Performance Update

Bryant VanCronkhite: What a start to 2024. The wealth effect is in full swing. As markets surge higher, the consumer is spending money and keeping the economy strong. I am Bryant VanCronkhite, lead PM for the Allspring Special Mid Cap Value Fund, and this is our Q1 2024 recap video. The market finished strong in 2023 off the back of dovish Fed (Federal Reserve) comments about the desire to cut interest rates in 2024. This optimism led the market to climb even higher in the first quarter. We saw a stronger-than-expected GDP (gross domestic product) print that satisfied that soft-landing crowd. However, inflation came in hotter than hoped, which should have put a damper on the rate cutting party, but the market and our Fed chair have chosen to brush off higher prices as seasonal aberrations, as opposed to resurgence in upward price volatility. Listening to the comments out of the Fed, they are certainly creating a hope that the hot inflation prints we received at the beginning of this year will fade. I'm less confident, especially given the ISM Prices Paid coming in higher than expected on April 1. The question has always been whether the employment picture, and thus the economy, can hold up long enough to show evidence inflation is sustainably low enough to allow the Fed to cut rates. If unemployment rises first, then the Fed reaction of cutting rates afterwards will be viewed negatively by the equity markets. On the other hand, a proactive cut with unemployment still low would be very likely judged favorably by the markets. My view is that investors want to respect the Fed's desire to cut rates, which equates to buying stocks and embracing a stronger economy, but they also have a healthy dose of skepticism, which I observe to a quality bias that defined Q1. Fittingly, we came into this year recommending investors tilt towards quality amidst worries about a temperamental growth path and an imminent debt maturity wall. We measure quality by high cash flow stability, which is critical when growth is less certain, and a strong balance sheet profile, which is especially desirable when debt maturities are faced with a higher interest rate backdrop. Despite rallying more than we anticipated in Q1, the market has seemed to follow our recommendation. As a result, the Special Mid Cap Value Fund (WFMIX) was up 9.12% for the quarter, outperforming the Russell Midcap Value Index, which is up 8.23%. During Q1, the Russell Midcap Value Index was led by the industrial, energy, and financial sectors. Now if you recall, financials were the best performing group in Q4, but this strong performance was led by banks and capital markets while insurance meaningfully underperformed back in Q4. Insurance bounced back with a very strong quarter in Q1, benefitting the Special Mid Cap Value portfolio, which is overweight the industry. The portfolio also had strong stock selection in the industry, including names like Allstate Corporation, Arch Capital Group, Brown and Brown, all of which outperformed both the sector and the index. Pricing within the insurance industry is remarkably strong and that is a key driver of improved earnings and return on equity for all three of these top ten holdings in the portfolio. The weakest sectors within the Russell Midcap Value Index were communication services, real estate, and health care. The move higher in the 10-year yield during the quarter put pressure on the more interest rate sensitive stocks in these sectors. Furthermore, in the mid cap market, these sectors are more defensive in nature and capital was definitely chasing the reasonably strong economic growth data released in Q1. Despite the portfolio outperforming for the quarter, there were pockets of disappointment, as well. Consumer staples, and specifically one of our holdings, Keurig Dr. Pepper, was an example of that. Both our overweight to this underperforming sector and our position in Keurig hurt us this quarter. However, we remain convicted that the consumer staples stocks we own possess unique competitive advantages, highly predictable cash flow streams, and strong balance sheets. Keurig has struggled to show an acceleration in the coffee business that we thought would happen by now. We viewed as a deferral in our expectations but not a derailment. The company is investing behind a very innovative coffee initiative that we think could drive a resurgence in the category, but it appears our timing could be off by a few quarters. In the interim, we are pleased with the strength in the cold beverage category and will remain patient but prudent in managing our position. Now, during the quarter, we increased our exposure to the health care sector across existing positions and by adding a new name, which we'll disclose in the near future. We decreased our weight within the industrials by trimming some of our large relative outperformers. Overall, the portfolio sector positioning has remained consistent with last quarter. We would appreciate the opportunity to take you deeper into the portfolio and our market views. Please reach out to your Allspring contact if you'd like to schedule a conversation. Thank you for your ongoing partnership and your investment in the Allspring Special Mid Cap Value Fund.