In our December Model Portfolio Investment Committee (MPIC) meeting, we voted to implement several such changes as we head into 2022.
Focusing on what we believe are the primary market “signals”—economic growth rates, inflation expectations, monetary policy and corporate earnings growth rates—here is how we see the world over the course of 2022.
We believe 2022 will enjoy generally constructive economic and market conditions, with the usual caveat of not knowing the outcome of the current “known unknowns,” specifically:
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Given the evolution of COVID-19 and its variants and the increasing global development of vaccinations and therapeutics, we think we may see a second “economic reopening” cycle, which will bode well for our allocations to quality, value, dividend-focused and small-cap stocks.
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The dollar rose steadily from June 2021–November 2021, before falling slightly in December. That general rally may continue in 2022, especially versus the euro and the yen. But we remain structurally bearish longer-term, and most of our non-U.S. positions remain unhedged.
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Expectations for returns from traditional assets remain muted, given current rates, spreads and valuations, and the ability of traditional diversified portfolios to achieve objectives in the manner they have in the past will be challenged. Capital efficiency, alternatives, alpha-drivers and diversifiers will become increasingly important as we move through the year.
With this market outlook and these asset allocation guidelines providing an appropriate framework, here is a summary of the changes we made within some of our Model Portfolios.
Endowment: This is a strategic multi-asset Model Portfolio that allocates to stocks, bonds, real assets and “nontraditional” or alternative assets to deliver a diversified “endowment-like” investment experience. Within this Model Portfolio, we voted to remove a hedged equity strategy in favor of a managed futures position (WTMF).
Volatility Management: This “outcome-focused” Model Portfolio is designed to act as a complementary sleeve to an existing multi-asset portfolio to provide additional diversification and potential drivers of lower-correlated returns. Within this Model Portfolio, we removed an interest rate and options-focused strategy and added in the same managed futures Fund (WTMF) we added into our Endowment Model Portfolio.
Disruptive Growth: This “outcome-focused” Model Portfolio is designed to act as a potentially volatile but high-growth complementary equity sleeve to an existing equity or multi-asset model. Given our view on interest rates, we reduced our exposures to high-growth but highly interest-rate-sensitive allocations to cloud computing and genomics, maintained our allocation to cybersecurity but swapped securities (into WCBR) and added in a new allocation to a “sustainable future” ETF that invests in companies focused on alternative energy, energy efficiency, green building, sustainable water and pollution prevention and control.
U.S. Multifactor: This “outcome-focused” Model Portfolio is designed to act as either a stand-alone equity model or as a total return and diversifying complementary sleeve to an existing equity or multi-asset model. Within this Model Portfolio, we removed our exposure to cloud computing and reduced our exposure to an earnings-weighted U.S. large-cap strategy. In exchange, we increased our existing exposures to a quality- and value-focused shareholder yield strategy (WTV) and a small-cap quality dividend growth strategy (DGRS).
Global Dividend: This all-equity Model Portfolio is designed to act as a stand-alone or a complementary sleeve to an existing equity model with the investment objectives of delivering both total return and enhanced current yield/income generation. Within this Model Portfolio, we reallocated from a technology-based dividend strategy to a banking-sector-focused strategy and reduced our exposure to an all-cap dividend fund in order to fund an allocation into a small-cap dividend Fund (DES).
Multi-Asset Income: Similar to the Global Dividend Model Portfolio, this is a multi-asset Model Portfolio (stocks, bonds and other assets) designed to deliver both total return and enhanced current yield/income. Within this Model Portfolio (and like the changes we made to the Global Dividend Model Portfolio), we reallocated from a technology-based dividend strategy to a banking-sector-focused strategy and reduced our exposure to an all-cap dividend fund in order to fund an allocation into a small-cap dividend Fund (DES).
As a reminder, while each of our Model Portfolios may have different investment mandates and objectives, they do share certain common characteristics:
Our Model Portfolios are designed to be strategic in nature and diversified at both the asset class and risk factor levels to potentially optimize risk-adjusted performance through full market cycles regardless of economic and market regimes.
As such, we remain largely comfortable with our core allocations and strategies—they have delivered a consistent performance in line with their objectives throughout the somewhat tumultuous past two years. We did, however, opt to make marginal changes as summarized above to position our Model Portfolios in accordance with our economic and market outlook as we head into and through 2022.
You can learn more about all our Model Portfolios, including full transparency into allocations, individual securities, fees, yield and performance, at our Model Adoption Center.
We invite you to take a look.
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