What recent investment allocation changes has your firm made?
Our most recent changes included adjustments to the international portion of our equity sleeve, as we increased our allocation to large-cap developed international, while decreasing small-cap international. We note that the international equity asset class trades at double its historic discount level vs. the U.S., while weaker foreign currencies provide additional support of earnings power for large-cap exporters. We maintained our overall international exposure which is modestly higher than our strategic benchmark, but notably lower than the MSCI All Country World Index.
What’s your top contrarian pick at the moment?
I wouldn’t refer to this as a contrarian pick, but we tend to have a slight value bias, which certainly is not in favor this year. Our investment approach uses quantitative analysis and factor scoring which tends to apply smaller weights to megacap growth which is driving performance. We believe that applying a consistent approach is imperative even when it’s out of favor, because perfectly timing the next shift from growth-to-value is incredibly challenging. As the hysteria around AI should subside and the business cycle moves to its latter stages, we believe the value focus will resume leadership and help mitigate drawdown risk.
In what areas of the market are you taking risk off?
We are avoiding high-yield credit because spreads are very tight, and if we do enter a recession or if financial conditions tighten further, that is one area that appears very susceptible to volatility.
In what areas of the market are you putting risk on?
As yields have risen on the long end of the curve, we are implementing a barbell strategy for both U.S. Treasuries as well as municipal bonds. The barbell strategy invests in short-term bonds which are offering the highest yields currently, while also adding duration, locking in longer-term yields, and helping protect against a risk-off, flight-to-quality trade should we encounter an economic downturn in 2024. We also continue to like several alternative investments such as private equity, which are able to deploy capital strategically over time.
What fund families or model portfolio providers do you use?
We do not use model portfolio providers but do use several fund families across both ETFs and mutual funds. Fund families include many household names such as iShares, Vanguard, AQR, and many others, but we believe in doing exhaustive due diligence when making manager selections which has resulted in a very diverse group of managers in our models.