Walter Scott briefed Norwalk trustees on underperformance, cites sector positioning and market rotations

Walter Scott, the investment manager for part of Norwalk’s international equity allocation, updated the Norwalk City Pension Board on portfolio performance and positioning, saying the strategy has produced an annualized return near 8% since the city’s investment but has trailed the MSCI growth benchmark through January 2025.

Laura McDonald, a Walter Scott client investment manager, and Alan, the firm’s investment manager for the mandate, told trustees the account’s absolute returns have been reasonable but that sector positioning — especially an intentional underweight to financials — and market rotations that favored value stocks at times have driven relative short‑term underperformance. McDonald and Alan described the process the firm uses to pick roughly 50 long‑term holdings and stressed a team‑based, bottom‑up stock‑picking approach with an internal cap near 5% for any single holding.

Walter Scott provided portfolio specifics and reasons for recent relative weakness. The managers said the portfolio tends to capture most downside during market drops but does not always capture all upside in sharp rallies. They pointed to three drivers of 2024’s underperformance: a short but sharp value‑for‑growth rotation in early 2022, weak performance in a number of industrial holdings (including some Japan‑based names), and strong returns in European and Japanese financials in late 2024, sectors in which Walter Scott is underweight. Alan said the firm “tends to capture 90% or so of the upside” in rising months and “about 80% of the downside” in falling months on average over long horizons.

Trustees raised questions about geopolitical and tariff risks for individual holdings. Walter Scott singled out Taiwan Semiconductor Manufacturing Co. (TSMC) as a top performer in the portfolio and discussed the low‑probability but material geopolitical risk tied to Taiwan. The managers noted TSMC is diversifying production — including existing fabs in Arizona — and that the company’s global importance makes an outright production cutoff unlikely. Managers also discussed Diageo as an example of possible tariff exposure because a portion of its input costs for U.S. sales come from Canada or Mexico; they said Diageo believes it can pass higher costs through to consumers but the board should monitor the position.

On client‑level performance, Walter Scott reported that the city’s investment grew from just under $31 million to just under $36 million over the near‑two‑year holding period covered through January 2025; that represents roughly an 8% annualized return since inception of the mandate but a meaningful shortfall versus MSCI growth indices over the same period. The managers described portfolio turnover as low — generally 10–15% annually — and said they have an internal hit rate of roughly 60% for investment decisions over time. They also described recent trading: trimming Taiwan Semiconductor and Adidas and adding to ASML and Dassault Systemes.

Trustees said they appreciated the firm’s transparency and asked to review fixed‑income manager recommendations and portfolio performance at a later meeting. Walter Scott also invited attendance at a firm research conference in Scotland in May 2026.

The board scheduled further manager discussion and asked staff to provide updated performance figures through the most recent month for the next meeting.