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 



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.

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