Gain Strategies
The first quarter was one of volatility and investor whiplash that felt much worse than it was, although the early April price action validates much of that angst. Global equities (as measured by the MSCI All Country World Index) posted modest losses, led lower by sharp weakness in domestic large-caps and especially the mega-cap technology names that have led the market since early 2023. In the first quarter, domestic cyclicals such as small-caps and banks were also under substantial pressure. However, there were notable pockets of green – classically defensive parts of the market, like staples, utilities, and quality dividends, saw gains in the first quarter, benefiting those that sought diversification within the domestic equity market. International diversification was an even greater tailwind in the first quarter as European equities rallied over 12% for their best quarter relative to the S&P 500 on record. Emerging markets also saw modest gains due to a sharp rally in China and a weaker dollar. In the fixed income market, core bonds (as measured by the Bloomberg U.S. Aggregate Index) posted total return gains as Treasury yields fell sharply across the rate curve. Corporate bond spreads widened in the first quarter from historically tight levels, causing the riskier slices of the fixed income market to trail Treasuries and mortgage-backed securities.
During the first quarter, Horizon’s Gain models were fully invested across their equity and fixed income allocations. Equity trends were very volatile during the quarter, first shocked by the Deep-Seek news and the sell-off in domestic mega-cap technology stocks. Then came the rotation in favor of international, and especially European and Chinese, equity markets on the back of sharp policy pivots in favor of greater fiscal spending. Toward the end of the quarter, defensive and low volatility rallied sharply relative to cyclicals like small-caps as the tariff policy came to the fore. The Gain equity allocation started 2025 with an overweight to domestic equities relative to global stocks and neutral positioning across growth and value, with focused overweights in software, semis, small-caps, banks, and Japan. After initially increasing exposure to the top of the U.S. market after its January slide, the portfolio moved from domestic large-cap growth into international developed market exposure on the back of the historical policy pivot from Germany after their elections. This reallocation increased the portfolio’s defensiveness and took its international exposure to its largest since before the AI theme took hold in early 2023.
The quarter-over-quarter positioning in the fixed income portion of the Gain models was broadly consistent despite the market volatility. The portfolio featured a large overweight to corporate credit and an underweight to Treasuries as a reflection of the investment team’s positive view on corporate fundamentals and economic growth. The one portfolio reallocation during the quarter occurred toward the end of the period. It featured small tweaks to the core bond exposure in favor of an active holding in the structured high yield credit space. Duration positioning was relatively flat to the benchmark during the quarter.
Gain Equity Contributors and Detractors
Broad international developed markets, emerging markets, and domestic large-cap quality contributed the most to the equity portfolio’s performance in the first quarter. Domestic small-caps, the S&P 500 Top 50, and domestic large-cap growth contributed the least to returns last quarter.
Gain Fixed Income Contributors and Detractors
In the fixed-income portfolio, performance last quarter was driven by two active core bond holdings—one multi-sector, the other mortgage-focused—and long-term U.S. Treasuries. Two active core plus bond holdings and currency-hedged international bonds contributed the least to performance in the first quarter.
Protect Strategies
The first quarter of 2025 saw a modest correction in equity markets that has extended more deeply into April. After rallying to start the year, the S&P 500 fell about 10% intraquarter, led lower by sharp declines in mega-cap technology and the Magnificent 7. International markets fared better; however, the broad MSCI ACWI ex-US index experienced a drawdown of less than 4%, leading to only minor losses for global stocks in the first quarter. Due to the relatively shallow drawdown in global stocks, Risk Assist® activity was fairly limited and not uniformly shared across all the Protect models. As losses accelerated early in April, Risk Assist® activity picked up across the entire Protect model suite.
As is Horizon’s standard allocation practice, the tactical tilts in the Protect equity allocation largely mirror those in the Gain portfolios with slightly lower expected risk and broader implementation.
The quarter began with an overweight to domestic stocks, neutral positioning across growth and value styles, and a slightly smaller-than-usual defensive bias. After late January’s Deep Seek dip in large-cap growth stocks, the portfolio leaned into the top of the market funded by domestic large-cap quality. As volatility rose throughout the quarter, the portfolio rotated in favor of more defensive parts of the market and away from higher beta allocations like the domestic mega-caps and mid-caps. The quarter ended with a modest overweight to international stocks versus global equities, a preference for value over growth, and a lower expected risk profile.
The fixed income component of the Protect portfolios mirrored that in the Gain portfolios during the quarter. Positioning was broadly consistent throughout the quarter and featured a large overweight to corporate credit and an underweight to Treasuries. There were small tweaks to the core bond exposure late in the quarter that saw an add to an active structured high yield credit holding. Duration positioning was broadly in-line with the benchmark and not a major driver of relative performance in the first quarter.
Protect Equity Contributors and Detractors
The first quarter’s biggest contributors to the Protect equity portfolio performance were international developed markets, domestic large-cap quality, and emerging markets. Domestic mid-caps, the S&P 500 Top 50, and domestic large-cap growth contributed the least to performance last quarter.
Protect Fixed Income Contributors and Detractors
In the fixed-income portfolio, performance last quarter was driven by two active core bond holdings—one multi-sector, the other mortgage-focused—and long-term U.S. Treasuries. Two active core plus bond holdings and currency-hedged international bonds contributed the least to performance in the first quarter.
Spend Strategies
The first quarter was a mixed one for stock and bond markets. Domestic equity markets were led lower by noticeable weakness in mega-cap technology and other growth stocks. However, defensive sectors such as healthcare and staples and dividends, low volatility, and broad large-cap value actually posted gains in the first quarter. International stocks also rallied across developed and emerging markets. Core bonds benefited from a fall in benchmark U.S. Treasury yields, although a widening of credit spreads dampened total returns in riskier slices of the fixed income market.
Unlike the prior five quarters, the core portfolio tilt of the Spend models, in favor of risk-managed equity and away from core fixed income, was a headwind in the first quarter of 2025. The widening of credit spreads also weighed on the models last quarter. On the positive side, the equity portfolios were well diversified, and the spending reserve allowed for the funding of current spending without pulling from the growth portion of the models. The mid-quarter reversal in some parts of the global equity universe led to modest Risk Assist® activity across some of the Spend models. Per Horizon’s standard rebalance process, the spending reserves were not replenished after the quarter ended due to performance. All Spend models entered the second quarter with 10 quarters of spend. Outside of the standard liquidity reserve rebalancing activity, the allocations in the growth portion of the models changed little during the quarter.
Spend Contributors and Detractors
The biggest contributors to performance in the Spend equity portfolio last quarter were broad international developed markets and domestic low volatility. Allocations to domestic large-cap core and growth contributed the least to performance in the first quarter.
In the Spend models’ fixed-income portfolio, core investment grade bonds were the top performance driver last quarter, while intermediate-term investment grade bonds contributed the least.
