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 rallied in Q2 as U.S. large cap growth companies outperformed and bonds generated attractive income. Exposure to a passive U.S. large cap strategy and higher quality large cap growth companies were the strongest contributors to the strategies in the quarter. Heavy allocations to artificial intelligence-related companies in these strategies were significant drivers of performance in Q2. Our exposure to mid and small cap equities and a valuation-focused manager detracted as these areas did not have the heavy artificial intelligence-related exposure that the outperforming large cap growth strategies had.
Across the taxable fixed income allocation, our allocation to actively-managed bond strategies added value in the quarter. Our aggregate overweight to credit was rewarded as credit markets were relatively stable. Our underweight duration positioning was also a slight positive contributor as interest rates moved higher, pushing interest rate-sensitive bonds’ prices lower. Across the U.S. Core Muni fixed income allocation, our active muni bond managers added value in Q2 as their overweight credit positioning and underweight duration was also rewarded.
Positioning
Risk Assets
The U.S. Core strategies remain diversified across market cap and investment styles (growth, core, value), blending actively- and passively-managed strategies. The U.S. equity markets this year have been heavily driven by very large, artificial intelligence-related technology companies, while the rest of the market has lagged. The strategies’ exposure to larger cap growth companies has continued to be beneficial to the strategies, but the diversified exposure to other higher quality areas across market cap and lower valued companies has dragged on the strategies. We believe the diversification of the U.S. Core strategies has the potential to add value over the long term, even if it may be a headwind over the short term.
Conservative Assets
Across fixed income, the strategies remain allocated across fundamentally-driven active bond managers. The strategies are blended with an allocation to higher quality, intermediate-term bond strategies and more tactically-driven bond managers. We continue to believe that our allocation to interest rate-sensitive high quality bonds can benefit in a declining interest rate environment. We also continue to prefer our allocation to more tactical bond managers that can take advantage of dislocations across the bond market, while managing downside risks.
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 and 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 Q2, but investors appeared to prefer the capital appreciation potential of growth stocks over income in the quarter. Across equities, the strongest contribution came from equity managers that focus on U.S. and international dividend growth companies, as growth was favored in the quarter. Exposure to closed-end funds was also a solid contributor in the quarter. Detractors in Q2 included exposure to option income, higher equity dividend-paying strategies and global real estate.
Across the fixed income allocation, an overweight to active bond managers was additive in Q2. The aggregate overweight to credit was a positive as credit markets remained relatively stable and the bond managers’ positioning was favored in the quarter.
In our Income – Ultra-Conservative portfolio, the portfolio’s structural lack of equity exposure dragged relative to more diversified, multi-asset strategies, as would be expected. The portfolio’s overweight to credit was a positive as credit continued to be supported. An underweight to interest rate-sensitive bonds was a positive contributor in Q2 as interest rates moved slightly higher and longer duration bonds underperformed.
Positioning
Risk Assets
The Income strategies remain structurally allocated to higher income-generating asset classes and strategies. We continue to prefer to be balanced with exposure to dividend-paying companies across market cap and geography, option income strategies, tactically-managed income strategies, income-generating real estate assets across the capital structure and high income-generating closed end funds. We believe this balance can provide higher income potential but also capital appreciation potential over the long term.
Conservative Assets
Across the Income strategies’ fixed income allocation, we prefer to remain allocated to actively-managed bond strategies. We believe the managers of these strategies can continue to add value over the long term. We remain allocated across a blend of higher quality, intermediate-term bond managers and more diversified, tactical bond managers. High quality, interest rate-sensitive bond strategies have the ability to participate well in a declining interest rate environment, while tactical managers can take advantage of different market environments. In our opinion, this blend of bond strategies has the potential to add value for investors over the long term.
TOTAL RETURN STRATEGIES
The Total Return strategies provide long-term diversified exposure across U.S. and international equity, bond 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 rallied in Q2, led by strength in U.S. large cap growth stocks and income generation from our bond allocations. Across our equity allocation, positive contributors included exposure to a passive U.S. large cap strategy, a U.S. dividend growth equity manager, a global growth equity manager and a dedicated emerging markets equity manager. An allocation to multi-asset income strategies was also additive in the quarter. Detractors for the quarter included exposure to U.S. mid cap, international small cap and global value equity managers.
Across the taxable fixed income allocation, our allocation to actively-managed bond strategies continued to add value. The strategies’ overweight to credit and tactical managers was a positive contributor in the quarter. The aggregate managers’ underweight to duration was also a slight contributor as interest rates moved higher in Q2. Across the Total Return Muni fixed income allocation, our actively-managed muni bond managers also did well as an overweight to credit-sensitive municipal bonds and an underweight to duration were rewarded in Q2.
Positioning
Risk Assets
The Total Return strategies remain structurally diversified across investment styles, market cap and geographies, with dedicated exposure to higher income-generating assets. Although U.S. large cap technology-related companies have driven U.S. equity markets, international equity markets had much broader participation across company types and diversification was beneficial outside of the U.S. Our exposure to higher income-generating assets continues to add income and may help support the strategies if volatility picks up from here. We continue to believe the Total Return strategies’ diversified approach to investing in risk assets remains a solid option for those investors seeking the potential benefits of diversification over the long term.
Conservative Assets
The Total Return strategies’ fixed income allocation remains positioned across actively-managed bond strategies driven by what we believe to be strong investment management teams. We prefer to remain balanced across higher quality, intermediate-term bond strategies with additional exposure to more tactical bond managers. Our allocation to tactical bond managers may add some additional volatility to our bond exposure, but we believe this volatility through active management can potentially add value to the strategies over the long term.