FINANCE: Move Toward a Barbell Approach with Investments

By Todd Hauer; Wealth Advisor, Global Wealth Management Division of Morgan Stanley- Denver Tech Center
Posted

The Morgan Stanley Global Investment Committee (GIC) has increased the strategic allocation to equities at the expense of fixed income, while keeping cash and alternative allocations roughly the same.

  • The GIC recommends a shift toward international equities. The US has led the global recovery, but now other equity markets appear to offer similar or more upside.
  • Within alternatives, they recommend a move from hedged strategies to commodities.
  • The US equity market has led the developed and much of the undeveloped markets since the lows of the crisis. There are many reasons for this, but the most important driver is that the earnings recovery has been stronger in the US than in other regions.

Rethinking the Future

  • The GIC has recently updated their annual return forecasts for all of the major equity and fixed income markets. From these forecasts, they surmised that cash might be a better place to be than bonds, assuming some degree of interest-rate normalization over the next seven years.
  • To be clear, cash will likely have negative real returns, too, but with much less risk than bonds.
  • Another important implication of their analysis is that abnormally low returns in bonds do not necessarily mean that returns in equities are likely to be higher than normal. In fact, they think returns are likely to be lower than normal across the entire capital structure over the seven-year strategic horizon.
  • The end result is that on a strategic basis, they have decided to increase our allocation to equities at the expense of fixed income, keeping cash and alternative allocations roughly the same.
  • If rates normalize fully or more quickly than we assume, many fixed income investments could produce negative nominal returns, something many investors are not prepared to accept.
  • Within fixed income, they are now emphasizing shorter-duration securities (one to five years) than previously.
  • They are also shifting our strategic equity allocations toward international markets.

Tactically speaking

  • The GIC thinks it is too early to be fully invested on a tactical basis. A "high risk" signal was recently triggered and when that happens, it typically makes sense to wait for a more favorable signal, which usually comes after a market pullback or consolidation. Most of our tactical equity underweight is in the US, reflecting our desire to shift toward international markets.
  • For now, inflation-linked securities have been eliminated from the tactical portfolio given their record high valuations.

Alternatives

  • The GIC did not meaningfully change our strategic or tactical allocations to alternatives.
  • Specifically, they have a 20% weighting in both frameworks, still a much higher percentage than what most clients currently hold.
  • The GIC stresses it is important for investors to fully consider the historic diversification benefits of alternative investments within the framework of their proposed increased weighting toward equities.
  • Within alternatives, they recommend a partial shift to commodities from hedged strategies and managed futures.

 

This article references information from the Morgan Stanley Global Investment Committee’s March 8, 2013 wealth management document titled “Strategic and Tactical Asset Allocation Change.”

Todd Hauer is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Denver, Colorado.  The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.  Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Wealth Management LLC. Member SIPC.

 

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