Coming up, we tell you why quality investing is less of a description and more like a philosophy.

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From Thrivent Asset Management, welcome to Advisor’s Market360^™, a podcast for you, the driven financial advisor.

Quality is a word you see attached to many things. Whether it’s a car, a vintage wine or a football coach, the word quality connotes a degree of comparative excellence. So, it shouldn’t come as a surprise that when we talk about quality investing, we are looking at the stocks of companies that when compared to their peers, are quantifiably superior. Of course, the trick is finding companies that go beyond window dressing and are truly superior. At Thrivent Asset Management, we are big believers in quality investing, especially in today’s markets, and have developed a set of criteria we use to help us determine companies that get our stamp of quality approval.

For a deeper dive into quality investing, we enlisted three Thrivent Asset Management experts: Steve Lowe, Chief Investment Strategist; David Spangler, Director of Mixed Asset and Market Strategies; and Kent White, our Head of Fixed Income.

Are you ready for some quality information? Let’s go.

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Before we get to the discussion of quality investing, it would be helpful to set the table with a quick summary of what’s performing well in the current economy. Here’s Spangler:

(Spangler) “In 2024, I think that because of the resiliency of the U.S. consumer and the U.S. economy overall, it's really benefited areas such as large-cap in tech, quality, growth.”

More specifically, we wanted to get Spangler’s take on U.S. equities and why they have continued to perform so well…

(Spangler) “It's really come down to corporate earnings. And the resiliency of the U.S. consumer and the U.S. economy overall has allowed the markets to perform very well. I actually believe that that's what we’ll continue to see, is that quality and even large-caps and tech can continue to do well within the market. Small-caps are considered to be far lower quality overall. Now, there are quality companies within the small-cap indices. And I think that there will be pressures on small-caps as we come into 2025, such as higher rates and perhaps some areas of the economy that could slow. But in general, I do expect to see more of a continuation of what we have experienced over the last couple of years.”

Recently, the equities market has been very narrow with large-cap tech names dominating thanks to continued developments in artificial intelligence, or AI. These names comprise the so-called Magnificent Seven. We asked Spangler if he anticipates a broadening of the market in 2025.

(Spangler) “Different types of policies that can come from the Trump administration could favor other areas of the markets, such as financials, industrials, materials, even real estate and biotech. It could help small-caps and mid-caps as well. So yes, you can see a broadening out within the market. Also too, as been mentioned, if AI doesn't continue to live up to its expectations, then you could see a broadening out to the remaining 493 companies within the S&P 500.

“Those are things that could encourage broadening out within the markets. But I think in general, if there is a broadening out, I don't think it's all the way down in the market cap spectrum and down in the small-caps, maybe in the mid-caps and maybe into the remaining companies within the S&P 500. But I think for, you know, in my view, for the foreseeable future, still the momentum is within large-cap and within large-cap tech.”

And that brings us back to the theme of this episode: quality. Here’s Lowe:

(Lowe) “So it's still a quality story. Quality continues to perform well.”

Spangler agrees:

(Spangler) “What you'd have seen is that quality has done well. Quality companies, that is, across every segment of the markets, from large-caps, mid-caps, small-caps to growth, core and value. Every industry sector is quality. Coming into 2025, I actually believe that's what we'll continue to see is that quality, and even large caps in tech, can continue to do well within the market.”

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Among many, quality is one very important factor in positioning and allocation within equities.  We asked Spangler to go a little deeper with his current equity positions:

(Spangler) “We're overweight equities. We’re underweight international by some four or so percent, and we intended to stay at least that underweight for the foreseeable future. And within equity itself, domestically, we're overweight large-caps, we're overweight mid-caps, and more neutral and small-caps at this point. We added a point of equity on more recently after the election—we wanted to add a point of equity on because of some pro-growth types of policies that can come out of the new administration.

“We put the point into small-caps, more as a risk mitigating type of strategy. We were a little underweight and now we're more neutral. But I think that over the intermediate or longer term, we’ll probably bring that weight in small-caps back down a little bit. If small-caps do well, then I do expect also too, mid-caps to perform reasonably well and know maybe not entirely keep up with small-caps, but they'll perform well too.

“And we're overweight mid-caps and we’ll benefit from that. But I think that being overweight large-caps is a more of a higher quality area of the market to be in. And so, we don't actually intend to change that overall allocation.”

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Aside from equities, this quality investing philosophy can also be used to assess fixed income, so we asked White to weigh in. He started with credit markets:

(White) “Valuations are probably our biggest focus right now. We've seen a pretty strong post-election rally in virtually every credit asset class, to levels that we haven't seen in decades, like investment grade credit, is as tight as it's been since pre-2000. We’re being a little bit more cautious around credit and a little bit more up in quality. Just because we don’t feel like we’re getting paid as much as we should be or normally are to take additional credit risk. But most of those asset classes, really, from a valuation perspective, look pretty rich to us right now. So, whether it’s within those different asset classes, we’re generally up in quality and, or just in some of our multi-asset class portfolios, we’re also kind of skewing a little bit more to higher quality, whether it’s Treasuries or securitized.”

Fixed income yields are another area of the market where quality shines. Here’s what White is thinking…

(White) “From a pure yield perspective, there's plenty of opportunities. I think that's the distinction here is that yield across fixed income really looks very attractive. We like fixed income and the benefit it provides in a diversified portfolio, especially the downside protection that it might have in case things go in a direction that we're not anticipating.

“Another area that we really like are tax exempt municipal bonds, high-quality munis. You have tax equivalent yields now that are in the 5 to 6% range, depending on your tax bracket, which we find very attractive, even if tax rates are potentially lower next year.”

Next, we wanted to know more about White’s fixed income positioning.

(White) “Right now, it's difficult to be underweight credit given our generally positive outlook for the economy in 2025, even though valuations are a little stretched. However, like I said earlier, we have been moving up in quality or more defensively positioned in certain parts of the credit curve, you know, favoring the front end. And we're keeping a little dry powder in the form of cash and U.S. Treasuries in the event we see a better opportunity. Add back a little bit more risk.”

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We hope you enjoyed, if you’ll excuse the pun, this quality episode. We would like to thank David Spangler, Kent White and Steve Lowe for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360^™ and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.

(Disclosures)

All information and representations herein are as of 11/24/2024, unless otherwise noted.

Past performance is not necessarily indicative of future results.

Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thriventfunds.com or by calling 800-847-4836.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

This podcast refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.

Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. U.S. government securities may not be fully guaranteed by the U.S government and issues may not have the funds to meet their payment obligations. The value of U.S. government securities may be affected by changes in credit ratings, which may be negatively impacted by rising national debt. The value of mortgage-related and other asset-backed securities will be influenced by the factors affecting the housing market and the assets underlying such securities. High yield securities are subject to increased credit risk as well as liquidity risk.

These and other risks are described in the prospectus. Thrivent Distributors, LLC, a registered broker-dealer and member FINRA, is the distributor for Thrivent Mutual Funds. Asset management services are provided by Thrivent Asset Management, LLC, an SEC-registered investment adviser. Thrivent Distributors, LLC, and Thrivent Asset Management, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans.