In March, the Size and Style Responsive US Equity Strategy implemented notable allocation shifts to adapt to evolving market conditions. The target allocation to large-cap stocks was increased from 70% to 80%, reducing the small/mid-cap exposure from 30% to 20%. At the same time, the strategy’s style tilt moved from a 60/40 preference for growth stocks to a balanced 50/50 mix of growth and value. These changes reflect a tilt toward stability amid gathering economic uncertainties, while maintaining a modest overweight to small/mid caps compared to a neutral benchmark (~90/10 large vs. small). In other words, the strategy still favors small and mid-sized companies more than the broad market does, but less aggressively than before. The adjustment toward equal growth and value exposure similarly signals a more neutral stance given recent factor performance shifts. Below we discuss the rationale for these moves in detail.
The decision to raise the large-cap allocation target to 80% – moving closer to the market’s natural capitalization weight – was driven by a deterioration in small-cap momentum and a flight to stability in recent months. After a period in late 2024 when smaller stocks showed improving relative strength, that trend lost steam heading into March 2025. In fact, by the end of February, riskier equities like small-cap and high-beta stocks had begun underperforming, while defensive areas outpaced them. This indicated that the tailwinds for small-cap leadership were fading. At the same time, macroeconomic uncertainty has risen, with new policy headwinds and growth concerns introducing volatility and caution into the market. Combined with projected earnings softness for smaller companies, the backdrop became less supportive of a heavy small-cap tilt. Analysts have warned that weaker economic growth could weigh on earnings, particularly for small-cap firms that lack the financial buffer of their large-cap peers. In light of these factors, the Investment Committee opted to scale back (but not eliminate) the small/mid-cap overweight to reduce risk. Large-cap stocks – often companies with diverse businesses, stronger balance sheets, and more stable cash flows – are viewed as better positioned to weather an uncertain environment. Indeed, the broader market has shown a shift toward stability and quality, with traditionally defensive, large-cap sectors holding up relatively well as smaller stocks lag.
The new 80/20 large vs. small/mid target still represents a mild overweight to small and mid caps (the overall U.S. market is roughly 90% large-cap by value). This reflects a nuanced stance: the strategy acknowledges the waning momentum in small caps and greater downside risks, yet it continues to maintain some exposure to the potential upside in smaller companies should conditions improve. In essence, the tilt toward small/mid caps has been dialed down, not reversed entirely. This balanced approach aims to capture long-term small-cap advantages (such as higher growth potential) while prioritizing capital preservation in the current climate.
Along with adjusting size exposure, the strategy neutralized its growth vs. value positioning, moving from a 60% growth (40% value) tilt to an even 50/50 split. This change was motivated by shifts in market factor trends and a recognition that the strong run in growth-oriented, momentum stocks has moderated. Earlier in the year, growth stocks (especially mega-cap tech leaders) drove market gains, but by late February the leadership broadened and previously high-flying growth names began to trail more defensive value stocks. The momentum factor – which had delivered exceptional performance through 2024 – started to falter, and history suggests that such streaks often see a reversal as they become stretched. Indeed, external analysis at the start of March showed growth falling to the lowest-ranked factor and value becoming the highest, with the Low Volatility (low-beta) factor seeing the most improvement amid the more cautious macro backdrop. In other words, investors have been gravitating toward quality and stability: stocks with solid fundamentals and lower volatility characteristics have gained favor, while the prior momentum-driven gains in growthier stocks have stalled. High-quality companies – many of which reside in traditionally value-oriented sectors like healthcare, consumer staples, or in mature growth segments – have held up relatively well. Meanwhile, higher-beta growth stocks have been more volatile and sensitive to interest rate and earnings disappointments, contributing to their recent underperformance
As of April 3rd 2025
Given this factor backdrop, the committee determined that a balanced approach between growth and value is prudent at this time. The 60/40 growth tilt instituted when momentum was strong is no longer justified in current conditions. By moving to a 50/50 allocation, the strategy avoids a bias toward either style until the market produces clearer signals. This repositioning ensures the portfolio is not over-committed to growth if the shift toward defensive quality and value continues. At the same time, it remains flexible to participate in any renewed growth leadership should the economic outlook improve. A 50/50 growth/value stance can be seen as “style-neutral” – positioning the portfolio to benefit from opportunities in both camps. The change aligns with the observed underperformance of momentum-oriented growth factors and the resurgence of low-beta, stable factors in recent months. Essentially, the strategy is respecting the market’s rotation toward stability by spreading its bets evenly across growth and value stocks, rather than leaning in one direction.
Overall, the March adjustments to the Size and Style Responsive US Equity Strategy represent a measured shift toward defense without abandoning strategic opportunities. By modestly increasing large-cap exposure and reducing the growth overweight, the portfolio is tilted toward higher-quality, lower-volatility segments of the market that are currently in favor. These changes were grounded in data – from deteriorating small-cap momentum to factor performance trends – and reflect a proactive approach to risk management given macroeconomic uncertainty and potentially softer earnings ahead. Importantly, the strategy maintains its responsive nature: the tilt toward small/mid caps remains positive (albeit smaller) and the portfolio is ready to recalibrate between growth and value as new information emerges. Going forward, the Investment Committee will continue to monitor market signals – such as momentum indicators, economic data, and corporate earnings trends – to guide any further adjustments. The neutral tone of the current positioning (slightly pro-small cap and evenly split on style) suggests confidence that the portfolio is appropriately balanced for the near-term landscape of choppy but range-bound market leadership. This positioning serves to protect on the downside if the market’s focus on stability persists, while keeping the strategy poised to capture upside when volatility subsides and broader growth opportunities reassert themselves. In sum, March’s repositioning is a commitment to staying agile and disciplined in the face of shifting winds – ensuring that client portfolios remain aligned with the prevailing market environment without straying from long-term objectives.