Multi-Asset portfolio positioning intra-quarter update as of 06/05/2023
With increased risks to economic growth suggesting incremental risk to corporate earnings, we have reduced the allocation to corporate credit by shifting some intermediate-term fixed income exposure from corporate bonds to Treasury bonds.
June 5, 2023
ACTIONS and OVERVIEW:
Reduced corporate bond exposure and increased Treasury overweight within fixed income
- Trimmed existing intermediate-term corporate bond ETF holding
- Added new intermediate-term Treasury bond ETF position
Portfolio rebalance
Key measures of real economic activity in the U.S. have shown signs of deceleration in recent quarters, and leading economic indicators continue to point to slower growth ahead. Our economic cycle analysis suggests that the delayed effects of monetary tightening, the negative impact to credit growth from tightening lending standards, and the rolling over of the profit cycle are all likely to be felt acutely in the second half of 2023. As such, we see an elevated likelihood of an economic contraction over the next 6-12 months.
Given increased economic risks, we believe our generally defensive positioning remains appropriate, but that an additional reduction in corporate credit exposure within the fixed income allocation was warranted. Thus, we have trimmed existing exposure to intermediate investment grade corporate bonds and increased our Treasury overweight with a new allocation to intermediate-term Treasury securities. We have also taken this opportunity to rebalance portfolios.
UPDATE DETAIL
Reduced corporate bond exposure and increased Treasury overweight within fixed income
- Given our outlook for increased risk to economic growth, including elevated risk of recession over the next 6-12 months, we believe a reduction in corporate credit exposure and corresponding increase in Treasury exposure is warranted.
- While investment-grade credit spreads moved higher during the regional banking turmoil in March, spreads remain below their 2022 peak and are meaningfully below levels historically associated with economic weakness.
- We do not currently view corporate balance sheets as stressed, but we believe the potential for profit declines and a reduction in cash balances has made businesses more vulnerable to economic risks.
- Treasury bonds have typically outperformed corporate bonds during recessionary periods, often posting positive overall returns.
- With this shift, the Multi-Asset strategy is now modestly underweight corporate bonds at the overall portfolio level and has a material overweight of Treasury bonds within the fixed income allocation.
- These adjustments had little impact on the average duration of the portfolio’s fixed income allocation, which retains a longer-than-benchmark duration. While these adjustments did incrementally reduce the yield of our fixed income exposure, the portfolio’s yield remains benchmark-like, and our analysis suggests that even a modest widening of credit spreads could more than offset the yield advantage of corporate bonds over Treasury securities at intermediate maturities.
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Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings, and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Multi-Asset holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary. Upon request, WestEnd Advisors will provide a list of all recommendations for the prior year.