Special U.S. Large Cap Value Equity Strategy

Katie Schmidt: Hi, I'm here with Bryant to talk about what happened in 2024 and see what lies ahead in 2025. Hi, Bryant.

Bryant VanCronkhite: Happy new year, Katie.

Katie: Happy new year. Welcome to 2025. This year has just begun and markets are volatile. But before we dig into the markets, did you make any New Year's resolutions pertaining to the portfolios?

Bryant: I always have the same resolution every year because what I think is important to investment success is always following your disciplined process. The process is what allows you to have confidence in the outcome pattern. So, my resolution every single year is to make sure we don't deviate from the time-tested process that the Special Global Equity team uses. I guess a sub-point to that is that emotions are our biggest enemy when it comes to investment success. So, my other resolution is always to make sure we don't let emotions drive decision making. People all the time try to chase returns based on the FOMO (Fear of Missing Out) of what their neighbor has said about how much money they're making on a stock or they decide to sell out of their 401K equities because they're worried about the market falling. Those sorts of emotional biases can ultimately destroy returns. So, for us, follow the process, be unemotional, and drive towards consistent outcomes over the course of 2025.

Katie: Great. Those are excellent resolutions. 2025 is off to a little bit of a bumpy start. What do you see as the setup for the market and what does that mean for the path of returns?

Bryant: I think people were pretty excited about 2025 coming into it. We had this America First policy that's coming into place. You have deregulation in certain sectors that should be good for equity markets. You have lower tax expectations. And so, valuations were pretty high coming in—expectations of the fiscal side high. But counterbalancing that is a Federal Reserve (Fed) who's saying, whoa, I don't know what's going to happen right now. I'm not sure about tariffs. I'm not sure about tax policy. I'm not sure about budget constraints. And so, the Fed's pulling back saying we need to offset some of the optimism with realism. And so, they decide to probably push out rate cuts. And so, this tug of war is happening right now and it's putting pressure on the markets. I think what that means, though, is that the fiscal side has to deliver. Expectations are high for the government to push through policies that are going to drive the economy higher. And if it doesn't happen in the first hundred days, then I think we have a potential for a big reset in the market. So, there's a lot of risk coming in, given where valuations are. But the upside is that the Fed is there to support us. It is there to support the economy. In the event there is a bump in the economy, which I don't think there is right now, I think the Fed will get back into the game, start to cut rates again, and stimulate. But for now, expectations are high and it could result in some early volatility in 2025.

Katie: Great. Thank you so much. And to conclude, are there any sectors that look particularly interesting, given the setup and everything you're considering for entering 2025?

Bryant: Well, one of the industries that I think is in the crosshairs of what people think will be positive Trump-based policies is banks. Back in 2016, during the first election, a lot of the lower tax policies, the deregulation elements, drove a significant increase in the share prices of banks for good reasons. I think that same playbook doesn't work as well this time. Although the tax policy might get extended on the corporate side, I don't think we're going to see significant cuts in tax rates. So, it's not going to be a new positive for banks. Deregulation is a good thing, but I think a lot of the benefits accrue to the larger banks. So, one of my things is what am I worried about, which will be the small and regional banks and the valuation expectation setup there is a little bit optimistic compared to what I think is going to happen in 2025. Now, where am I more positive? Well, I’m sort of running into the fire, so to speak here, with healthcare. I think the nomination of RFK to the healthcare industry, to a leadership role in healthcare, is very concerning for a lot of people. There are some extreme views in many cases and it could put standard policies into question. And valuations across all of healthcare have dropped meaningfully. There are places now for stock pickers to go in there and pick up the scraps, if you will. And so, we don't want to go all in on healthcare right away, but I'm finding areas of CROs, for example, which are clinical research organizations, some of the labs, some of the medical insurance, all very interesting early on here in 2025. So, I think healthcare is appealing and you can be contrarian there, given some of the pullback we've seen late in 2024 and early in 2025.

Katie: Bryant, thanks so much for your time today. That was really insightful regarding healthcare. We'll keep an eye on that and look forward to next time.

Bryant: It was a pleasure. Good to see you.

Katie: Good to see you.