Investing in private markets can deliver premium returns and help with portfolio diversification. While some investors associate private equity with more risk, the asset class is increasingly utilized in a wider swath of portfolios. Clients with long-term investment horizons should consider adding private equity, private real estate and private debt to their portfolios.
Why You Should Rebalance Your Portfolio
Rebalancing, or periodically selling a portfolio’s best performers to buy the worst performers, is the most effective path to an investor’s desired outcome. When a portfolio is initially constructed, an investor targets a level of risk and return through the portfolio’s asset allocation (i.e. stocks, bonds, etc). Rebalancing can help investors maintain an asset allocation that aligns with their needs, goals, and risk tolerance. As the performance of portfolio components varies over time, component weights may deviate from their target allocations, exposing investors to a different risk-return profile than that of the intended allocation. Rebalancing is a tool to manage such deviations.
At Fi3, we have a very disciplined rebalancing process. While we have a somewhat sophisticated approach using tolerance bands that could trigger an intra-year rebalance, the starting point is often a calendar year rebalance during the first 4 months of the year. At the onset of every year, we update our 10-year capital market assumptions, conducted alongside our investment consultant, Fiducient. We utilized these 10-year capital market assumptions to adjust our client portfolios. While many times we only make modest changes to portfolio targets, market action in 2022 was unique. A swift rise in interest rates caused markets to “hit reset” on valuations, which are the largest input into our capital market assumption. This, in turn, resulted in more changes than usual in our portfolio targets. These are summarized below:
Year-over-year we are adding to high quality fixed income primarily by reducing dynamic bonds. As interest rates are beginning to return to historical norms, we can return our fixed income portfolios to a more “normal” allocation. For the prior two years, we utilized a fairly heavy allocation of dynamic bonds in order to play defense against our expectation of rising interest rates. This thesis has played out and we were able to protect capital as dynamic bonds have outperformed core bonds over the past two years.
We are adding Treasury Inflation Protected Securities (TIPS), a financial asset that acts a lot like a real asset. The market is hyper-focused on short-term inflation, yet is seemingly complacent about the prospects for longer-term inflation. With real yields on TIPS at their most attractive levels in some times, an allocation adds relatively inexpensive insurance against long-term inflation running higher than today’s sanguine assumptions.
We are modestly increasing U.S. small cap stocks based on attractive relative valuations compared to their large U.S. counterparts, and in preparation for a possible market rebound.
We are maintaining our slight overweight to Non-U.S. equities, which have compelling valuations compared to U.S. equities. Additionally, should the dollar weaken, this would likely prove to be a tailwind for Non-U.S. equity. Note, however, while we are overweight international equities, we are not adding to these positions due to the greater potential for exogenous events outside of the United States.
As indicated above, we feel there is opportunity within the international markets due to compelling valuations and the potential for a weaker dollar. However, while we tend to utilize a more passive, index approach to U.S. investing, there is room to add an active component to international investing. Therefore, through an extensive research process, we have built a more robust approach to how we invest internationally. Through this work, Fi3 has added several new managers, including for the first time, a dedicated international developed small cap manager. We are excited to add dedicated exposure to this asset class on behalf of our clients as this is one of the least efficient markets that exist in the public space, giving an active manager a ripe opportunity set.
For additional details, please see the brief deck linked here.
Paving the Way for Big Changes
The SECURE 2.0 Act of 2022 is full of provisions aimed at improving Americans' preparedness for retirement, including greater access to retirement plans to further encourage retirement savings. Want a rundown of the latest changes in the law? The Fi3 team has you covered!
May 2022 - Mayday?
On the surface, market returns in May appeared to be uneventful and were modestly positive. However, the reality within the month was far from that. For much of May, equity markets largely fell as investor focus turned to whether the Federal Reserve actions to suppress inflation could lead to recession.
April 2022 - When Hawks Cry
“I would say 50 basis points will be on the table for the May meeting,” said Chairman Powell on April 21 during a press conference.[1] Pursuing a dual mandate of both full employment and price stability, the Federal Reserve (the Fed) is under pressure to cool off inflation which is near 40-year highs.[2] Higher rates have had an adverse impact on many asset prices globally.
February 2022 - Variations on a Theme
While February began with eyes on Fed Chairman Powell’s hawkish stance, inflation and a focus on the job market, the resounding theme was Russia’s invasion of Ukraine during the last week of the month. As this evolved from a low likelihood event to a distressing reality, markets adopted a risk-off stance. As we outlined in our 2022 Outlook – Navigating Moderation, volatility would be the recurring theme for the year. That said, we certainly did not foresee armed conflict as a driving factor.
January 2022 - Inflation, the Fed, Correction; Oh My!
The summer months are typically filled with days at the beach, barbeques with friends, vacations and baseball games long into the night. However, August was marked with extreme weather events across the country, the continued spread of the delta variant and unrest in the Middle East. Yet, despite the negative events and headlines, investors were rewarded with higher equity markets.
November 2021 - Markets Pause as a New COVID Variant Emerges and the Fed Strikes a Hawkish Tone
The summer months are typically filled with days at the beach, barbeques with friends, vacations and baseball games long into the night. However, August was marked with extreme weather events across the country, the continued spread of the delta variant and unrest in the Middle East. Yet, despite the negative events and headlines, investors were rewarded with higher equity markets.
October 2021 - Markets Unfazed by October Frights
The summer months are typically filled with days at the beach, barbeques with friends, vacations and baseball games long into the night. However, August was marked with extreme weather events across the country, the continued spread of the delta variant and unrest in the Middle East. Yet, despite the negative events and headlines, investors were rewarded with higher equity markets.
August 2021 - Summer Rain Feeds the Equity Market
The summer months are typically filled with days at the beach, barbeques with friends, vacations and baseball games long into the night. However, August was marked with extreme weather events across the country, the continued spread of the delta variant and unrest in the Middle East. Yet, despite the negative events and headlines, investors were rewarded with higher equity markets.