With the current administration’s focus on trade imbalances, tariffs continue to make waves in the market. Investors are naturally asking how this impacts their portfolios—and whether managers are adjusting in response.
While tariffs are certainly worth monitoring, here at Prospector Partners they don’t dictate our strategy. Our portfolios are built on a foundation of quality and selectivity. As such, we’re confident they’re already positioned to weather policy-driven volatility without having to make dramatic shifts.
First, we’d emphasize that tariffs are just one of many macro variables we monitor — and not the most important one. As a rule, we focus on company-level fundamentals rather than making top-down bets on policy.
Insurance companies, for example, are less exposed to tariff pressures. And as anyone familiar with us knows, insurance has long been an area of focus in our strategies. It’s a sector we’ve researched and invested in for decades, drawn to the stable cash flows, prudent capital allocation, and lower sensitivity to macroeconomic swings of these businesses. Insurance companies tend to have consistent earnings power and operate within regulated environments, making them a dependable core holding—especially when headline risk is high.
Banks are another area we feel confident about. While tariffs don’t pose a direct risk to bank earnings, we do consider their potential to trigger a broader economic slowdown. That’s why we’ve modeled recession scenarios into our credit assumptions for all our bank holdings and adjusted loss reserves accordingly. Even with those stress tests, the banks we invest in remain well-capitalized with durable earnings.
Meanwhile, a steeper yield curve, which often accompanies tariff-driven uncertainty, can actually benefit banks by expanding net interest margins. We've also seen an uptick in bank M&A activity, which we believe reflects management teams positioning for tougher economic conditions and searching for cost synergies. That kind of proactive behavior adds another layer of resilience to the sector.
Similarly, consumer staples can offer a degree of tariff agnosticism — if you’re selective. Companies differ widely in terms of where their products are sourced, manufactured, and sold. If you avoid those with high geographic or product concentration in affected regions, you can build exposure that’s less vulnerable to the impact of tariffs.
Where things get more complicated is in sectors like industrials and consumer discretionary. But even there, we’re not exposed in a way that keeps us up at night.
Within industrials, we like defense industry-related companies, which don’t face meaningful tariff risks. If anything, their biggest challenge in the current environment is related to potential disruptions stemming from the Department of Government Efficiency (DOGE), not trade policy. While DOGE’s recent push for cost-cutting has led to some delays in contract execution, we’re staying close to the developments and remain confident in the long-term stability of defense spending, which continues to enjoy bipartisan support and strong structural tailwinds.
Outside of defense, our industrial holdings are concentrated in companies tied to secular growth trends—automation, electrification, data center expansion, HVAC upgrades, and more. These aren’t businesses heavily reliant on global trade. Many have diversified supply chains and pricing power that help mitigate the impact of tariffs. While some consumer-facing industrials, like building products companies, are starting to express concern about softening demand, most of the management teams we track have reiterated 2025 guidance and described tariffs as manageable. Their confidence stems from experience. Many successfully navigated the first wave of Trump-era tariffs and pandemic-related disruptions, and they’re drawing on those lessons now.
Across the board, we're seeing industrials companies use sourcing strategies, cost management, and selective pricing to offset pressures. That’s why, beyond defense, we remain constructive on our exposure in this sector—we own high-quality businesses with strong cash flows and solid balance sheets, and we believe they’re well equipped to weather near-term uncertainty and thrive over the long haul.
Consumer discretionary, especially apparel and retail, is a different story. That’s the part of the market most clearly under pressure from tariffs—and our exposure there is minimal. We’ve long favored quality and predictability in this sector, a bias that has kept us away from what we consider to be the more vulnerable parts of the consumer discretionary sector.
We maintain some exposure to healthcare and are closely monitoring the evolving conversation around pharmaceutical-specific tariffs. Historically, drug imports have been left out of tariff battles due to the risk of higher costs being passed directly to U.S. consumers. But that precedent may be shifting. President Trump has floated the idea of a 25% tariff on pharmaceutical imports—an unprecedented move that would have significant implications across the supply chain. At this stage, pharmaceutical tariffs are still a topic of debate, leaving the path forward unclear.
We may not be repositioning the portfolio in response to tariff headlines but that doesn’t mean we’re standing still.
We review our holdings constantly and use market volatility as a tool. When prices swing broadly on sentiment, we look for chances to upgrade the portfolios: trimming lower-conviction names and reallocating to higher-conviction ones. We also use periods of dislocation to engage in tax-loss harvesting where appropriate—swapping positions between similarly valued names to capture losses and reduce capital gains, without compromising portfolio quality or intent. In some cases, we’ll return to the original name after the wash-sale window, but often we take the opportunity to move into what we believe is a stronger long-term holding.
Additionally, we maintain a running list of companies we admire but have historically found too expensive. Broad market pullbacks often give us the chance to initiate positions in these businesses at more attractive valuations. Our goal is to emerge from uncertain periods stronger than we entered them.
We’ve always believed that steady, fundamentals-based investing outperforms reactionary moves over the long term. That philosophy has guided us through countless market cycles—and it continues to guide us now.