seeing more globally?

Jessica Wasserman: During the post-financial crisis of very low interest rates, companies with high cash flows attracted premium valuations. That dynamic has created an environment of abundant opportunities for us in value today. As an example, valuation dispersions in the S&P 500 Index are at among the highest levels that they've been since 2009. So today, we're finding opportunities in the cyclical, more economically sensitive sectors.

Heinel: It has been a crazy ride this year. Post the Trump election, there was a lot of enthusiasm for deregulation, fiscal reform and tax reform. Certain sectors and factors in the market rallied. And then, when people started to lose their enthusiasm for that agenda, we started to see a lot of reversals in the market. Jessica, as a value-oriented investor, how has that influenced the positioning of the portfolio? Or has it?

Wasserman: We believe that investors are very quick to react, both positively and negatively, to every headline and tweet that comes out of the White House. For us, the focus is more longer term. Because we're agnostic to both sector and geographic weights we believe that actually gives us an advantage in the current environment, as we can really go where the value is. Our overweight and exposure levels to the financials, industrials, materials and energy sectors remain materially unchanged this year and we continue to see a long runway for those sectors to grow.

Sector opportunities

Heinel: Dave, are there other things that you've evolved in the portfolio as we've seen a changing backdrop?

David Carlson: In terms of what we've seen, technology and health care have been strong performers year-to-date. We're still overweight in health care and have stayed pretty much with those positions. Some of the internet-related names that are up considerably, we've trimmed those positions. We've added to other areas of technology: semiconductors, semi cap equipment traded at lower multiples. On an ongoing basis, we're always running our screens, looking at the market on a bottom-up basis, looking at our company fundamentals.

Heinel: Olivia, can you talk about how your portfolio has evolved over the course of this year and your particular views on some of the high-flying tech stocks?

Engel: Not everything within the tech sector is unattractive. This year, we have actually added to some of our tech exposures, more in the hardware and equipment side of names that people probably haven't ever heard of. We've added to our financials exposure, in the industrials segment, and we've reduced actually some of our very large holdings in the health care segment. The other area that we've changed to our portfolio has been reducing our consumer staples exposure.

One of the macro themes that's been influencing our portfolio is really the interest rate environment. So whilst we have maintained a meaningful exposure in the utilities segment, which gives a good cushioning in terms of big macro shocks, we don't know where they're going to come from. We have started to increase our cyclicals and positive interest rate-sensitive positions like banks.

Opportunities in 2018

Heinel: We're nearing 2018, how are you thinking about that future opportunity set? And what else might be different?

Wasserman: Based on the valuations that we're observing, we believe that we're still in the early stages of a value recovery. We continue to see the dispersion between low beta and high beta stocks at near historic highs. So for us, it really comes back down to the environment in which our companies are functioning.

We are hearing good news from the managements that we speak to. We see their order books filling. We see the confidence returning and we're very optimistic about 2018. The sectors that we're in today and the regions that we're focusing on today have had such a material rerating in the past that even though they've been doing well this year, we continue to see a lot of opportunity there and we don't expect to see a material change of our focus in 2018.

To learn more about the different ways that State Street Global Advisors’ active teams are approaching today’s environment, watch the full discussion at


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