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 Q4 as U.S. equities were flat to higher, while bond prices declined as interest rates moved higher. Within the equity allocation, exposure to higher-quality growth companies was additive, as investors appeared to prefer quality growth over value-oriented and income-generating assets in Q4. Our allocation to an active valuation-focused equity manager was also relatively positive during a period when “value” stocks generally struggled. Dedicated exposure to quality small companies was a key detractor in the quarter as investors may have preferred the perceived safety in larger quality companies to end the year.
In the U.S. Core strategies’ taxable bond allocation, exposure to core, intermediate-term bonds detracted, as rising interest rates caused bond prices to decline. Our allocation to tactical bond managers was highly beneficial in Q4, as their underweight duration positioning was rewarded. In our U.S. Core Muni strategies, our aggregate allocation to active managers was slightly beneficial, as their underlying positioning helped protect some value in a weak muni market environment.
Positioning
Risk Assets
We continue to allocate the U.S. Core strategies across market cap and investment styles (growth, core, value) to help provide long-term diversification. The strategies also remain allocated across passive, rule-based and active managers in areas where we believe added value could be obtained.
Conservative Assets
The U.S. Core strategies remain allocated to a broad range of bond securities, including across sector, credit quality, maturity and interest rate-sensitivity. We continue to prefer actively-managed core and tactical bond managers, as we believe they have the breadth and depth of resources and knowledge to navigate the complex and ever-changing bond markets.
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 declined in Q4 as income-generating assets broadly declined along with a rise in interest rates along the yield curve. Performance across the strategies’ income-generating strategies was mixed. While equity income strategies were weak in Q4, the strategies’ exposure to U.S. large-cap core option income and dynamic multi-asset income strategies outperformed. Exposure to international dividend growth was also a detractor in the quarter as foreign equities and foreign currencies generally underperformed U.S. assets. Exposures to closed-end fund and global real estate income strategies were also detractors in Q4.
Across the fixed income allocation, the strategies’ structural underweight to interest rate-sensitive bonds, along with the allocation to tactical bond managers similarly underweight duration, were strong contributors in Q4 as interest rates rose and bond prices declined. An overweight to credit-sensitive bonds also contributed positively, as their higher yields generated income for the strategies.
For our Income – Ultra-Conservative strategy, performance was weak in Q4 due to rising interest rates and falling bond prices. The strategies’ structural underweight to duration and overweight to tactical bond managers were large positive contributors in the quarter, protecting material value relative to core, intermediate-term, interest rate-sensitive bond indices.
Positioning
Risk Assets
The Income strategies remain allocated across a diversified set of income-generating investment strategies. These strategies include U.S. and international dividend growth companies, mid cap dividend-paying companies, tactical multi-asset income, option income, closed-end funds and global real estate income strategies. We believe the allocation across these strategies allows for asset class diversification, attractive income generation and potential upside equity participation over time.
Conservative Assets
The Income strategies’ conservative assets allocation remains positioned across actively-managed bond managers. We prefer active, credit-sensitive bond managers over passive bond strategies for the Income strategies. We believe these active bond managers have the breadth, depth and experience to successfully manage their strategies in both strong and weak bond market environments over time.
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 weak in Q4, driven by challenges in foreign equity and bond markets. The strongest contributor in the quarter was our exposure to quality U.S. growth companies, as investors preferred growth over value and income-generating assets. The strategies’ exposure to international developed and emerging markets was also a detractor as foreign equities and foreign currencies generally underperformed U.S. equities in Q4. Exposures to tactical multi-asset income and closed-end funds were detractors as income-generating assets experienced downside pressure while interest rates moved higher in the quarter.
In the Total Return taxable bond allocation, exposure to core, intermediate-term bond managers detracted, as rising interest rates caused bond prices to decline. The strategies’ allocation to tactical bond managers was a strong positive contributor in Q4 as their underweight to interest rate-sensitive bonds protected some value. In the Total Return Muni strategies, the interest rate sensitivity of muni bonds resulted in weaker performance, but the allocation to active muni bond managers was slightly positive overall.
Positioning
Risk Assets
The Total Return strategies’ risk assets remain structurally allocated across equities and multi-asset, income-generating strategies. We prefer to remain diversified across geographies, market cap, investment styles (growth, core, value) and income-generating assets. We also maintain positions across active, rules-based and passive strategies to try to balance fundamentally-driven strategies with efficiently-priced investment options.
Conservative Assets
The conservative assets of the Total Return strategies remain allocated to active bond managers that provide broad exposure to the U.S. bond market. We believe these bond managers can successfully navigate challenging bond markets while adding value relative to traditional core, passive bond investment options.
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 in Q4, as U.S. high quality large and mid cap growth equities rallied. The strategy’s exposures to leveraged large caps, diversified quality large/mid cap growth, large cap core, active valuation-sensitive and active mid cap growth equity managers were solid contributors in the quarter. Detractors in Q4 included exposure to dividend-growth, high quality small caps and leveraged exposure to mid and small cap equities. Tactical adjustments and rebalancing across leveraged positions were also beneficial in the quarter.
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).
Following the rally in October, we reduced our leveraged exposure to the NASDAQ 100 index as it reached our targets. In November, as markets continued to rally, we reduced our leveraged exposure to the Russell 2000 Index. As downside volatility picked up in December, we took advantage of tactical rebalancing opportunities to increase leveraged small cap equity exposure in appropriate accounts. Following the leveraged risk reductions in October and November, the U.S. Core X strategy is now leverage neutral.
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 the quarter as weakness in foreign equities, income-generating assets and select leveraged positions declined. The strategy’s exposures to high quality U.S. large and mid cap growth stocks and core U.S. large caps were positive contributors in Q4, but weakness elsewhere caused the Global Unconstrained strategy to decline overall. Investors appeared to favor high quality growth stocks in the quarter, while rising interest rates negatively impacted cyclical and smaller companies’ equities, income-generating assets and foreign currencies. Tactical profit-taking in leveraged NASDAQ 100 index and tactical rebalancing of leveraged small caps was also beneficial in the quarter.
Positioning
Risk Assets
The Global Unconstrained strategy remains allocated across U.S. and international equities, across market cap and investment styles (growth, core, value). Within equities, we prefer to primarily be allocated to higher quality companies that have the potential for earnings and cash flow growth over time. The Global Unconstrained strategy is also allocated to multi-asset income strategies, including a tactical income manager and closed end funds. We believe this allocation can provide income in stagnant equity markets while potentially acting as drier powder should global equity markets experience a deeper selloff that we can take advantage of.
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. In late October, following the broader U.S. equity rally, we removed our exposure to the leveraged NASDAQ 100 Index and reallocated to our position in a non-leveraged U.S. growth equity manager. Our leveraged trading positions remain allocated across U.S. mid and small caps, with additional leveraged equity exposure to China, U.S. biotech, semiconductors and diversified emerging markets.