As the economy recovers, we continue to monitor the markets and what it means for asset allocation. In the coming months, asset allocation and diversifying your portfolio will be critical in achieving your financial goals. Spreading your investments across the right mix of assets including stocks, bonds, and cash will help keep you safe from market downturn and ensure balance of risk and reward.
Below are our comments and recommendations for asset allocation as of April 2021.
U.S. Large Cap: We are currently overweight U.S. equities relative to our global benchmark. We are currently underweight U.S. large cap stocks relative to our U.S. benchmark. Our U.S. large caps are balanced between value and growth styles with an overweight to the information technology sector. Our allocation to hedged equity provides some protection against downside market risk.
Mid/Small Cap: We are currently overweight mid and small cap stocks relative to our benchmarks with a balance between value and growth styles. We expect mid and small cap stocks to perform well relative to large caps as the market broadens in anticipation of continued economic recovery in the coming year. Mid and small caps may also benefit from potential buyout activity.
Developed International: We are underweight international equities relative to our global benchmark. We expect performance to improve relative to U.S. equities longer term due to improving fundamentals, attractive relative valuations and dollar weakness. Our current international portfolio is partially hedged for currency risk.
Emerging Markets: We are currently underweight emerging market equities relative to our global benchmark. We expect emerging market equities will outperform U.S. and developed international equities over the long term due to faster economic growth rates, improving fundamentals, attractive relative valuations and dollar weakness.
Note: Global Benchmark is defined as: 54% US large cap/4% US mid cap/2% US small cap/27% developed international/13% emerging markets
U.S. Investment Grade Bonds: We are currently overweight corporate credits versus governments, focused on investment grade quality and neutral duration relative to our benchmarks based on our interest rate outlook. Our allocation to non-indexed bonds provides added diversification and return opportunities.
Municipal Bonds: We use municipal bonds for tax-sensitive client situations. We focus on higher quality general obligation, revenue and essential service bonds. We focus on the intermediate maturity range of the municipal bond yield curve and maintain duration neutral to our benchmarks based on our outlook for interest rates.
High Yield Bonds: Our focus is on the higher quality segments of the high yield market, with some emphasis on the BB sector of the credit markets for upside opportunity. High yield spreads are very tight on a historical basis, but extremely low interest rates justify an allocation to the space by providing higher yields. Defaults should remain manageable due to an improving economy.
Emerging Market Debt: Emerging market debt provides an opportunity for higher yields and added diversification for our fixed income and total portfolios. Our focus is on both local and U.S. currency bonds, with a tilt toward sovereign credits.
Real Estate: We currently do not have a dedicated allocation to real estate. We gain exposure to the sector through investment in stocks of companies engaged in the real estate industry. We would consider adding to the sector when we perceive real estate fundamentals are improving.
Gold: We do not have a dedicated allocation to gold. Gold does not provide a yield for our portfolios and is used primarily as a hedge against inflation and market uncertainty. Any exposure to the gold and precious metals sector would come through investment in stocks of companies engaged in these industries.
Commodities: We do not have a dedicated allocation to commodities. Any exposure to the sector would come through investment in stocks of companies engaged in the commodities industries.
Infrastructure: We currently do not have a dedicated allocation to infrastructure. Any exposure to the sector is gained through investment in stocks of companies engaged in infrastructure spending. We believe there are challenges to investing in this space through marketable securities, and that private investments are the best alternative in this category.
Cryptocurrencies: We do not currently invest directly in cryptocurrencies due to their volatile and speculative nature. Any exposure to these assets would come through our investment in stocks of companies engaged in cryptocurrencies.
- Do note that the information provided is general in nature and based on our understanding of available information as of the publish date. Please consult your financial advisor to discuss how the information presented here may impact your investments.