Allspring's Exclusive Quarterly Update for Wells Fargo Advisors
Stay up to date with the Portfolio Management teams for the Managed DSIP SMAs and other Equity Income strategies at Allspring.
Transcript
Brian Piskorowski: Happy 2025, everybody. This is Brian Piskorowski from Allspring Global Investments, and we're super excited to be sharing our DCIP Dividend Growth Update with you here for Q4.
As we enter 2025, clearly there's lots of opportunities. There's a lot of optimism when you look at markets overall. This is coming off of what was pretty spectacular year of 2024. When we think about the Institute and the recommended guidance and how that overlays with Allspring and our investments, we think there's a lot of synergies and opportunities for you and your clients as we look into 2025.
First and foremost, I'm thinking about the abundant liquidity that's out there in the marketplace. Clearly, when you think of Allspring, a lot of people have thought about WMPXX, our money market fund. We continue to garner assets in that favor. But if you're looking to add growth to a client's portfolio or add some diversification to a client's portfolio, take a look at US large -cap equities. The Institute's been recommending that through Darryl and Crew, positioning for cyclical recovery but remain tilted towards the US. So what better way than to get an update from our DCIP team here today to kind of take a look at where those opportunities are.
I think also dividend growth, while that's the story, is also a huge format of investment income now that we see interest rates starting to come down from the Federal Reserve and that US large -cap companies have accumulated somewhat of $2 .4 trillion of cash on their balance sheets, which could be increased dividend payouts. From our perspective, that plays right in line with what we're doing with DCIP, global dividend payers, and the rest.
When you're looking also at the fixed income side of the story, Allspring is the number one SMA provider at Wells, clearly driven by the DCIP story. But don't forget the fact that we have seven recommended fixed income separately managed accounts available on the platform as well, particularly looking in the municipal space on our ladders, but also with CorePlus, CoreBuilder, and our CoreBuilder, and their beauty fixed income offerings on the SMA front as well. So as you think about our portfolio discussions here today with our investment teams, remember that Allspring plays both sides of the coin.
We're going to focus on equities for you here today, but when you think about Wells Fargo's investment guidance into 2025, it's about extending that balance, extending both the equity and the fixed income side of the coin, moving off of the balance sheet from the cash side. And last but certainly not least, we here at Allspring are here to support you.
We've got 28 internal and external regional directors supporting you, as well as a new expanded team reporting to me in our separately managed account advisory specialists.
So we're super excited to be able to support you here in 2025. Please feel free to reach out to our teams to help broaden that story, to broaden that equation, and hopefully diversify your clients' assets in a positive way for performance. Have a great week, everybody. Have a great month. Have a great year. Happy 2025.
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Jim Argabright: Well, 2024 is now officially in the rearview mirror. US large cap stocks were largely a story of the haves, the MAG -7, and the have-nots, which was essentially everyone else. In the fourth quarter, once again, the MAG -7 dominated performance being up 10 % for the quarter versus the S &P 500, which was up 2%. It was a challenging market for stable, moderate growth stocks that pay rising dividends that we invest in. For example, the cap -weighted S &P 500 was up nearly double the equal index for the last year.
A narrow market with many non -dividend payers leading the charge is exactly the type of market we will struggle to match our benchmark's return. That said, in 2024, MD -2 returned a very strong 11 .5 % and had 42 companies announce dividend increases at an average of 7 .4 % while having a much lower beta than our benchmark. Therefore, we remain confident with our long -term strategy investing in a diversified group of high -quality dividend growth companies.
I'd like to highlight two stocks in the MD -SIP -2 portfolio, JP Morgan, which contributed for both the quarter and the full year. Investor sentiment is positive toward financials based on solid US economic growth and signs regulatory scrutiny could be easing. We appreciate JP Morgan's global scale, its leading market share, and its strong balance sheet. Another financial name, BlackRock, also contributed to both the quarter and the full year. Their most recent earnings showed an improvement in both assets under management and revenue growth. Its enormous global scale and product diversity continued to benefit versus peers.
Several trades in MD -SIP -2 during the fourth quarter, we increased our positions in Broadcom, trimmed our position in UnitedHealth, and added a new position in GE Aerospace. Broadcom is a semiconductor name. It's got a moderate dividend payout averaging about 40 % of free cash flow, stemming from its industry -leading profit and free cash flow margins. It also has a leading position in the design of custom semiconductors for AI with many applications for customers like Alphabet and Meta. The company expects AI -related revenues to double the share and account for about 20 % of total sales. The shares reacted positively in both solid earnings and better than expected guidance. Its most recent dividend increase was 12%. UnitedHealth Care Group is the largest U .S. healthcare insurer and has leading patient care and health analytics businesses. While we think the company provides a great scale with barriers to entry that allows management to leverage costs across a large membership based and invest in technology, we did take the opportunity to trim the shares this quarter. Our concern is that the company is facing near -term growth challenges together with increased regulatory scrutiny.
On the growth front, we think increasing membership and health plans could mean that higher costs than in turn might mean they have to slow growth while finding ways to manage those additional costs. In addition, we have concerns around a potential for increased regulatory focus on how the company processes their health insurance claims and provides pharmacy benefits. So bottom line, these issues have increased our concerns about UNH's ability to hit its mid -teens earnings growth target for the next year. We were excited to add a new position in GE Aerospace within the industrial sector. GE is a pure play aerospace business focused on manufacturing commercial and defense aircraft engines and spare parts. The capable management team has done a great job at reshaping and refocusing the company into one with a dominant position in commercial engines, a combination of strong recurring revenue, and also strong pricing power. They have an attractive ROIC, low dividend payout ratio, and we think potential for consistent dividend increases above 10 % for several years. We think that the stock returns in 2025 have the potential to be positive, but likely a little more muted than in 2024 when we have both good profit growth and PE expansion. S &P earnings should be up about 8 % for the full year according to Bloomberg estimates.
Additionally, we are encouraged by research from empirical partners showing current returns on equity of 20%, with 75 % of that being returned to shareholders in either buybacks or dividends. The one risk we are most focused on right now is inflation if that does not decline as the Fed hopes.
On behalf of the entire rising dividend team, we thank you for your trust and we look forward to working with you in 2025.
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Chelsey Barta: Our resilient global equity team focuses on building portfolios that seek to generate income and balance growth and value characteristics to help clients meet their goals, leveraging the full opportunity set of large -cap, developed market equities.
In the fourth quarter, we saw mixed performance across global markets. MSCI World Index remaining nearly flat while the S &P 500 rose 2 .4 % with almost 10 % gain from the MEG 7 stocks now make up a third of the entire S &P500 index, which is important to be aware of when thinking about risk and the underlying strength and trajectory of U.S. stocks. International markets faced significant headwinds with MSCI -IFA declining by 8%. A big reason? The U.S. dollar got much stronger, up over 7%, which is a big move in three months and tends to weigh on international returns in U.S. dollar terms. Europe had an especially tough time with France dealing with political shakeups and proposed tax changes.
For the quarter and throughout the year, our global dividend payers' equity strategy delivered strong results with an 11 % one -year return that beat its benchmark MSCI World High Dividend Yield Index by 320 basis points. 49 held names announced dividend increases at an average rate of 9%. Let's talk about what moved the needle this quarter, starting with Williams Companies, a U .S. energy infrastructure company, which has been an extremely strong performer this year given their position as a natural gas supplier. AI data centers need massive amounts of power to run, and Williams has the infrastructure to deliver it. Given their strong performance, we trimmed our position in the quarter. Luxury Goods Maker, LVMH, Louis Vuitton, based in France, detracted from performance due to concerns over consumer spending, especially in China. We think the market's overreacting and we saw an opportunity to add to this high -quality name in the quarter.
Pivoting to the international DSIP strategy, which underperformed its benchmark for the quarter and the year, returning 2 % versus MSCI IFA's 3 .8 % return. 34 held names announced dividend increases at an average rate of 15%. In a challenging international market, these companies weren't just maintaining their dividends, they were also growing them significantly, and that's exactly the kind of we look for in our dividend strategies. Stock selection in healthcare, particularly Smith & Nephew, and weakness in pharmaceuticals weighed on performance. Deutsche Post, a German logistics company, also impeded returns as post -COVID earnings normalized and tariff concerns mounted. However, we believe Deutsche Post remains well -positioned to capitalize on any rebound in global trade.
SAP, a global software company headquartered in Germany, delivered strong performance this quarter and the full year in both of our strategies. In the quarter, SAP reported solid results as they continued to improve margins as their cloud business achieved scale, moving to a subscription basis, and they also benefited from their AI capabilities. Both GDP and IDSIP currently offer dividend yields of over 3%, which compares favorably to S &P 500's 1 .3 % and Russell 1000 value at 2 .3 % dividend yields.
This could be a good time to review your international allocations, as international stocks are currently trading at a compelling 35 % discount to US equities based on 2025 PE ratios, a wide gap between IFA and S &P 500. Several potential catalysts could benefit international markets. AI adoption anticipated rate cuts by central banks, a strong dollar boosting foreign companies, US revenues, and Chinese stimulus measures as well as easing inflation.
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Transcript
Margie Patel: As we start the new year, there are many uncertainties in the minds of some investors. The first thing is what will be the effects of the announcements from the Trump administration about so many changes that might affect the economy or the financial markets. And secondly, what is the path of the Federal Reserve as far as interest rates? But we think that those factors are not as important as what really is important, which is the economy is very strong.
We think that the growth will be around 2 .5%. We don't see any imbalances. Unemployment looks low. We think it will stay low. So we think the backdrop is very good for another year of growth, perhaps not as strong as we had in the market in last 24 when the S &P was up 25%. But we still think a very good market.
We think that revenues in this year will be up around 4%. And that will allow companies, we think, with a GDP of, say, 2 .5 % to produce earnings growth of 10 % to 12%. And even without a P expansion, which we are not counting on, we think that will allow for the stock market to move about 10 % or 12%, or basically better than the alternatives in fixed income, whether it be short -term rates, which are, say, 4 % to 5%, or longer -term bond yields, which are between, say, 5 % and 6 .5%. So we think it will be a good year for the equity market once again.
As you know, we use a top -down approach in the investments for the diversified capital builder. We start with industries that we think have a good outlook, that should grow preferably stronger than the economy, have sustained earnings path, and then look for companies that we think have some special niche within that industry.
Our largest industry exposure is technology. It's the same as last year. And we continue to think that technology companies will provide above -average growth for a sustained period of time. So, we still have our allocation to technology. We have about 47 % of the equity portfolio in technology stocks right now. We think that the secular drivers will continue. And although some people have been concerned about overvaluation, about the price -earnings ratio being too high, we think when you look at the likely earnings growth, we think that it really is about fairly priced. And we see it as a sector that should lead the market once again, with earnings growth of, say, 20%. Within this sector, our four largest holdings are Broadcom, Nvidia, Marvell, and Micron.
Our second largest sector is the industrial sector. We think the industrial sector has changed quite a bit from the last cyclical moves that we've had in the market. And certain areas of the industrial economy, we think will have very strong growth, perhaps even comparable to the technology sector, due to some underlying trends of accelerating growth. This includes the reshoring of companies bringing back production to America, increased capital expenditures across many sectors, the need to build data centers, which we see to be perhaps a decade -long endeavor. And also, we think that we will see that companies related to the power grid, we need to expand the capacity of our electrical system, we need to harden it, strengthen it, make it more efficient, and we think companies exposed to those trends will continue to do very well. Also, we see aerospace as a growth sector. The companies we have there, that's about 20 % of our exposure in the equity portfolio. Our largest exposure there is Leidos, Emerson Electric, and Curtis Wright. In the industrial sector, our largest holdings are Leidos, Emerson Electric, CurtisWright, and Amitek.
Our third largest sector is the energy sector, particularly those names exposed to the gas sector. We began to increase our exposure last year. You might recall at the beginning of last year, we had virtually no exposure in the energy sector. But as the year progressed by the end of the year, we thought there were many opportunities in the sector, particularly in the gas -related names. We thought that sentiment was very, very negative, discounting too much any negative possibilities. We thought that people were concerned about the price of oil, which is not necessarily the same as the price of gas, concerned about demand, and concerned about oversupply, and also unfavorable government regulations would make it very difficult for companies in the energy space to really expand their earnings. But we thought the energy space, particular for gas name, has tremendous growth potential because gas is likely the source for increasing the capacity of our power grid. So we see gas as a leading supplier to the demand for higher energy consumption, for the more expensive so -called alternative energies, which we see will not be able to compete with low -cost gas. So not only for domestic consumption, but also for exports. The demand for liquefied natural gas, so -called LNG, is very strong overseas. So we think those companies who have exposure to exporting to other countries will do very well. Altogether, we have about 17 percent of our assets in energy issues, as I said, primarily the gas -related names. Our largest holdings are Target Resources, Chenier, One Oak, and Schlumberger.
Concerning our fixed income holdings, we have about 15 percent of the assets in the fund in fixed income securities, in double -B rated, in other words, just below investment grade, high -yield bonds of U .S. companies with public equities. And we regard this portion of the portfolio as giving us the flexibility, offering yields between five and a half and, say, six and a half percent, to have more flexibility in our equity holdings, where we can choose companies that may have no dividend or very small dividend and use the income from this 15 percent bond allocation to supplement the dividend income of the equity holdings of the portfolio.
As far as interest rates in general, we think that interest rates are going to be basically in a trading range. We think the Fed is not going to make any dramatic actions, either up or down, or interest rates. And we think that interest rates around these levels are sufficient to allow the economy to continue to expand. But we also think that for the longer -term investor, we think that equity holdings will provide a higher return than we can get in fixed income side. So, therefore, we have only about 15 percent.
In conclusion, I'd like to say that I think 2025 might turn out to be a surprisingly good year for equity investors, one because Sinema has been rather negative last year. Concerns, as I said, about the Federal Reserve, possible negative changes by the government. But it looks as if the changes that are being proposed should on balance be positive for the equity market and for the economy. And we look for the Fed to be rather passive and not make any moves that would slow the rate of growth in the economy. Also, many investors have been, I think, holding more cash than they would typically hold over concerns that the Fed may bring on a recession, which we don't think will happen.
And secondly, short -term rates, when the Fed began to raise rates, were so high that many investors said that those short -term rates of four or five percent were good enough to hold off from the equity market. But we think that short rates come down and as the economy continues to advance, we'll see more of that money on the sidelines come into the market. And that will do two things. One, of course, that may help to lift equity prices in general. And two, if the market has a correction because of some short -term bad news, we think that potential cash on the sidelines will help to keep a floor under how big of a correction the equity market will have. So altogether, we think we'll have, as I said, another good year, perhaps not as strong as we had in 2024, but certainly, I think, a very attractive year for equity -oriented investors who can forge to look at the long term.
The top 10 fund holdings as of September 30th, 2024 in order are Broadband Incorporated, Lado Holdings Incorporated, Advanced Micro Devices Incorporated, Microsoft Corporation, Micron Technology Incorporated, NVIDIA Corporation, Ansonal Corporation Class A, Marvell Technology Incorporated, TIGA Resources Corporation, and Schlumberger Limited.