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 Q3 as U.S. equities and bonds rallied. Equity performance broadened out to other parts of the market in the quarter, benefitting the strategies. The strategies’ exposure to small caps delivered the strongest performance in the quarter, followed by strength in our allocations to a valuation-sensitive equity manager and a dividend growth-focused manager. Our exposures to core U.S. large cap and growth equity managers were also positive contributors, but these areas generally lagged other parts of the market in Q3.
Across the taxable fixed income allocation, our fundamentally-driven bond managers performed well as interest rates declined and bond prices rallied throughout the quarter. Managers with longer-duration positions generally outperformed, and those with overweight credit exposure also added value in Q3. Across the U.S. Core Muni strategies, the municipal bond managers also performed well as muni bonds rallied. Municipal bond managers that were underweight duration slightly lagged in the quarter.
Positioning
Risk Assets
The U.S. Core strategies are structured to provide diversified exposure across U.S. equities. The strategies are allocated across a mix of systematic rules-based, lower expense ratio exchange-traded funds (ETFs) and actively managed, fundamentally-driven, bottom-up stock picking managers. Our exposure remains diversified across growth, core, and value investment styles, and across large, mid and small cap companies. If U.S. equity market performance can broaden out from just focusing on select large cap growth companies, we believe the diversified approach of the U.S. Core strategies may benefit over the longer term.
Conservative Assets
The U.S. Core strategies remain allocated across actively managed bond strategies. We continue to believe that active bond managers have the potential to add value across different market environments. We remain positioned in core intermediate-term bond managers that we believe can perform well in flat and declining interest rate environments. To complement that exposure, we also allocate to tactical bond managers that can adjust their exposure across sectors, maturities, duration and credit quality. We believe this diversified approach to our bond allocation can provide strong support for the U.S. Core strategies over time.
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 Q3 as investors appeared to favor income-generating assets over capital appreciation and higher growth-focused investments. The strongest contributors to performance in the quarter included global real estate, international dividend growth and U.S. mid cap dividend strategies. Option income, large cap dividend growth, multi-asset income and closed-end fund strategies also positively contributed to the strategies in Q3.
Across the fixed income allocation, our positions in interest rate-sensitive core bond managers were strong contributors as interest rates declined and bonds rallied in Q3. Our more tactical and credit-sensitive bond managers also positively contributed as credit markets were relatively stable and higher yields from credit added value.
In our Income – Ultra-Conservative strategy, the strategy’s structural focus on bonds was beneficial as short- and intermediate-term interest rates declined, pushing bond prices higher throughout the quarter. Our allocation to short-term bond managers and their shorter duration was a bit of a drag, as longer-duration bonds outperformed in Q3.
Positioning
Risk Assets
The Income strategies are structured to provide diversified exposure across income-generating asset classes and strategies. For equity dividend exposure, we prefer a balance of dividend growth and higher dividend-paying companies, with dedicated exposure across large cap, mid cap and international companies. We continue to gain additional income generation through our exposure to option income strategies, which can often generate higher income than traditional dividends, while maintaining potential upside through equity exposure. We remain allocated to multi-asset income strategies through a tactical income manager and through exposure to diversified closed end funds. We also remain allocated to a multi-asset real estate income manager to try to provide some additional diversification for the strategies.
Conservative Assets
The Income strategies remain allocated to actively managed, credit-sensitive bond managers that we believe can generate attractive income. We maintain our exposure across a blend of short-term, intermediate-term core and tactical bond managers. We believe our dedicated exposure to short-term bonds can reduce potential downside from a rising interest rate environment, while providing enough credit exposure to generate attractive income. To balance that exposure, we remain allocated to an intermediate-term, investment grade-focused core bond manager that can be beneficial in a declining interest rate environment. To try to further diversify our bond exposure, we also allocate to tactical bond managers that have the potential to add value in both rising and falling interest rate environments.
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 rallied in Q3 as global equities, bonds and multi-asset income strategies rallied. The strategies’ allocation to a global valuation-conscious equity manager and diversified allocations across market cap in international equities were the strongest contributors in the quarter. Exposure to a U.S. large cap dividend growth manager was also a strong positive in Q3. The strategies’ allocations to growth strategies and emerging markets were also additive but these areas generally lagged other areas of the equity markets in Q3. Our dedicated allocation to multi-asset income strategies also added value as income-generating assets were supported in the quarter.
Across the taxable fixed income allocation, our bond manager positions performed well as interest rates declined and bond prices rallied. Bond managers positioned with higher interest rate-sensitivity and credit exposure outperformed those with less interest rate-sensitivity in the quarter. In our Total Return Muni fixed income allocation, bond managers’ performance was additive to the strategies, as interest rate-sensitive municipal bonds rallied. An underweight duration position across muni managers was a slight drag on the strategies in Q3.
Positioning
Risk Assets
The Total Return strategies remain allocated across equities and multi-asset income strategies. Within our equity exposure, we maintain exposure across U.S., international developed and emerging markets, with diversification across market cap. We also prefer a diversified approach across growth, core and value equity managers as different investment styles can be complements to each other in different market environments. To attempt to generate additional income for the strategies, we remain allocated to a tactical multi-asset income manager and diversified closed-end funds. If equity market performance participation can continue to broaden out from just focusing on U.S. large cap growth stocks, we believe the Total Return strategies’ diversification could potentially benefit investors.
Conservative Assets
The Total Return strategies continue to be allocated across fundamentally-driven active bond managers. We believe that active bond managers have the potential to add value in both weak and strong bond market environments. Across our bond allocation, we maintain a mix of intermediate-term, core, investment grade bond managers, and tactical bond managers that have the flexibility to invest across sectors, maturities and credit quality. We believe this blend of bond managers offers a solid foundation for the conservative assets in our Total Return strategies.
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 performed well as U.S equities rallied in Q3. Strength was broad-based across market cap and investment styles in the quarter. Across the long-term allocations, the strategy’s position in small caps was the strongest performer, followed by positions in an actively managed value manager, a large cap dividend growth strategy and a diversified large/mid cap growth strategy. Exposure to passive U.S. large cap equities and an actively managed mid cap growth manager also positively contributed in Q3, but these positions generally lagged the others. The U.S. Core X strategy’s exposures to leveraged positions across market caps were also very additive in the quarter. A tactical increase of exposure to a leveraged NASDAQ 100 Index position was also additive in Q3.
Positioning
Risk Assets
The U.S. Core X strategy remains allocated across U.S. equities, through positions in actively managed, enhanced index, and passive index strategies. The U.S. Core X strategy structurally maintains exposure across market cap and investment styles (growth, core, value). The strategy remains structurally allocated to leveraged U.S. equities across market cap. Due to the selloff in Q3, leveraged exposure to the NASDAQ 100 Index was increased to a slight overweight position. The strategy also maintains a slight overweight to leveraged small caps at this time.
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 performed well in Q3 as global equities and multi-asset income strategies rallied. Across the long-term allocation positions, the Global Unconstrained strategy’s exposure to U.S. and international small caps were the strongest performers in Q3. Additional strength was provided by allocations to an actively managed global value manager, a U.S. large cap quality dividend growth strategy and a diversified closed-end fund strategy. Other positive contributors included passive exposure to U.S. large cap equities, multi-asset income strategies, and exposure to actively managed global growth, mid cap growth and emerging markets strategies.
The Global Unconstrained strategy’s tactical exposure to dedicated leveraged positions was a significant positive contributor in the quarter. Exposure to leveraged Chinese equities, U.S. biotech, diversified emerging markets, and broad exposure across U.S. market caps added strong performance in Q3. Tactical trades in leveraged semiconductor stocks and the NASDAQ 100 Index were also solid contributors in the quarter.
Positioning
Risk Assets
The Global Unconstrained strategy remains diversified and allocated across global equities, multi-asset income strategies, and tactical leveraged positions. The strategy’s long-term allocation positioning maintains exposure across market cap and investment styles (growth, core, value) globally, with exposure to developed and emerging markets. The strategy remains allocated to a dynamic multi-asset income strategy and diversified closed-end funds to attempt to generate income for the strategy.
Due to the significant rally in Chinese equities, in early October, the leveraged Chinese equity position was reduced to less than a third of the largest position we historically had on the trade. Our leveraged trading positions remain allocated across U.S. market cap, with additional leveraged equity exposure to China, U.S. biotech, semiconductors and diversified emerging markets.