Some Changes to Our Investment Strategy

No April Fools’ jokes in this month’s Fun Facts, we promise!

Instead, we’ll introduce some of the changes that we will implement over the next few months as a result of our continuous investment strategy review.

Here is an executive summary of those changes, followed by an explanation.

  1. We are eliminating the Commodity asset class under Alternatives and allocating those dollars to REITs (Real Estate Investment Trusts).

  2. We are eliminating the “Low Volatility” funds category under Alternatives and allocating those dollars to REITs, up to 15% of the stock allocation with a cap of 10% of the total portfolio in REITs. Dollars in excess of the 10% cap will be allocated to stocks, but this results in less than a few percentage points in portfolios with stock allocations over 70%.

  3. The majority of the “Low Volatility” fund dollars will be re-invested to bonds. Long-term clients may remember that in 2012, after the 2008 global crisis when the Federal Reserve lowered short-term interest rates to practically zero for what evolved from a short-term to long-term time period, we added “Low Volatility” funds with the goal of earning a higher return than bonds with less volatility than stocks. While we had some fund selection challenges in the “Low Volatility” category over the years, we did achieve our goal over multi-year periods. For reference, the “Low Volatility” funds in most client portfolios include the Gateway Fund and the Vanguard Global Minimum Volatility Fund. We may continue to hold the Gateway Fund in taxable accounts where it has a large capital gain, in which case it will be counted as part of the stock allocation.

  4. Inflation-protected bonds, or TIPS (Treasury Inflation Protected Securities), will continue to be held in portfolios for clients near to or in the “distribution” mode, wherein they are taking regular distributions from their portfolio. In general, these are older clients who are approaching or in retirement and are at a greater risk of being affected by inflation. Clients in the “accumulation” mode (typically younger clients) will no longer have inflation-protected bonds, and those dollars will be re-allocated to traditional bonds. For reference, the PIMCO Real Return Fund owns inflation-protected bonds.

In summary, the “Alternatives” category will be exclusively invested in REITs. REITs have higher income than traditional stocks and bonds and the potential for growth in share price. REITs have outperformed the S&P 500 over long periods, and although they are more volatile, REITs are not strongly correlated to U.S. stocks and provide valuable diversification. The new REIT allocation will be similar to our REIT allocation pre-2012.

Commodities are being eliminated because they have had very poor performance and have been a thorn in our side for years. Honesty is the best policy—we have run out of patience waiting for better performance. We simply do not see commodity prices, mostly oil and natural gas, increasing dramatically in the near future.

Commodities also provide a hedge against inflation, and we have had a very low inflation rate for years. Commodities have the lowest correlation to the stock market, but the total return performance has been abysmal. Fortunately, commodities have been a very small percentage of your portfolio, 2% to 4% in most cases.

As always, please contact us with any questions, news, or comments.