Add new comment

Asset Allocation Update

Geoff Scott's picture

We recently convened our quarterly Asset Allocation Committee meeting and would like to provide you with an update on our current views. In this meeting, we review our portfolio positioning, the performance of the underlying strategies in our Balanced portfolios, and each committee member shares their views on the risk/reward opportunities in their respective asset classes.

While several members of the Cambridge investment team participate, ultimate voting responsibilities are held by the portfolio managers on our Balanced portfolios – Brandon Snow, Bob Swanson and Paul Marcogliese. The outcome of the meeting and voting process determines the asset mix within funds in our Balanced portfolios: Cambridge Asset Allocation Fund, Cambridge Monthly Income Fund and Cambridge Global High Income Fund.

It was a timely meeting considering the significant rally in equity and fixed-income markets throughout the quarter. While equity markets took their cue from a dovish pivot in monetary policy from the U.S. Federal Reserve and other central banks globally, fixed-income markets focused on a slowing backdrop and risks to the global economy.

As we look at the current environment, we see that economic growth has peaked and is slowing. In the U.S., for example, leading indicators show that year-over-year growth peaked in mid-2018 around 6% and has recently slowed to about 3%. Although this level of growth is still healthy, the slowing trend is of greater concern. The chart below shows the U.S. leading indicators over the last 25 years. 

Conference Board Leading Economic Index for the U.S. (YoY%)

Conference Board Leading Economic Index for the U.S. (YoY%)

Source: Data provided by FactSet, March 31, 2019. Shaded areas are periods of recession.

Another observation is that corporate earnings growth is also starting to slow. Coming off stimulus-supported growth in 2018 that was led by the U.S. corporate tax cuts that took effect early in the year, earnings growth is now expected to slow from above 20% to mid-single digits in 2019 (Source: Bloomberg Finance L.P.). In addition to the slowing growth environment, we believe the high levels of leverage in the global economy add additional risk.

As we look for signposts to guide our decision making going forward, we are closely watching employment and delinquency rates for any signs of stress or change in trend. Within employment data, we are specifically monitoring initial jobless claims and layoffs, which have proven to be strong leading indicators of economic growth in the past. The chart below shows U.S. initial jobless claims, which have crept higher off 2018 lows, but remain very low by historical standards. 

U.S. Initial Claims for Unemployment Insurance
Four-week moving average (000’s of persons)

U.S. Initial Claims for Unemployment Insurance - Four-week moving average (000’s of persons)

Source: Data provided by FactSet, March 31, 2019. Shaded areas are periods of recession.

Given this backdrop, we took the opportunity to reduce our target equity weight by about 3%, with a corresponding increase to our fixed-income exposure across each portfolio. Looking at Cambridge Asset Allocation Fund as an example, this adjustment reduced the target equity exposure to about 48% from 51%.

Following the strong rally throughout the first quarter, it has become more challenging to find attractively valued opportunities and has led us to reduce our equity exposure. We feel this positioning is prudent at this stage in the economic cycle as downside risks have grown given the trends we are seeing in economic growth, corporate earnings and aggregate debt levels. We continue to closely monitor the data for signs of stabilization or any change in trend that would impact economic prospects going forward.  We hope you find this update on our asset allocation views informative.  We appreciate the continued support of our clients – investing on your behalf is a great privilege and responsibility. 

Geoff Scott
Institutional Portfolio Manager 

 

IMPORTANT INFORMATION

Geoff Scott is an Institutional Portfolio Manager at Cambridge. He does not have a material interest in the securities discussed herein; however, he is an investor in certain Cambridge funds which may hold these securities.

This commentary is published by CI Investments Inc. The contents of this piece are intended for informational purposes only and not to be used or construed as an endorsement or recommendation of any entity or security discussed. The information should not be construed as investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor. Some conditions apply.

Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Investments Inc. has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither CI Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The comparison presented is intended to illustrate the mutual fund’s historical performance as compared with the historical performance of widely quoted market indices or a weighted blend of widely quoted market indices or another investment fund. There are various important differences that may exist between the mutual fund and the stated indices or investment fund, that may affect the performance of each. The objectives and strategies of the mutual fund result in holdings that do not necessarily reflect the constituents of and their weights within the comparable indices or investment fund. Indices are unmanaged and their returns do not include any sales charges or fees. It is not possible to invest directly in market indices.

CI Investments, the CI Investments design, and Cambridge are registered trademarks of CI Investments Inc. Cambridge Global Asset Management is a division of CI Investments Inc. Certain funds associated with Cambridge Global Asset Management are sub-advised by CI Global Investments Inc., a firm registered with the U.S. Securities and Exchange Commission and an affiliate of CI Investments Inc. Certain portfolio managers of CI Global Investments Inc. are associated with Cambridge Global Asset Management.

We welcome your comments and questions for the Cambridge team and will respond as soon as possible. Please note that all comments are reviewed for their relevance to the topics discussed in the blog, and that comments may be edited.