It has been a rough year in all parts of the financial markets. Due to several factors, nearly every part of the bond and equity markets have fallen dramatically.  How do we respond? Our goal is to remain strategically disciplined in our portfolio allocation and adjust only for long-term changes to the markets while also taking in new information as it arises. 

We feel some changes are in order due to the following:

• Increased government intervention in China across multiple industries with focus on the most profitable companies

• Russian invasion of Ukraine and the impacts on commodity supplies (grain, oil, and natural gas) and on geopolitical alliances

• Higher inflation as unemployment remains low

• Rising Interest rates and a flatter yield curve

China’s crackdown, the invasion of Ukraine, and the shifting allegiances have reduced our expectations for emerging market returns. Some emerging markets will benefit from higher commodity prices while others will suffer for the same reason. Some may see a jump in trade while some will not. We are reducing our allocation to emerging markets while retaining the use of active managers.

Rising interest rates and increased geopolitical uncertainty hurt international small cap companies disproportionately. This portion of portfolios has struggled despite low-interest rates, we think it will get harder. We are reducing our allocation to international developed small cap.

Amid the array of headwinds, international developed markets have thrived, most notably in Europe as the scope of the war remains limited but the side effects benefit larger companies in developed markets (ex: defense and energy companies).  We will reallocate the proceeds from emerging markets and international developed small cap to international developed large cap.

While we use broad index funds for most of our equity investments, we also use a select group of active global managers who tend to have a growth-oriented bias in their company selections. Growth oriented stocks have been punished by rising interest rates. We are reducing our allocation to active global managers and redirecting the funds across US companies.

On the fixed income side of portfolios, we have seen a rapid and massive jump in interest rates across the yield curve which reduces the value of bond holdings. Longer term bonds are punished more severely than shorter term bonds.  We will further reduce the average term of bond holdings until the yield curve stabilizes.

We intend to make these changes in the coming weeks. In the process, we will reduce the average manager cost and the level of volatility in portfolios. Please let us know if you have any questions.