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Market Perspectives - April 2018


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Market Perspectives - April 2018

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Market Perspectives - April 2018

  1. 1. Market Perspective – April 2018 Experience Insight Impact Overview: Most investment firms will guide investors toward a certain mix of equity exposure with the rest falling into a so-called “safe basket” comprised largely of fixed income (or perhaps alternative investments). The design of this basket is to earn some level of return, but above all else, protect principle and reduce correlations in the portfolio. The goal is to improve overall return, while reducing risk levels. While the exact mix of an asset allocation will depend largely on an investor’s “risk” profile, as well as their goals and objectives, the dramatic rise in interest rates has created a difficult environment for many investors. This month, we examine the current fixed income landscape, as well as some potential solutions to this problem. 1
  2. 2. Year To Date Fixed Income Returns Have Proven Challenging Experience Insight Impact Through April 20th, YTD returns for most sub-asset classes in the fixed income area have been negative (e.g. iShares Core US Aggregate Bond ETF, AGG = -2.39%; Barclays High Yield Bond ETF, JNK = -.69%). Maintaining a diversified mix of fixed income strategies, with tactical tilting away from long duration securities, has proven beneficial. 2 Source: Bloomberg, Goldman Sachs Asset Management US Fixed Income Maturity and Quality Returns
  3. 3. 10 Year Treasury Yield Has Risen Rapidly Experience Insight Impact The chart above shows the 10 year Treasury yield which currently stands at 2.97% (as of 4/23/18) up from a low of 2.04% (9/7/17). As yields rise, prices fall, leaving investors with “pain” in their “safe” buckets. 3 Source: Bloomberg
  4. 4. Fed Actions Heighten Interest Rate Risk Experience Insight Impact The chart to the right shows the acceleration of the Fed balance sheet tightening over the last year. If this continues, which is expected based on current Fed governor statements, we may see interest rates rise further, as well as fixed income securities with higher interest rate correlations (and greater durations) fall. 4 After many years of accommodating monetary policy from the Federal Reserve (“Fed”), as denoted by the long flat balance sheet in the chart on the left, the unwind of Zero Interest Rate Policy (“ZIRP”) has begun. Source: Bloomberg
  5. 5. Solutions Experience Insight Impact 5 • Maintaining a well diversified portfolio focused on correlation between asset classes, especially forward looking ones, can add to portfolio optimization over time. It is not surprising that fixed income securities have experienced difficulty after a lengthy bull market in bonds. Source: Bloomberg, Goldman Sachs Asset Management • In addition to diversification, limiting exposure to interest rates, still appears logical. The included chart shows that not all fixed income securities were equally impacted by the interest rate moves. • Alternative assets, in the form of market neutral, long/short equity and various other strategies, offer an opportunity for investors to have differentiated return streams, while maintaining low correlations to stocks and bonds. In the current environment, even managed cash-like vehicles can offer some level of return without adding large degrees of risk. • Specific portfolio construction, with appropriate risk levels, can be tailored to an individual investor’s goals and objectives.
  6. 6. Market Perspective – April 2018 Experience Insight Impact Conclusion: While fixed income has served many investors well over the long-term, a strong focus on risk/reward seems prudent in this asset class, with rates seemingly set to continue their rise over time. A well diversified mix of fixed income, with tactical tilts toward lower durations, coupled with a mix of alternative assets, can help ensure this basket maintains the desired low correlation. Overall, our focus remains on a flexible investment approach targeted towards meeting our investor’s unique goals and objectives. 6
  7. 7. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 7