As an investment consultant and portfolio manager for different clients, I manage a number of different investment strategies. Once you understand my investment philosophy, you’ll understand why I manage these strategies the way I do. I share the investment commentary on these strategies here.
U.S. CORE STRATEGIES
The U.S. Core strategies provide long-term exposure to core U.S. equity and bond markets. The strategies may have some exposure to non-core markets, including foreign assets and lower-quality fixed income. The strategies are structured to participate in the upside of bullish U.S. equity and credit markets. The strategies’ risk exposure is not tactically managed and can result in poor performance in weak U.S. market environments. The U.S. Core strategies are managed across Conservative through Aggressive risk profiles.
Performance Review
The U.S. Core strategies were mixed in Q1 as U.S. equities declined while bonds rallied. The U.S. Core equity allocations were weak across all positions in the quarter. Our exposure to a dividend growth manager held up better in the quarter as investors appeared to favor income-generating assets. Our exposures to growth stocks and mid/small cap stocks were the weakest performers in the quarter as more volatile areas of the market generally underperformed in Q1.
In the U.S. Core strategies’ taxable bond allocation, our exposure to active bond managers positively contributed to the strategies as interest rates declined and bonds rallied in the quarter. Managers with heavier allocations to interest rate-sensitive bonds generally outperformed in Q1. In the U.S. Core Muni strategies muni bond allocation, performance was positive overall in Q1. Individual muni bond manager performance was a bit mixed, as duration and sector positioning were key factors in driving performance in the quarter.
Positioning
Risk Assets
The U.S. Core strategies remain allocated across the U.S. equity market through passive, fundamentally-driven, rules-based index and actively-managed strategies. We remain diversified across investment styles and market cap, with a preference for exposure to higher-quality, growing companies.
Conservative Assets
The U.S. Core strategies maintain diversified exposure to core, investment grade bond strategies alongside more tactical bond strategies. We continue to prefer exposure to core bond strategies that may act as a diversifier to equities should bonds rally when equities decline. We also continue to prefer exposure to tactical bond managers that can increase exposure to credit risk when risk assets decline and opportunities in credit-sensitive bonds become available.
INCOME STRATEGIES
The Income strategies primarily invest in higher income-generating assets. This can include dividend-paying stocks, option-income strategies, investment grade bonds, high yield bonds, emerging markets debt and real estate securities. The strategies’ risk exposure is not tactically managed, which can result in poor performance in weak U.S. market environments. The Income Strategies are managed across Ultra-Conservative through Aggressive risk profiles.
Performance Review
The Income strategies rallied in Q1 as income-generating assets generally outperformed assets that rely on capital appreciation for returns. The strongest positive contributor in the quarter was our exposure to foreign dividend growth companies. International equity markets outperformed U.S. markets in Q1, and our dedicated exposure to international stocks benefited. Our exposures to a valuation-focused, option income strategy and closed-end funds were also solid contributors in the quarter. Exposures to a multi-asset income manager, our second option income manager, and a global real estate income manager also generated positive returns in the quarter. Detractors in Q1 were driven by exposure to U.S. large and mid-cap dividend-paying companies.
Across the fixed income allocation, the bond managers performed well as interest rates declined and bond prices rallied. Our structural underweight to duration was a slight headwind in Q1 as interest rate-sensitive bonds outperformed.
For our Income – Ultra-Conservative strategy, performance was solid as our allocation to active bond managers was beneficial as bonds rallied during the quarter. The strategy’s structural lack of equity exposure also benefited as U.S. equity markets declined in Q1.
Positioning
Risk Assets
The Income strategies remain positioned across higher income-generating assets. This exposure includes allocations to dividend-growth and higher dividend-paying companies, option income, tactical income, closed-end fund income and global real estate income strategies. We believe this diversified approach may help maintain higher income generation with additional opportunities for potential capital appreciation.
Conservative Assets
The Income strategies remain allocated to higher income-generating, credit-sensitive bond strategies. We prefer to allocate to core and tactical bond managers that have the flexibility to increase/decrease credit exposure as opportunities and risks arise. We continue to allocate across short-term and intermediate-term bond strategies to help diversify across interest rate exposures.
TOTAL RETURN STRATEGIES
The Total Return strategies provide long-term diversified exposure across U.S. and international equities, bonds and income-generating assets. The strategies are structured to participate in the upside of bullish equity and credit markets and provide moderate income generation. The strategies’ risk exposure is not tactically managed and can result in poor performance in weak market environments. The Total Return strategies are managed across Conservative through Aggressive risk profiles.
Performance Review
The Total Return strategies were mixed in Q1 as U.S. equities declined, international markets showed relative strength and bond markets rallied. The Total Return strategies’ focus on diversification appeared to be beneficial in the quarter. The strongest contributors to performance were our dedicated exposures to international equity markets as international equities generally outperformed U.S. equities in the quarter. This included exposures to active core/value global equity, international developed large and small cap equity, and emerging markets equity managers. Our exposures to multi-asset income and closed-end funds also positively contributed in the quarter. Detractors in Q1 were primarily our exposures to U.S. equities and growth stocks, which underperformed.
In the Total Return taxable bond allocation, our allocation to active bond managers was a positive as interest rates declined and bond prices rallied. The bond managers with the heaviest duration exposure generally outperformed those that were underweight duration in the quarter. For the Total Return Muni bond allocations, our exposure to active bond managers was a positive overall in the quarter where positioning was a key driver for performance in a mixed muni market environment.
Positioning
Risk Assets
The Total Return strategies maintain diversified exposure across U.S. and international equities, with an additional allocation to higher income-generating assets. Across equities, we prefer to remain diversified across management style, market cap and geography. Within our income-generating assets, we also prefer exposure to multiple asset classes, including dividend-paying equities, credit-sensitive bonds, option income and closed-end funds. We continue to prefer a mix of passive index, fundamentally-driven, rules-based and actively-managed strategies to construct the Total Return strategies.
Conservative Assets
The Total Return strategies remain allocated to actively-managed bond strategies. We remain balanced across core, investment grade bond managers and more tactical bond managers that have the flexibility to allocate across the bond markets. We believe these bond managers have the depth and experience to successfully navigate the complex bond markets over time.
U.S. CORE X STRATEGY
The U.S. Core X strategy provides long-term exposure to core U.S. equity and bond markets. The strategies may have some exposure to non-core markets, including foreign assets and lower-quality fixed income. The strategies are structured to participate in the upside of bullish U.S. equity and credit markets. The strategy is tactical in nature, allowing for the use of leveraged investments to attempt to generate higher returns. The use of leveraged investments can increase the risk of the strategy. Leveraged investments should be considered speculative investments and may not be suitable for all investors.
Performance Review
The U.S. Core X strategy declined in Q1 as U.S. equities broadly declined. Our dedicated exposure to a valuation-sensitive manager was the only positive contributor in the quarter. Although our exposure to a quality dividend growth strategy declined in Q1, it held up better than other strategies as investors appeared to prefer income-generating assets. Key detractors in the quarter included exposures to growth and mid/small cap equities. As would be anticipated in a deep equity market decline, our structural exposure to leveraged equities was a large detractor in Q1. If U.S. equities continue to decline from current levels, we would anticipate our leveraged equity exposure to continue to be a significant source of downside pressure for the U.S. Core X strategy. If U.S. equities rally from here, our leveraged exposure could be beneficial for the strategy.
Positioning
Risk Assets
The U.S. Core X strategy remains structurally allocated across a blend of passive U.S. large cap equity, rules-based active equity managers, fundamentally-driven active equity managers, and tactically-managed leveraged equity positions. The strategies are allocated across market cap and investment styles (growth, core, value).
Throughout the decline across U.S. equities in Q1 and through April 7th, we were actively adding exposure to leveraged equities across large, mid and small caps. We sourced this exposure by reducing exposure to our non-leveraged equity positions with similar style and market cap. We also tactically rebalanced select positions when opportunities were available. The U.S. Core X portfolio is now fully allocated to its first tranche of increased exposure to leveraged equities. Should the U.S. equity market continue to decline from current levels to our price targets, we will continue adding exposure to leveraged equities as the U.S. Core X strategy is designed.
GLOBAL UNCONSTRAINED STRATEGY
The Global Unconstrained strategy provides long-term diversified exposure across U.S. and international equities, bonds and income-generating assets. The strategies are structured to participate in the upside of bullish equity and credit markets and provide moderate income generation. The strategy is tactical in nature, allowing for dedicated positions to attempt to generate higher returns and/or hedged positions to attempt to reduce risk. The strategy may utilized leveraged investments, which can increase the risk of the strategy. Leveraged investments should be considered speculative investments and may not be suitable for all investors.
Performance Review
The Global Unconstrained strategy declined in Q1 as global equities were mixed, while bonds rallied. Key contributors to performance in the quarter were exposure to international equities, through global value, emerging markets and international small cap strategies. Exposures to multi-asset income and closed-end funds were also positive contributors in Q1. Key detractors in the quarter included exposure to growth and mid/small cap equities. As would be anticipated, exposure to leveraged equities was a significant detractor in the quarter overall. Exposures to leveraged Chinese and diversified emerging markets were additive in the quarter, but positions across small cap biotech, semiconductors, mid and small cap equities were detractors.
Positioning
Risk Assets
The Global Unconstrained strategy remains diversified across U.S. and international equities, with exposures across investment style (core, growth, value) and market cap. Due to above average valuations in U.S. large cap equities, the strategy maintains a heavier allocation to multi-asset income strategies, through a tactical income manager and diversified closed-end funds. We maintain our exposure to leveraged equities, including exposure to U.S. large, mid and small caps, Chinese equities, diversified emerging markets, semiconductors and small cap biotech.
As global equities declined in Q1 and through April 7th, we began increasing exposure to our leveraged equity positions. We specifically added leveraged exposure to the S&P 500, NASDAQ 100, U.S. mid caps, U.S. small caps and semiconductors through April 7th. We sourced these allocations from non-leveraged equity positions we believed had similar style and market cap profiles to the leveraged positions. We also tactically rebalanced select positions when opportunities were available. If we continue to see opportunities following further declines in global equity markets to what we believe are attractive price targets, we will continue to increase exposure to leveraged positions in the Global Unconstrained strategy.