Investment Committee: Target Portfolio Changes

We hope that you and your family kept warm as the Polar Vortex sunk its teeth into the northern part of the country.  Our investment committee has been busy sinking its teeth into economic and market data after an eventful and volatile 2018. We have shared our current approach to the investment environment in our latest blog post.

Recognizing that we are likely nearing the more mature stages of the economic cycle, for the last year and a half we have been locking in gains across portfolios by trimming positions that have performed well. While portfolios certainly would have been better off without a market decline at the end of the year, it did provide an opportunity for tax conscious advisors to gather losses to offset gains previously incurred. This tax loss harvesting work also provided a “blank canvas” for the Investment Committee to ensure portfolios are well aligned with our best thinking around current market conditions. In this light, the Investment Committee has approved the following changes to target portfolios:

• We will be reducing exposure to developed foreign markets and deploying the proceeds into a low-cost index fund, iShares Dividend Growth ETF, that focuses on US companies that have been growing their dividends. The US stock market declined almost 20% from the highs in September to Christmas Eve. While the market has recovered a portion of those losses since then, we still believe that this precipitous drop, along with a downward revision of growth expectations in foreign markets, represents an attractive buying opportunity. Also, dividend-paying stocks have historically preserved value better during volatile markets. Our remaining large cap foreign market exposure will be maintained through a low-cost passive investment vehicle, iShares MSCI EAFE ETF, in an effort to compress fees in a changing macro environment.

• We will be eliminating our dedicated allocation to floating-rate bonds and will be replacing it with the PIMCO Income Fund, which has a broader mandate to find value across the fixed income spectrum.  While the floating rate bonds were a great contributor to clients’ bond portfolios amid rising interest rates in 2018, the high demand and valuation of these securities has forced us to shift away from the “mob mentality”. 

• Lastly, we will be selling our active municipal bond manager, Delaware Tax-Free Intermediate Fund, and reallocating to a lower cost manager, Vanguard Intermediate Term Tax-Exempt Fund, in the same space.  This is another example of reducing expenses in the portfolio when return expectations are modest and where we think it will be difficult for active managers to outperform their fees.

Despite changes to asset class exposures, your high-level asset allocation (i.e. how much in stocks versus how much in bonds) is a function of your individual plan and is key to navigating markets over the long term. As always, feel free to reach out with any questions.

The foregoing content reflects the opinions of Connecticut Wealth Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.