What recent investment allocation changes has your firm made?
This summer we reduced our weighting to U.S. large cap equities from overweight in our model portfolios to equal weight as we believed that the somewhat surprising advance through the first half of the year had left equities fairly valued. The proceeds of the reduction went to close our longstanding underweight to core fixed income. With interest rates across the maturity spectrum having risen close to our year-end target and with the Fed near the end of its tightening cycle, fixed income yields have effectively “normalized” and are now deemed to be attractive from a risk-adjusted return perspective.
What’s your top contrarian pick at the moment?
Although we do not believe a recession in the U.S. economy is imminent, interest rate spreads in the high yield debt asset class are not sufficiently attractive to compensate investors for the risk of an economic slowdown or the refinancing risk that will occur as debt matures over the coming years. Despite our rather favorable assessment of the broader fixed income markets, we are aggressively underweight this riskier asset class within the space.
In what areas of the market are you taking risk off?
We recently reduced the weighting to U.S. large capitalization equities and high yield debt.
In what areas of the market are you putting risk on?
We have increased our weighting to core fixed income through both an increased allocation and in extending duration.
