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Tiffany Li, director at Rothschild & Co Asset Management.
In terms of the impact of rising interest rates on large cap stocks, we see multiple compressions on long-duration stocks, especially within the technology sector. While rising rates are often good for banks, the threat of a looming recession has weighed on many within the sector. And more recently, we had some companies in many sectors highlight foreign exchange headwinds from currency movement, particularly the stronger U.S. dollar.
Regarding adjustments made to our portfolio, we have made relatively few portfolio changes this year. However, we have turned back some of our energy exposure on substantial out-performance of that sector. We also trimmed some of our holdings in aerospace and defense, and shifted our exposure in that industry incrementally towards aerospace. We also found new investment ideas in the media, medical equipment, and technology sector. Lastly, I already mentioned that a June rebalance of a benchmark led us to trim down our healthcare services holding, and add to our technology holding.
In terms of which sectors provide opportunity, as a result of our bottom-up approach given by stock selections, the portfolio is overweight manufacturing, energy, and healthcare. For manufacturing, we’re over weight with aerospace and defense, where we see attractive risk and reward given escalating global geopolitical tensions and company-specific product cycles that way. In terms of capital cost, we own a few sectors that are growing relevant to infrastructure spending, as well as some [inaudible 00:02:04] industrial. For energy, we believe the supply in that picture is still constricted. We can’t simply flip a switch to increase supply.
The energy stocks we hold, do have attractive relative valuation, and generate a lot of free cash flow, at around $80 oil. Within healthcare, we’re over weight in health care services and pharmaceuticals. For our pharmaceutical holdings geared towards value, we also hold down growth in appearance that provides better balance in the portfolio. But backing up for a sec, at a higher level, while we had hoped this year would mark a return of stock picking, so far it’s a market primarily dominated by the macro and significant sector dispersion. We remain committed to maintaining a balanced portfolio, especially during times of inflection points and low conviction. Oftentimes during periods of [inaudible 00:03:05], great companies can become very unbalanced as investors politely head for the exit in an effort to be with exposure.
With the material drawdown across the U.S. equity market cap section during the first half of 2022, we believe the bargain bin is once again filling up with great companies, particularly within the cyclical and growth sectors.
We believe it’s approaching the time to take a more patient view of the quality secular compounders that offer superior long-term growth, return and growth process. As such, we continue to believe that a balanced portfolio, good representation to attractively valued large-cap stock, that carry cash flow above the internal need, have high returns on capital, and enjoy competitive advantages, appears as the most effective way to generate consistent alpha for our clients across market cycles.