Portfolio Insights: Large Cap Strategies


Patrick Kelly (continued): Currently over 70% of companies in the S&P 500 have dividend yields that are north of the 10-year bond.

This is a theme that you've been discussing for years and years whether it's through cloud computing, ecommerce, artificial intelligence, et cetera. Can you talk to some of the recent things that you've seen or examples of how companies or industries have been transformed because of this digitalization? Patrick Kelly: Sure. We've been repeatedly saying over the past several years that we believe we are in the early days of the one of the most innovative times in history. We've discussed how the pace of innovation has been accelerating. The COVID situation has further accelerated many of the themes that we have been discussing over the past several years such as e- commerce, digital advertising, digital transformation, cloud computing, artificial intelligence. One of the biggest themes that we've highlighted over the past several years is digital transformation. How sectors are digitizing and how companies across sectors need to digitally transform themselves to remain competitive and relevant within their respective industries. It has become table stakes for many companies in many sectors. Virtually every industry is digitizing, from retail to media to financial services, advertising, payments, telehealth, dentistry, education, gambling and even dating has gone digital. Businesses are accelerating the digitization of every aspect of their operation from manufacturing to sales and customer service. Twilio CEO Jeff Lawson suggested that he has seen yearslong digital transformation roadmaps compressed into days and weeks. The company's digital communication strategies were accelerated by an average of six years. ServiceNow CEO Bill McDermott recently said that he has seen CEOs around the world doubling down on their investment in digital transformation. In a pre-COVID world, CEOs recognized that you have to transform but in a post-COVID world you have to be digital to survive. And nine out of 10 CEOs have a digital first strategy yet only four out of those 10 say that they're ready for the digital disruption.

The last time equity dividend yield exceeded Treasury yields, which was at the end of 2008, stocks outperformed bonds by 1,100 basis points annually over the following five years. Goldman Sachs recently issued a report where they indicated stocks have a greater than 90% likelihood of outperforming bonds over the next 10 years, and we feel that equities will continue to look attractive relative to fixed income and money market yields. The path of the coronavirus remains an overhanging risk to the market. We do think that there is risk of cases increasing in the fall as kids return to school, but we continue to be optimistic on a vaccine and expect the news flow to be positive over the next several months. We do expect a COVID vaccine to be widely available in the first half of 2021. Expectations on the timing of a vaccine have improved dramatically over the past three months. Again, we believe equities will continue to look attractive relative to bonds and money market yields especially when we look out for more normalized earnings post a vaccine. The election is also an overhang on the market, but again, we're going to remain positive on equities with a longer term perspective for all of the reasons mentioned. We also continue to believe that high-quality, long- duration growth equities will trade a premium given the low rates and all the disruption that is occurring across sectors and would compare these equities to beachfront property. Jessie Quick : I like that comparison to beachfront properties. One thing that's pressing is COVID-19 and this resulting work-from-home environment that most of the call are probably enjoying today, seems to have accelerated many things, especially the theme of digital transformation.

Conference Call 2/9

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