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 Q1 as U.S. equity and credit markets rallied. Exposure to higher quality growth companies across the market cap spectrum was the strongest contributor to the strategies in Q1. Dedicated exposures to actively managed value and mid cap growth managers were also additive but both were generally in-line with broader U.S. equity indices.
Across the taxable fixed income allocation, an underweight to duration and overweight to investment grade and below investment grade credit added value as interest rates moved higher, pushing interest rate-sensitive bond prices lower, and credit sensitive bonds outperformed in Q1. Across the U.S. Core Muni fixed income allocation, an underweight to duration and overweight to credit also added value in the quarter.
Positioning
Risk Assets
The strategies’ diversified exposure across market cap can provide some potential added value if the U.S. equity markets transition into a broader market rally, rather than a concentration of outperformance by large technology-related companies. If the U.S. economy weakens materially from here, the strategies’ exposure to mid- and smaller cap companies could drag on the strategies. We continue to prefer an overweight to quality companies that may have sustainable advantages over longer periods of time.
Conservative Assets
Across fixed income, the strategies’ diversified exposure across bond sectors with an overweight to credit-sensitive bonds could add value in a moderately decelerating economy. Higher current bond yields could add some cushion over time should interest rate or credit volatility pick up from here. If the Federal Reserve begins to cut interest rates in 2024, our exposure to higher quality interest rate-sensitive bonds could add value. If inflation continues to persist or incrementally increases from current levels, interest rate-sensitive bonds could drag on the strategies. We continue to prefer to allocate to diversified active bond managers in most market environments that can take advantage of bond market dislocations and attempt to mitigate material 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 Q1 as income-generating equity and credit-sensitive bonds performed well. Equity dividend-oriented and option income strategies positively contributed to the strategies in the quarter, but generally lagged broader equity indices where the capital appreciation potential of quality growth companies in the indices was favored. Exposure to global real estate was a detractor in the quarter as rising interest rates may have been a headwind to the sector. The strategies’ allocation to closed end funds was also additive in the quarter as riskier income generating assets rallied. Exposure to broad multi-asset income strategies were also positive contributors, but these strategies could not keep up with the broader equity market rally, as would be expected.
Across the fixed income allocation, an underweight to duration was beneficial as interest rates moved higher in Q1. An overweight to credit was also positive in the quarter as riskier credit-sensitive bonds outperformed.
In our Income – Ultra-Conservative strategy, the strategy’s structural lack of equity exposure dragged on the strategy as equities rallied in Q1. The strategy’s structural underweight to duration and overweight credit was beneficial as longer duration bonds underperformed and credit rallied.
Positioning
Risk Assets
The strategies’ structural overweight to income-generating assets may provide some support if equity market volatility increases from here. We have already seen a solid rally in quality dividend-focused strategies but believe there still may be opportunities across market caps and geographies. We continue to like our exposure to option income strategies, where higher market volatility could translate to higher option income being generated. High yield bond spreads and closed end fund discounts are a bit tight, which causes some near-term concern with our exposure, but the higher absolute yield generation remains attractive and could provide some cushion in choppier market environments.
Conservative Assets
Across fixed income, we continue to be structurally overweight credit and underweight duration. With credit spreads tight, credit could be subject to some volatility and downside pressure. If the Federal Reserve begins to cut interest rates, there may be some positive effects with exposure to interest rate-sensitive bonds in the strategies. We continue to prefer allocating to active bond managers that have the potential to take advantage of opportunities throughout the bond markets, while attempting to manage exposure to unnecessary risks.
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 Q1 as global equity and credit markets rallied. Exposure to quality growth companies across market caps and geographies was a strong contributor in the quarter. Dedicated exposures to a passive S&P 500 Index strategy and an active mid cap growth manager were also solid contributors in Q1. The strategies’ allocations to an active global growth manager, international quality large cap companies and an active international small cap manager were also additive. Exposure to a global value manager was a positive contributor, but value companies generally lagged broader growth-oriented equity indices in Q1. Dedicated exposure to an emerging markets equity manager was a positive contributor as the manager’s positioning was rewarded in the quarter. Dedicated exposure to multi-asset income strategies was also a positive contributor, particularly from strength in closed end funds in the quarter.
Across the taxable fixed income allocation, an underweight to interest rate-sensitive bonds and overweight to credit were positive contributors as interest rates moved higher, pushing interest rate-sensitive bond prices lower, and credit-sensitive bonds outperformed. Across the Total Return Muni bond allocation, an underweight to duration and overweight credit-sensitive munis were also positive contributors in Q1.
Positioning
Risk Assets
The Total Return strategies continue to be structurally diversified across U.S. and international equities, with exposure across market cap and investment styles, and a preference to overweight quality companies. U.S. large cap growth companies have continued to show outperformance relative to mid/small caps and international equity markets. If investors shift their focus from artificial intelligence-related companies and reallocate to other global opportunities with solid growth prospects and potentially attractive valuations, the diversification of the Total Return strategies could provide some added value to investors. If we get into a period of flat equity markets, the Total Return strategies’ exposure to higher income assets could also provide some added value.
Conservative Assets
Across the fixed income allocations, a general underweight to duration may hinder some performance if interest rates decline from here, but an overweight to credit and the resulting higher potential return could mitigate some of that potential headwind from a duration underweight. We continue to favor allocating to active bond managers that we believe have the expertise to navigate challenging bond market environments.