Navigating Volatility with Discipline: Touchstone Non-US Equity Fund's Q1 2025 Strategy

In a quarter marked by geopolitical tensions, fluctuating interest rates, and AI-driven market swings, the Touchstone Non-US Equity Fund demonstrated how a disciplined, balanced approach to risk mitigation and sector allocation can yield stability amid turbulence. By prioritizing diversified exposures, strategic tilts, and rigorous ESG integration, the fund carved a path that blends growth potential with prudent risk controls. Here's how its Q1 2025 strategy stacks up.

A Sector Allocation Anchored in Stability

The fund's portfolio reflects a deliberate focus on sectors with defensive characteristics, particularly in volatile environments. As of March 31, 2025, Industrials (26.3%) and Consumer Staples (16.1%) formed the core of its holdings, sectors historically resilient to economic cycles. These allocations are bolstered by a secondary focus on Financials (12.8%) and Healthcare (8.8%), which provide further diversification and income stability.

Notably absent from the portfolio are exposures to Energy, Real Estate, and Utilities, sectors deemed cyclical or overly sensitive to interest rate shifts. This strategic avoidance aligns with the fund's “home bias” tilt toward smaller-cap domestic equities—a move predicated on expectations of a U.S. economic soft landing. The fund also maintained a cautious underweight in AI-driven tech stocks, such as NVIDIA, despite broader market enthusiasm, opting instead for established giants like Microsoft, Apple, and Meta.

Risk Management: Layers of Prudence

The fund's risk framework is multi-tiered, combining macroeconomic foresight with granular security selection. Key strategies include:
1. Fixed-Income Buffer: By targeting high-yield bonds without prolonged rate exposure, the fund mitigates interest rate risk—a critical hedge in an era of uncertain Fed policy.
2. Scenario Stress-Testing: Proactive modeling of delayed Fed rate cuts or policy missteps ensures resilience against downside risks.
3. Concentration Discipline: Top holdings account for just 45.3% of assets, with sector allocations intentionally spread to avoid overexposure.

The fund's low turnover rate of 5% further underscores its commitment to long-term holding, reducing transaction costs and enhancing tax efficiency. This patience is amplified by the sub-adviser's bottom-up ESG analysis, which screens companies for environmental, social, and governance risks. For instance, the fund engages directly with firms to address issues like climate risk or board governance, ensuring alignment with its sustainability ethos.

Performance and Considerations

The fund's $77.44 NAV and 1.16% one-day return as of June 25, 2025, reflect its ability to navigate volatility. Its 0.89% expense ratio remains competitive, though its trailing yield of 0.59% lags peers—a trade-off for its equity-heavy growth focus.

Investors should note key risks:
- Interest Rate Sensitivity: Performance hinges on Fed rate decisions, as 88.1% of equities are in developed markets.
- Sector Overlap: Tech's 10.8% allocation creates exposure to AI volatility, even with caution around pure-play stocks.

Investment Takeaways

For investors:
- Hold for the Long Term: The fund is best suited for those with a 3–5 year horizon, seeking capital appreciation through a mix of equity exposure and fixed-income stability.
- Monitor Fed Policy: Historical data suggests buying on Fed announcement dates could yield short-term gains (0.88% average per holding period from 2020–2025).
- Avoid if Seeking High Yield: The fund's growth focus means it cannot compete with bond-heavy or dividend-centric funds.

Conclusion

In a market where uncertainty reigns, the Touchstone Non-US Equity Fund's Q1 strategy exemplifies the power of balance. By leaning into defensive sectors, maintaining ESG rigor, and avoiding speculative excess, it offers a disciplined alternative for investors wary of chasing fleeting trends. While not immune to market swings, its blend of prudence and opportunism positions it as a reliable core holding for those prioritizing steady growth over immediate income.

Past performance is not indicative of future results. Always conduct independent research or consult a financial advisor before making investment decisions.