The Dividend Corner: Quarter-end Market Update

Hi, I’m Nick Puncer, Portfolio Manager and member of Bahl & Gaynor’s Investment Committee. Welcome to our second episode of The Dividend Corner, following our inaugural episode, which was our mid-quarter update. Today is Monday, March 31, 2025, and we will discuss the first quarter including the current growth scare, Bahl & Gaynor’s positioning, and our outlook.

Since our mid-quarter update, domestic equity markets have remained volatile after sliding as much as 10% during the quarter on growth concerns. This drawdown is perhaps not unsurprising given the combination of high recent returns, lofty valuations, and a fast-changing policy mix.

Bahl & Gaynor’s strategies are designed to provide downside protection, which they did during this quarter. We believe this downside protection is a natural outgrowth of our preference for companies that pay dividends and grow them because the market recognizes the intrinsic quality of these businesses, particularly in times of stress.

As active managers, we believe we can further compound this intrinsic quality, and therefore downside protection, through portfolio diversification and valuation discipline.

In a broader sense, downside protection is important for investors not only because of the recent market drawdown but also because of the current market structure. The slide pictured here illustrates the well-understood dynamic of large-cap concentration increasing over the last decade. But we take this a step further and examine how the downside capture ratio of the largest equity market constituents, pictured at the bottom of the slide, has also changed. This group’s downside capture profile has increased by nearly 50% over the last decade.

Even though the market’s beta will always be one, this does not mean the market has constant volatility. With the high equity returns of the past few years, indeed the last decade, it may be tempting for active managers or investors to mirror index composition. But that action could involve assuming more risk than investors expect or is necessary to achieve their goals. That is why Bahl & Gaynor’s strategies emphasize high active share relative to their index benchmarks, meaning we look very different than the construction of passive indexes.

Because investors have made significant progress against their goals, given the high equity returns of the last decade, a core mandate for our active approach is to avoid setting investors back through exposure to excessive risk and downside volatility.

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Switching gears to the growth scare at hand. Growth scares occupy a tiring middle ground between the wealth creation of economic expansions and the unsettling wealth diminishment of economic contractions. This fear is perhaps most poignantly elicited in the Atlanta Fed’s GDP Now indicator pictured on this slide, which shows the onset of the growth scare in real time.

Investors are now understandably busied by trying to figure out whether the economy will continue to grow or weaken further. We don’t know which way this growth scare will break, but we also don’t believe that information is necessary for many investors to achieve their goals. Various envisioned futures depend largely on the timeframe. An economic contraction may have a higher probability of occurring near term, but that gives way to a rising potential of expansion further out. The reverse of this is also true. Much of the work to be done by investors concerns managing risk around different time frames. In the near term, if an incremental drawdown is more likely, then downside protection can serve an important purpose. But in the long term, inflation and preserving investor purchasing power are probably the risks of greatest concern.

Bahl & Gaynor’s investment approach attempts to balance the various timeframes investors must navigate:

• The downside protection we seek to provide is the desired o