Asset Allocation Committee: Q4 Recap

Asset Allocation Committee: Q4 Recap

February 16, 2023

Our Q4 2022 Asset Allocation Committee Meeting was held on Thursday, February 9, 2023. TPFG Chief Investment Officer Judith Cheng moderated a series of informative Strategist presentations on the performance of our suite of Strategy PLUS model portfolios.


Here's a recap:

Introduction - Judith Cheng (TPFG)

Q422 Overview of Markets:

  • Developed markets outperformed US Large Cap in Q4, Europe was a large contributor to outperformance in International Developed.
  • In the US, Large Cap Value outperformed Large Cap Growth.
  • Emerging Market Equities outperformed US counterparts due to a weaker US Dollar and optimism on China relaxing some Covid restrictions.
  • In Fixed Income, Emerging Market Debt and Global Aggregate Bonds outperformed US Fixed Income.
  • In Real Assets, Gold led due to a weaker US Dollar and inflationary pressures.

Strategy Plus Overview:

  • In Strategy Plus, all Aggressive Strategies outperformed the S&P 500 in Q4.
  • The PFG JPMorgan Tactical Moderate and Tactical Aggressive Strategies were the largest contributors to: Multi Plus Moderate Conservative, Moderate, and Aggressive models as well as the Focus PLUS Moderate Conservative, Moderate, Moderate Growth, and Aggressive models.
  • American Funds Fundamental Investor fund was the largest contributor to PFG American Funds Growth strategy.
  • American Funds American Mutual fund was the largest contributor to PFG American Funds Conservative Income strategy.
  • PFG BNY Mellon’s Diversifier Strategy was the largest contributor to the Multi PLUS Conservative model.
  • PFG Active Core Bond Strategy was the largest contributor to Focus PLUS Conservative model.

2023 Market Themes:

  • While falling, inflation remains elevated and well above the Federal Reserve’s 2% target.
  • Interest rates are likely to remain higher for longer as inflation remains elevated. Most Strategy Plus models entail lower duration risk (ranging from 4.4-5.9 years) than the Barclays Agg which is 6.2 years.
  • Weakening macroeconomic data, earnings, and other signals like an inverted yield curve are signalling recession concerns.

Sharika Cabrera, CIMA Investment Specialist (JP Morgan)

Advisory Strategies:

PFG JPMorgan Tactical Moderate Strategy R

PFG JPMorgan Tactical Aggressive Strategy R

  • Three key differentiators of JP Morgan strategies include: active allocation, active management, and active insights (i.e., Guide to the Markets, analytical tools, and trade commentary).
  • Played defense when Covid hit in 2020 and did the same in early 2022 as markets broke down.
  • Tactical allocation decisions have been a major driver of alpha over time.
  • Latest themes in January 2023:
    • 60/40 is back: Reset in valuations across equities and fixed income creates attractive entry points for long term investors.
    • Shifting the balance of risks: Risks are shifting from runaway inflation and policy tightening to slowing growth and recession risk. As a result, strategies are underweight risk across portfolios and continue to favor core fixed income/cash.
    • Back to basics: Core fixed income now offers compelling opportunities for both defense and attractive yield. Continued emphasis on core bonds.
    • Staying close to neutral: Preference for defensive strategies and to remain well-diversified across styles and regions.
  • Key active asset allocation decisions in 2022:
    • Shifted from offense to defense. Strategies were overweight equities to begin 2022 but were quick to pivot to a more defensive position.
    • Kept portfolios anchored with bonds. Reduced credit risk and maintained an underweight to duration.
    • Tactical allocation to cash which provides optionality and risk management.
  • Sees most of the pain in fixed income is behind us and there is a lot of opportunity in that asset class.
  • Inflation continues to cool and we’re nearing the end of the tightening cycle.
  • Ended 2022 with a 2% underweight to equities in the 60/40 portfolio which has since been brought up to target. Further, US equity exposure has been slightly reduced while International Developed and Emerging Market Equities have been added to on a weaker US Dollar, optimism on China relaxing Covid policies, and a more favorable valuation comparison.
  • Current preference is to incorporate more defensive strategies. For example, the Premium Income Fund is more defensive and employs a call writing strategy which can generate higher yields.
  • Overall, cautiously positioned as looking to greater understand the current market backdrop and risks.
  • Utilizing ETFs in the portfolio to get beta exposure in markets where they are tactically shifting.

Stanley Moy CFA, CAIA, Investment Product Manager (The Capital Group/American Funds)

Advisory Strategies:

PFG American Funds Conservative Income Strategy R

PFG American Funds Growth Strategy R

  • 2022 was a challenging year for growth.
  • Tesla, Meta, biotech, and cloud computing were among the biggest detractors in Q4 and calendar year 2022.
  • Not owning enough from some of the top contributing sectors like energy, industrials, and consumer staples were also detractors.
  • Growth Fund of America and AmCap were some of the weaker components while Fundamental Investors was a strong contributor.
  • Became more defensive as 2022 progressed and that tilt remains in place. Strategies increased their weightings to industrials, materials, energy, and materials while trimming from Consumer Discretionary and Communication Services. A few examples of names that were added include Target, Starbucks, Yum Brands and trims from Amazon, Tesla, Home Depot, and MercadoLibre.
  • Cash went as high as 6% in 2022 but came down in Q4, currently at 4.5%-4.75%.
  • Conservative Income strategy beat its benchmark in Q4, mainly from US equity selection with help from Treasuries, High Yield, and Emerging Market bonds. Exposure to non-US equities was also helpful.
  • Portfolio Managers are generally positioned defensively in the Conservative Income strategy to protect against volatility and economic weakness.
  • The Portfolio Solutions Committee (PSC) consists of seven portfolio managers with an average 30 years if investment industry experience. The PSC builds and oversees model portfolios.
  • The Capital Solutions Group (CSG) supports the Portfolio Solutions Committee (PSC) and consists of three portfolio managers, 10 analysts, and > 30 technology, operations, and overnight staff.

James Macy CFA CAIA, Sr. Investment Strategist (BNY Mellon)

Advisory Strategies:

PFG BNY Mellon Diversifier Strategy R:

  • BNY is the oldest financial institution in the US and 8th largest asset manager in the world.
  • Baseline allocation is to have a strategic allocation to stability across multiple regimes.
  • Target weightings for the strategy are as follows: 60% is investment grade fixed income or floating rate. 30% is diversifiers (or real return). 10% is Natural Resources or Real Estate. There is flexibility to shift weightings though. The current weighting is 60% fixed income (in-line), real return is 35% (5% overweight), and liquid real assets is 5% (5% underweight).
  • 2022 was a challenging year in that both stocks and bonds were lower which had never happened in a calendar year before.
  • Sees value leading growth in the first half of 2023 and a reversal in the second half of 2023 in which growth will lead.
  • Objective is to beat the Barclays Agg. Further, the strategy is built to address concerns around inflation and diversifying away from traditional assets.
  • Generated +351 bps of outperformance over the Agg last year with a slightly lower standard deviation than the index.
  • Increased Core Fixed Income weighting. Moved out of Floating Rate position as that trade has run its course. Increased exposure to Real Return.
  • Rally in equities may stall given sharp gains in a condensed period to begin the year.
  • Backdrop for fixed income remains constructive.
  • Inflation is coming down but unlikely to reach the Fed’s 2% target this year or anytime soon. Rates and inflation are likely to remain elevated in the interim.

Bradley Noss CFA, CAIA, Product Strategist (PIMCO)

Advisory Strategies:

PFG Active Core Bond Strategy R:

  • Three themes over the next 6-12 months across developed markets: inflation likely to moderate, central banks close to holding at restrictive rates, and shallow recession but not without pain.
  • Three investment implications: bonds are back, build a resilient portfolio, and opportunities in active management.
  • Bonds are back: rates have reset, and bonds are providing some of the most attractive returns and entries in many years.
  • Build a resilient portfolio: Cautious approach is prudent amid economic uncertainty and potential volatility.
  • Active management should benefit from the uncertain and volatile environment. One such area is keeping power dry to take advantage of market dislocations and attractive opportunities.
  • Neutral on duration due to hawkish central bank rhetoric and elevated interest rate volatility.
  • Broadly constructive on credit with an emphasis on high quality credit given recession risk. Constructive on securitized credit and higher quality corporate credit. Cautious on lower quality, higher yielding corporate credit.
  • Favor the G-10 and Emerging Market Currencies and to use the US Dollar, Euro, and British Pound as funding currencies for positions in G-10 and Emerging Market Currencies.
  • PIMCO’s Core Fixed Income model is focused on quality with significant allocations to core fixed income. Further, the model offers a compelling yield profile (around 7%) with lower duration risk (4.9 compared to the Agg of 6.2 years).
  • Enhanced Core Model rebounded in Q4 (+2.39%) predicated on allocations to corporate credit due to tightening spreads (particularly corporate and emerging market), duration positioning, EM external spread exposure, and select currency positions.
  • Over 2022, PIMCO’s Enhanced Core Model declined by -11.8% compared to a -13% decline in the Bloomberg US Agg Index.


DISCLOSURE: The information provided herein is the opinion of The Pacific Financial Group (“TPFG”), a registered investment adviser, and may change without notice at the discretion of TPFG. Market Data is as of the time period noted and TPFG makes no warranties as to the accuracy of the information or any representations made or implied at any time given. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. The information is for informational purposes only and should not be relied on or deemed the provision of tax, legal, accounting, or investment advice. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. Information from companies mentioned herein are the express option of the third party author. TPFG is not affiliated with any of the companies mentioned herein. Capital Group® | American Funds® are registered marks of The Capital Group Companies, Inc. BlackRock® is a registered mark of BlackRock, Inc. MFS is a registered mark of MFS Investment Management. JPMorgan is a proprietary mark of JPMorgan Chase & Co. Fidelity Institutional® and the Fidelity Investments logo are registered service marks of FMR LLC. PIMCO is a proprietary mark of Pacific Investment Management Company LLC. BNY Mellon is a proprietary mark of The Bank of New York Mellon Corporation. Meeder is a proprietary mark of Meeder Investment Management. Janus Henderson is a registered mark of Janus Henderson Group plc. Invesco is a registered mark of Invesco Ltd. In each instance, the mark is used with permission. No representation is made by The Capital Group Companies, Inc., BlackRock Inc., MFS Investment Management, JPMorgan Chase & Co., Fidelity Institutional Wealth Adviser LLC (“FIWA”), Pacific Investment Management Company LLC, The Bank of New York Mellon Corporation, Meeder Investment Management, Janus Henderson Investors, Counterpoint, or Invesco, or by anyone affiliated with such entities, regarding the advisability of investing in any investment product offered by Pacific Financial Group.