By Matthew McKee, CFA, CFP® and Adrian Colarusso, CFA, CFP®
April 2, 2023
Two weeks ago, we offered the Target Rock take on the unfolding banking stresses. We have been poring over the investment landscape and our current client portfolios.
Heading into 2022, we expected inflation and rising rates to damage asset values across the board and positioned accordingly. Highlights for last year included our overweight to value and dividend stocks, the currency-hedging of our international holdings, and a small commodities position that rose 40% before we took it out.
The lowlight was our small position in long-term government bonds, which we owned as a hedge against a recession that didn’t materialize. Bonds in general experienced their worst year since the 18th century.
Heading into 2023, we gravitated to short-term, high-quality bonds suddenly yielding around 5%, which looked attractive against a backdrop of increasing economic uncertainty, on both growth and interest rates. We’ve stuck to our guns with longer-term bonds and added high-yield bonds that offer a compelling risk-return profile.
The markets have not rewarded conservative positioning to start the year. There has been a bear market rally in stocks, which we are choosing not to chase, as higher prices represent higher risks compared to the start of the year. We don’t feel like it’s the time to reach for returns.
Of course, as long-term investors, stocks still represent the core of our clients’ portfolios.
Sometimes no action is the best action:
After diligent analysis and spirited deliberation about the current market backdrop and our client portfolios, we concluded that our posture from last quarter still makes sense.
Overall, we are taking less risk than our benchmarks across the asset allocation spectrum, but still retain the potential for upside participation if conditions suddenly and unexpectedly improve.
Recent developments in the banking sector are not existentially threatening but represent cracks in the economic foundation that will curtail growth, in our opinion. Despite the dramatic events, assets haven’t re-priced in a way that has made any segment of the market a screaming buy or obvious sell. Reasonable professionals may disagree with us and have a particular idea to point to, but after analyzing many, none moved us.
We continue to focus on our individual clients to find low-hanging fruit, where their goals are at risk due to more obvious misalignments in their wealth positioning. We are encouraging them to reduce concentrated risks and diversify, while carefully managing tax impacts.
Our value proposition to clients has two pillars:
- Hands-on investment management responsive to changing market conditions, but without deviating too far from a sensible, long-term asset allocation strategy.
- Holistic planning that helps our clients “point their wealth toward its highest purpose” with confidence and clarity.
One detail we’re attending to – tax-loss harvesting:
Many of our clients have initiated positions in various investments in the last 18 months, which are sitting at modest losses. This is not surprising or concerning.
In taxable accounts, we are harvesting these losses (a nice tax-asset) and replacing the exposures with comparable funds.