Investment Committee: Market Highs & Capitalize on GainsSubmitted by Connecticut Wealth Management, LLC on August 22nd, 2017
We are writing to inform you that the Investment Committee has approved another change to our target portfolios. When you last heard from us in June, we shared with you a trade we had authorized that reduced domestic large cap growth stocks in favor of non-US equities. The central theme behind decreasing large cap growth was to take advantage of market highs and capitalize on gains in an asset class overweight that had benefited our clients’ portfolios for years. A similar notion applies to this particular shift in client portfolios, and that is the elimination of the high yield bond allocation.
Clients who have been with us over the last several years have earned outsized returns and significant amounts of money from having exposure to high yield bonds. Over this time period, this asset class has appreciated meaningfully while also offering yields far in excess of other fixed income asset classes. This appreciation has caused bond spreads (a measure of investors’ appetite for risk) to decrease to the point where we no longer believe our clients are sufficiently compensated for the added risk of investing in this type of bond.
The decision to eliminate high yield was not easy given the positive experience we have had with the asset class, but it is our responsibility to ensure that our allocations represent our best thinking given the economic and market variables of today and not to let recent performance (positive or negative) cloud our judgment. We will continue to revisit this topic in future Investment Committee meetings and may decide to reintroduce the asset class if spreads once again offer a more attractive risk/return tradeoff.
We have decided to invest the proceeds into the PIMCO Investment Grade Corporate Bond Fund. Investment grade corporate bonds are a sub asset class within the high quality component of a bond portfolio and offer the best value based on current pricing in its category. PIMCO’s current positioning, track record, and outstanding management team make the fund an easy choice to access this asset class.
As always, if you have any questions, please do not hesitate to reach out to us.