Making Sense: Q2 Portfolio Positioning

Making Sense: Q2 Investment Philosophy & Positioning

Recorded: April 21, 2025

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. On Monday, April 21st, 2025, Thomas O'Keefe, managing director of the Capital Management Group, sat down with Phil Neuhart, Director of Market and Economic Research, to talk about the underlying philosophy that drives our market decisions.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. None of this information should be considered as tax, legal or investment advice.

Phil: Thomas, thank you for joining us again. Really excited to speak to you today. In volatile times like these, it's always good to return to our core investment tenets. Would you mind discussing some of the investment team's guiding principles at times like these?

Thomas: Yeah. Thanks, Phil. Let's first start by setting a baseline for what the markets have done over the course of 2025. As you all know, the White House announced sweeping global tariffs on April 2nd. Before that, the S&P 500 had declined about 3.3%.

Since then, up to April 18th, the S&P 500 has declined about 6.8%. Within that time period, we've seen really large daily swings. We've had days that have been down about 6%, and we've had one specific day that was up about 9.5%. To put all that into perspective, normal—quote, unquote—normal days we expect in markets and normal market times, we see the S&P 500 and the general markets decline about 1% or maybe can increase about 1%. So these daily swings are quite significant.

Now to your actual question, Phil, I'd like to highlight three specific core principles that we have that I think are particularly relevant in these times that we're seeing today, these volatile times.

Firstly, outcomes are more predictable over time. This might seem pretty intuitive, but remember, it's very hard to predict what a daily return is going to be in the market. Markets swing for many different reasons. Over longer periods of time, we actually see the variance of those returns shrink, and so it becomes much easier for us to predict what the actual return will be over those long periods of time.

So we don't want to overreact on any news or any market movements in the short time—in short periods of time. It's really easy to panic sell. And sometimes when we do this, we might miss the opportunity to have those plus-9.5% days that I talked about earlier. So we want to stay invested in the markets, and we want to stay long term in nature.

Secondly, we manage risk that we can observe. Risk is the permanent impairment of capital, and so this can be observed in a couple different ways. We can see that in the write off of a worthless investment, or we can also see that in selling an investment at a depressed valuation.

So where we manage this, or where we try to manage this, is—a—just stay diversified. Let's try to stay as diversified as we can, and we want to make sure that we are in clear understanding of all the exposures that we have and how those different exposures might actually react to different scenarios.

The final thing I'd like to point out from one of our core disciplines, or from one of our core principles, is to stay disciplined. We've built a repeatable process that we believe should produce quality outcomes over multiple market cycles. So we want to do the work, and we want to make sure that we trust the process.

Phil: So in times like this, does the team change their investment philosophy? Do you react to major moves in the market? How do you think about investing when markets are moving so rapidly, and do we really adjust our approach?

Thomas: Yeah, Phil. So it's consistent to what I said earlier. We really want to stay disciplined to the process.

And so we will not be changing our investment philosophy when we see changes in the market, changes in the economy or even big headlines within the news. We want to stay very consistent and disciplined in how we operate. That being said, there are different opportunities that we want to take advantage of in times like this—and in times that aren't so volatile as well.

The first being, we do have a regular process for updating our capital market assumptions as well as our portfolio allocations. This process is generally done on a quarterly basis, but we have the ability to actually update it and run through the numbers and run through the models on a more regular basis. And so when we see environments that dictate that we should be doing this more regularly, we can find opportunities in doing that, and the team will certainly take advantage of that.

The second thing is disciplined rebalancing. Obviously, there are moments where we will see dispersions in our asset class allocations based off of market movements. And so back to the discipline of staying long term in nature, we want to make sure that we rebalance our portfolios back to our long-term targets to hit our long-term goals that we've established for our particular clients.

And then finally, these environments give us a great opportunity to go back to our clients to reassure them of what we're doing in the background to manage risk, to make sure that their portfolios are properly and prudently invested.

Investing in these markets can be very emotional, so we want to make sure that we are settling our clients into understanding what that volatility means for them. And then, also, taking the opportunity to really understand if our clients' goals have shifted at all because at the end of the day, our clients' goals are really how we're investing portfolios. And if those goals have shifted at all, we need to make sure that we are managing the return and risk expectations properly.

Phil: Yeah. That, of course, is very important. So considering everything you just just said, what are some portfolio changes the team made entering the second quarter?

Thomas: Yeah. So all of our over and underweights to particular asset classes in the portfolios remained unchanged for the second quarter.

This is through all the data that we're ingesting and all the work that the team is doing. We felt that the long-term targets that we had for quarter one are consistent with quarter two. Now that being said—and consistent with what I said earlier—we did take the opportunity to rebalance some of the swings that we saw within those portfolios.

A great example of that is large-cap growth was a large detractor to our portfolios in the first quarter, whereas international developed was a large contributor. And so in moments like that, we like to take the opportunity to trim some of our winners and add to some of our losers in order to keep with our long-term targets and be disciplined in that rebalancing.

Phil: Yeah, that disciplined approach, of course, is essential. Thank you so much for your time. I know your schedule is busy these days. Thank you for joining us. I look forward to next time.

Thomas: Thanks for having me, Phil.

Making Sense

In Brief | A look at the week ahead in under two minutes every Monday morning

Q&A Videos | Monthly conversations covering 2 to 3 of the top questions we're hearing from clients

Market updates | Monthly interactive discussions with in-depth analysis of markets and the economy

Written Commentary | Often coinciding with market or economic events

Brent Ciliano, SVP

Chief Investment Officer

Phillip Neuhart, SVP

Director of Market and Economic Research

Blake Taylor

Market and Economic Research Analyst

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Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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