There’s never a dull moment. Designing and managing client portfolios can be both satisfying and challenging. Helping individuals and families realize their dreams adds to the reward. Assessing the economic environment and market risks while addressing objectives and constraints can stretch one’s intellect but is critical in the risk reward of every portfolio design.
The economic outlook appears very strong at this stage of the recovery. There are growing pains as the US and the world reopen after a sudden shut down over a year ago due to COVID, such as supply chain missteps causing seemingly temporary elevated inflation. Consumers, in aggregate, are in one of the strongest positions not seen in years with a lot of cash on hand and some of the lowest debt levels not seen in decades. To be clear, we recognize some are struggling, but in the aggregate, people are ready to spend and have come through this crisis in a strong position financially.
The markets are the tricky part at the moment. Some of the investment markets are exhibiting signs of opportunity, while other investment markets are showing signs of excess exuberance. Developing and managing client portfolios is a delicate balance and hence why we have extremely diversified portfolios.
Bond yields have bounced off the ultra-low rates from nine months ago, yet yields are still at or below the low points of the past decade. Even further, last decade’s rates were the lowest in generations. Fixed income assets have historically been implemented as an equity market diversifier and/or as an income generator. The low yield environment has limited the benefit of both, hence the current precarious situation within portfolio design.
February’s sudden move up in rates was atypical, prompted by unexpected economic activity. Going forward, bond markets have priced in higher economic expectations, clearly tied to vaccinations. As such, fixed income investors are likely to see more normalized bond market movements.
Yields are the key to both bond advantages. Traditionally, fixed income offers higher more reliable yields than stocks. This higher cash flow reduces volatility, increases diversification and offers investors income. But with very low yields (even if the yields increase slowly), portfolio architects may need to explore fixed income positioning within client portfolios and/or explore fixed income alternatives, which may come in the form of insurance-based products, trading strategies or alternatives assets. For traditional bond exposure, focus on high quality defensive bonds while also making room for flexible bond managers makes the most sense.
Developing portfolios can be rewarding and stimulating. We relish the challenge to find solutions that help you achieve your goals and objectives. Thank you for the trust you have placed in us. We hope you have begun to make fun plans this summer as COVID restrictions ease and you are able to have a more normal summer.
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