Often times, it is good to look back at what your thinking was to see how it turned out. Last year on October 15, 2020, I wrote a blog post titled, “Where Do We Go From Here?”, that reviewed market thoughts and outlooks put out by Wellington Management. At that time, we stated that “This all sounds very logical and reasonable to me and consistent with a long-term strategic approach that captures the broad trends in the economy and the capital markets”. Let’s see what they said and how it all worked out!
Wellington Management is a well-respected Boston-based investment management firm with $1.6 trillion (trillion with a “T”) assets under management. Their write-up last year focused on the COVID-19 situation, potential for another shutdown, and fiscal and monetary supports. In summary, they felt the economic and capital market situation favored overweights in U.S. growth equities and U.S. corporate and high yield bonds with underweights in U.S. value stocks, international and emerging market equities, and U.S. Treasuries.
Per the table below, you can see that U.S. growth equities, indeed, did perform exceptionally well, but U.S. value stocks beat them out by a bit. Likewise, international and emerging market equites performed well, but not to the level of U.S. value stocks. In the bond space, it was easy to call for weakness in U.S. Treasury returns given the historic low level of yields and simple bond math; something that D&A has been reporting for quite some time. Adding a bit of credit spread to bond holdings adds some return while reducing overall portfolio risk.
Though D&A is a believer in long-term strategic investing with a mostly passive approach, it is often appropriate to shift long term targets to reflect underlying shifts in the environment. Such is the case with an underweight to U.S. Treasury bonds where the simple bond math indicates that forecast total returns are likely to be weak compared to historical returns over the near to medium term. In equities, however, bets between value and growth and international exposures are less likely to be predictable and are not something to which we manage. For most client accounts, we are currently overweight to equities in all equity classes and underweight in U.S. treasury bonds to reflect this long term strategic view.