NorthCoast Asset Management kept large cap U.S. equity ETFs as its top holdings in its ETF portfolios in the first quarter of 2021. The conviction paid off with those holdings hitting record highs as the reopening of the economy continued to pick up steam.
The firm adjusted its fixed income ETFs to address future expectations of higher taxes and the recent steepening of the U.S. Treasury yield curve. NorthCoast also sees positive signals for Australian stocks.
Here are some highlights from the portfolios from the quarter (see table):
NorthCoast Opportunities in Fixed Income
In Q1, NorthCoast added to its position in iShares National Muni Bond ETF. “We believe issuers of municipal bonds should benefit from the economic recovery as well as more fiscal support coming from Democrats,” said Patrick Jamin, NorthCoast chief investment officer.
“There is another dynamic here too. There are expectations of having higher income taxes that would increase the demand for tax-exempt investment bonds and reduce the default risk for MUB.”
Jamin also points out that about 95% of MUB’s holdings have a credit rating of A or better.
The NorthCoast team has cut its position in iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB). It also increased its allocations to iShares Interest Rate Hedged High Yield Bond ETF (HYGH) and iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH) in recent months.
“We have reduced duration risk because long duration bonds tend to suffer from a steepening of the yield curve and increases in interest rates,” Jamin said.
“From February to March when we saw the steepening of the yield curve, we saw HYGH and IGBH barely move and barely acknowledge that change in tone and perception in the market,” Jamin said. “This is an example of how you can still be invested in fixed income without suffering from a steepening of the yield curve.”
Increased Mobility Points to Continued Recovery
Jamin maintained large stakes in iShares Core S&P 500 ETF (IVV) and Invesco S&P 500 Equal Weight ETF (RSP) throughout Q1. He says a number of factors make for an optimistic outlook. Among them, global growth, corporate earnings, sustainable policy commitment and consumer spending.
“We see mobility, a metric in our models which is measuring how much people are moving and participating actively in the economy, improving. We are also looking at high frequency data such as TSA checkpoint data and OpenTable restaurant reservations,” he said. “If we were to see these metrics degrade then we might adjust the portfolios and trim these positions.”
Shares of IVV and RSP are up 5.9% and 11.5% respectively, year to date.
NorthCoast sees more room to run from iShares MSCI Pacific ex Japan ETF (EPP). That ETF is weighted almost 60% in Australian equities. “We see vaccination distribution that is being well-handled in Australia,” Jamin said.
NorthCoast Sees Australian Data Encouraging
“The recent macro data, the labor market and retail sales are also encouraging. There’s a lot of things to like there,” in Australia. “And like in the U.S., there is very supportive government fiscal and monetary policies that should continue the recovery.”
EPP has risen 5.9% so far this year.
Jamin held positions in iShares Core MSCI Emerging Markets ETF (IEMG) during Q1. “There is a weaker dollar and negative real rates which benefit emerging market assets,” he said. “We did see that the Chinese manufacturing PMI dipped slightly below 51 in February, so we are watching the situation. Overall, we are still constructive on IEMG, but are less and less bullish and it might be a position we might be trimming.”
IEMG shares have risen 3.5% in 2021.
YOU MAY ALSO LIKE: