Topic Tags: Asset Allocation

De-risking at a Lower Price

In 2023, managing uncertainty and risk is top of mind as markets continue to grapple with inflation, a potential recession, and ongoing geopolitical conflict. Increasing allocations to investment-grade fixed income may be one way investors can better position their portfolios to navigate the current environment.

The chart above illustrates return outcomes for two portfolios based on a Monte Carlo simulation of portfolio returns over a forward-looking ten-year investment horizon. As a baseline, the 60-40 portfolio consists of a 60% allocation to U.S. equities (the S&P 500) and a 40% allocation to investment-grade fixed income (the Bloomberg U.S. Aggregate). Alternatively, the 50-50 portfolio shifts an incremental 10% from equities to IG fixed income. Benefitting from today’s elevated yields and lower volatility inherent to fixed income, the 50-50 portfolio projects a greater concentration of outcomes centered around the 7% target rate of return with less volatility than the 60-40 baseline portfolio. Although the expected return decreased slightly, portfolio risk decreased by roughly 1.5 percentage points, creating a more favorable risk-adjusted return. As described in Marquette’s latest white paper, The 60/40 Portfolio Revisited: Back from the Dead?, the rise in yields in 2022 has made fixed income a more attractive investment relative to prior years and reduced the expected return differential between stocks and bonds. For many investors, the 60/40 portfolio seems poised to meet their long-term risk and return goals, but for those looking to remove additional risk from their portfolios, the new yield environment makes further de-risking more of an option than it has been over the past decade.

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Disclosure > Hypothetical Performance

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The 60/40 Portfolio Revisited: Back from the Dead?

In response to an inquiry concerning rumors of his demise in 1897, American writer and satirist Mark Twain quipped, “The report of my death was an exaggeration.” This quote may also apply in the case of the 60/40 portfolio and a white paper published by Marquette Associates in late 2021. The piece, entitled, “Is the 60/40 Portfolio Dead Forever?” examined the challenges faced by the popular model consisting of a 60% allocation to diversified equities and a 40% allocation to a broad basket of fixed income securities. These challenges included elevated equity valuations and the prospects of rising interest rates and slowing economic growth. Indeed, both stocks and bonds struggled mightily last year due to these and other headwinds, with 2022 one of the worst on record for the 60/40 portfolio. That said, and amid a strong start to 2023, there are reasons for optimism when it comes to the viability of the model to again generate attractive risk-adjusted performance.

This white paper provides historical context for the 60/40 portfolio, details its current outlook, and outlines ways in which investors can augment the model to achieve desired return targets.

Read > The 60/40 Portfolio Revisited: Back from the Dead?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Four Virtues of Private Equity

In classical philosophy we are taught that there are four virtues of mind and character. Given the uncertainty that lies ahead in 2023, it is prudent (pun intended) to revert back to these virtues — as they relate to private equity — to outline a framework that may help investors effectively navigate the market.

  • Prudence: The ability to discern the appropriate course of action
  • Temperance: The practice of discretion, restraint, and moderation
  • Fortitude: strength, endurance, and the ability to confront fear
  • Justice: fairness

Read > The Four Virtues of Private Equity

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

International Equities: Waitin’ on a Sunny Day

In recent years, international stocks have underperformed their domestic counterparts by a significant margin. Specifically, the MSCI ACWI ex-US index has compounded annual returns at just 3.3% over the last decade through the end of October, compared to an annualized return of 12.8% for the S&P 500 index. This current stretch marks the longest period of relative outperformance on a trailing 5-year basis for either index since the early 2000s.

This newsletter examines a host of factors that have contributed to this pattern of performance, including differences in composition between U.S. and international equity indices, currency movements, and geopolitics and analyzes the diversification benefits of international equity allocations within portfolios despite performance challenges.

Read > International Equities: Waitin’ on a Sunny Day

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Business Cycle Diaries

Even the casual observer of market dynamics is likely aware that the world economy appears to be on uneven footing. Elevated price levels, increasingly restrictive monetary policy, and geopolitical turmoil have plagued securities markets during the first half of the year and are now dampening expectations for global GDP growth going forward. Given this myriad of macroeconomic challenges, many investors are now assessing the possibility of a prolonged slowdown in economic activity for both the United States and the rest of the world.

The aim of this newsletter is to gauge the extent to which the global economy is at risk of such a downturn by examining the state of the current domestic business cycle, inferring its likely next stage, and reviewing which asset classes and investing styles tend to be the most attractive during each phase of the cycle.

Read > The Business Cycle Diaries

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Can Bond Investors Outsmart the Market?

While it is generally accepted that successfully and consistently timing the equity market is a loser’s bet, the same sentiment is not heard as often in the bond market. However, timing interest rates is just as difficult as equity markets and can lead to the same patterns of underperformance over multiple market cycles. Nonetheless, the recent rate volatility may be a temptation to shorten duration in anticipation of further rate rises. The following analysis examines why this strategy could be difficult to execute successfully, and why we recommend that clients stay the course and remain invested in line with their investment policies.

Read > Can Bond Investors Outsmart the Market?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Flirting With a Bear Market: How Did We Get Here, and What Comes Next?

Quite simply, this has been the worst start to a year since the 1930s:

  • One of only 19 quarters since 1976 when both bonds and stocks posted negative returns;
  • One of only six of those quarters when bonds have underperformed stocks;
  • The worst four-month return for the S&P 500 since 1939.

2022 to date has featured a myriad of macroeconomic factors coming to a head: inflation at its highest level since the 1980s, the Federal Reserve responding with aggressive rate hikes, and increasing concerns about the health of the consumer leading to a possible recession. An evolving pandemic, a war in Eastern Europe, and draconian lockdown policies in the world’s second-largest economy and largest manufacturing hub have further added to the problem and complicated the solution. With these macro headwinds and uncertainties driving markets year-to-date, Marquette’s fixed income, U.S. equities, and non-U.S. equities teams discuss the impacts on their asset classes and weigh in on the outlook from here.

Read > Flirting With a Bear Market: How Did We Get Here and What Comes Next?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

OCIO Momentum Continues

One of the most significant evolutions in our business over the last decade has been the growth of our Outsourced Chief Investment Officer (“OCIO”) services platform. What at first seemed like chance requests over a decade ago from a handful of clients looking for additional help managing their portfolios has become increasingly mainstream. More than half of our prospective client engagements last year inquired about OCIO services. Our experience is certainly reflective of a broader industry trend as OCIO assets under management have grown from $90 billion to an estimated $2.7 trillion over the last fifteen years.¹ Given the industry growth and increased interest in OCIO services from our client base, we thought we’d share our experience as to why institutions are asking about OCIO and what the major challenges are that Marquette has helped these clients solve.

Read > OCIO Momentum Continues

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2022 Market Preview Video

This video coincides with our 2022 Market Preview letter from Director of Research Greg Leonberger, FSA, EA, MAAA and provides analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2022.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

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In Context Video: Is the 60/40 Portfolio Dead Forever?

In this video, the authors of our recent white paper discuss the 60/40 model portfolio — a long-time approach to portfolio construction that generally consists of a 60% allocation to equities and a 40% allocation to fixed income. From the decades of success the 60/40 portfolio has experienced (and why) to skepticism about its future viability in light of the current low interest rate and expensive equity market environment and how organizations may still be able to meet their return targets, we seek to answer if the 60/40 portfolio’s efficiency is a thing of the past.

Marquette’s In Context series brings our latest research to your screen, with discussion led by the authors behind Marquette’s papers and newsletters. From current events and trends to portfolio strategy and the broader economic landscape, we explore the questions investors are asking with consideration and the context you need to know.

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For more information, questions, or feedback, please send us an email.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.