Making Sense: Q4 Portfolio Positioning

Making Sense

Q4 Portfolio Positioning

Phillip Neuhart | Senior Director of Market & Economic Research

Thomas O'Keefe | Managing Director of Portfolio Strategy

Recorded Tuesday, October 7, 2025

Amy: On Tuesday, October 7, 2025, Senior Director of Market and Economic Research Phil Neuhart sat down with Thomas O'Keefe, Managing Director of Portfolio Strategy, to talk about our positioning for portfolios going into Q4. 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. This should not be considered as tax, legal or investment advice.

Phil: Thomas, thank you so much for joining us again. This is our quarterly call. We've done this for several quarters now. We're really discussing the portfolio changes we as a team are making in our client portfolios. This is for the fourth quarter.

Before we talk any allocation shifts, why don't you give us some reminders on our approach and philosophy?

Thomas: Yeah, happy to. Thanks for having me here, Phil. So as we've talked about before, we do quarterly allocation changes. We do have the ability to change our allocations within quarter. We're monitoring the data on a quarterly basis, but the process, you know, usually comes to fruition on a quarterly basis—if there is not something immediate that demands our attention intraquarter.

So that data is flowing through into our process. We are ingesting more than a hundred data points. That is informing our capital market assumptions, which are forward-looking expected returns for all the different asset classes. Once we've built those out and defined what those are for the quarter, we then put them into our actual allocation modeling system to get the allocations that we're going to have every quarter.

Phil: So entering the fourth quarter, are we making changes to portfolios this quarter?

Thomas: Yeah, three key takeaways from the work that the team did this quarter. Number one is we are not changing our target allocation from the prior quarter. So that means what we had as our target allocation at the end of Q2, we continue to have at the end of Q3.

The second thing is we actually are not rebalancing from those portfolios that exist that have drifted. The primary reason for this is the changes were pretty de minimis overall after we got done with looking at all the data.

And we want to be really thoughtful and conscious around the costs of trading. So if the move is small enough—and we're comfortable with where we are from an allocation perspective and from a drift perspective—we don't want to incur taxes, trading costs, all of the different frictions that might create poor outcomes for our clients.

Phil: Right—is the juice worth the squeeze? If you aren't making major changes, why would you trade?

Thomas: That's exactly right. And then the third thing to mention here is we've made no changes to our managers within our portfolios. This should be expected. We had a call just a month ago around what our core principles are—and one of them is that we want to stay long term in nature.

So as much as we're evaluating our managers and our manager roster on a regular basis, we believe it imprudent to make changes too often to managers, reactionary to performance that is happening on a short-term basis.

Phil: So why don't you highlight some of the allocation positioning we do have, even though we aren't changing from the previous quarter. What are some of the key positions we have from a portfolio perspective?

Thomas: Yeah, as a reminder, we have a slight overweight to growth. This is both at the large-cap US equity asset class and also at the mid-cap level as well.

We have also a slight overweight-to-small cap. This is both in the United States and this is also international as well—international being a quote-unquote satellite holding for us, meaning that it is nonbenchmark. So we have the ability to have a 3% overall weighting in our satellite holdings. And we currently are not at 3%, but we have a slight weighting to that position.

The one interesting thing to note here is international-developed—or non-US-developed. That actually moved from a slight underweight to a neutral position in this quarter. Now you might be asking yourself, well, you didn't make any changes. How could your relative positioning change?

Well, what happens is during the quarter is the benchmark composition changes, usually because an asset class does very well or very poorly. And so international-developed actually did quite well, and so it increased the actual exposure to that asset class. So we moved to a neutral position, even though—

Phil: Without trading.

Thomas: Yeah, even though we didn't make any changes to our allocation.

Phil: Understood. So in terms of the data—no changes this quarter—but in terms of the data, what are some key themes you're seeing? Anything interesting happening within our capital market assumptions?

Thomas: Yeah, and I might say, these are anecdotes. We have lots of different pieces of data, so there's not one piece of data that's informing what we're doing. We are not top-down, we're not looking at macro, we're really looking at fundamental data. So I think it is important to remind everyone that each one of these themes that I'm about to mention are just a piece of the overall pie, but they're some of the ones that stood out to us.

I think first and foremost, we saw that expected returns across all asset classes went down. This generally happens when we see good performance. You can see it most specifically in valuations. We've seen valuations stretched across the board.

Now, I think what's important to note is each asset class has a different sensitivity to valuations. So we've absolutely noticed that growth, particularly large-cap growth, has very little sensitivity to high valuations. So those expected returns—or those forecasted returns—continue to stay quite high, even though we see valuations at historic highs.

Phil: Yeah, we know that that's a place where valuation's very high, very expensive, so it is interesting that not as sensitive to valuation because it's so growthy, right? It's really about growth at any price.

Thomas: Yeah, that's absolutely right. One of the other themes that we've noticed in the data for this quarter is input and output prices. So an input price essentially is, a company needs a widget in order to produce some good that will be sold to a consumer. So that's the widget that they are buying is the input price to the end good. The output price then is whatever that consumer good is that that company is producing will go out, and those prices are higher as well. With observing both input and output prices higher, we could deduce that there is impact from government policies, specifically tariffs within that.

We are monitoring that through the data. And we've talked about this before. We do not specifically measure government policy in terms of our allocation decisions, but we see it impacted in the data. And so this is a place where you could say, yes, we are seeing certain policies impact the data, which then impact the allocations that we have.

So the last theme we're seeing in the data really revolves around the US dollar. So as you've observed—and I'm sure everybody else has observed—the US dollar has weakened quite bit this year. It's still, though, fairly elevated compared to its longer-term history. So when we're looking at the data and we're trying to come up with forward-looking expectations for a longer period of time—so we're not looking at the next quarter or two, we're looking more at a 1- to 3-year expected return—we still see a stronger dollar compared to its historical average.

What does that mean? We think actually the US dollar could continue to decline—or I shouldn't say that—it has the potential to decline as we're looking at forward-return expectations. So if you're going to buy a foreign-denominated asset, say in Europe, you have two components of return. You have its actual return, and you have a currency return attached to it.

So if that currency has the potential to continually appreciate compared to the dollar, we actually see that as a potential theme for increased return expectations. This is again, medium- to longer-term return expectations for international or non-US-denominated assets.

Phil: That makes a lot of sense when you bring those euros back, and if the Dollar is weaker, it's worth more. Those euros are worth more, and that finds its way, of course, into earnings for that company.

Thomas: That's right.

Phil: Thank you so much as always for this discussion. Look forward to next quarter.

Thomas: Yeah, thanks for having me.

Authors

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

Thomas O'Keefe, CFA, CAIA | Managing Director

Capital Management Group | First Citizens Bank

222 Second Street | San Francisco, CA 94105

TO'Keefe@SVB.com | 408-761-6592

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