What recent investment allocation changes has your firm made?
Sometimes no decision is the best decision. We made the decision to maintain our quality focus in portfolios in 2023. This was partially due to a continued consciousness about tax sensitivity (we look to build equity portfolios that can compound value through cycles with lower turnover), but also for the expectation of continued market and economic uncertainty. The April-July rally did not favor quality equities; instead, we saw risky, high-beta, low-quality equities lead the market. We chose to maintain our position and add to our highest conviction areas on weakness instead of chasing this rally. As we have been experiencing higher equity volatility in August and September, quality has begun to shine again as the riskier parts of the market reversed the majority of their ephemeral summer gains.
What’s your top contrarian pick at the moment?
Large-cap high-quality biotech equities have been left behind this year (with the biotech sector down 10% year-to-date), but we are finding some great companies in the biopharma space that to us offer attractive valuations, durable earnings growth, and secular growth driven by technological advancements in treatments and therapeutics.
Large-cap biotech companies with strong balance sheets and healthy cash generation are in an advantageous position given the disruption in capital markets. The market for IPOs has been effectively closed for 18 months.
Biotechs with ample capital may have the opportunity to acquire assets and technology at attractive prices from smaller firms that are struggling to raise capital to fund their cash-burning businesses. The group trades at a mid-teens forward PE multiple, a notable discount to the market, capturing the risk and stress currently present in the industry, but also likely understanding the future secular growth potential of this market segment.
In what areas of the market are you taking risk off?
We are finding increasingly compelling after-tax yields in the municipal market. For clients who intend to hold to maturity and can tolerate near-term volatility with principle (given continued risk that yields could move higher), we see the potential to begin to lock in higher yields for longer duration municipal bonds. To fund these investments, we look to the riskier portion of fixed income portfolios, such as high yield, which now have all-in yields only slightly higher than some of the after-tax municipal yields we are seeing. Notably high yield also carries significantly more credit risk than high quality municipals, mostly if the U.S. economy were to experience a weaker period.
In what areas of the market are you putting risk on?
We are constantly finding opportunities in the equity market to find high-quality stocks that have been left behind in this year’s narrow rally. We think adding to risk exposure in these lower valuation, yet attractively positioned stocks helps reduce the risk of potential downside if equity valuations were to come under continued pressure.
It has become very popular for firms to add risk to portfolios using private credit. We agree that there are compelling opportunities in private credit, but investors have to be extraordinarily selective about how they get exposure to this risky asset class, favoring managers that have a long track record of underwriting, with battle-tested expertise of managing through prior downturns. Given the swift proliferation of this asset class and the rapid entrance of new managers, significant due diligence is required to ensure that risks are being properly managed, mostly given our view that we are in a late cycle economy.
What fund families or model portfolio providers do you use?
We have an open architecture that allows advisors to build portfolios in a way that best suits their client. We provide support on manager/solution selection, asset allocation decisions, and overall portfolio construction.
We have solutions that we manage internally through New Edge Investment Solutions, from turnkey complete asset allocation portfolios and high-quality core equity portfolios (dividend, growth, ESG, and international), to core bond portfolios and cash management (both taxable and municipal), and diversified alternative investment solutions.
We also maintain a robust, research-backed third-party platform. We have a broad solution set of separately managed accounts, mutual funds, ETFs, direct indexing, and alternative investment solutions that advisors can use to construct portfolios.