With that said, we present this discussion of our asset allocation approach and our current portfolio stance as we begin the year.
Our motivation for preparing this report is expressed in its title, “Balance in an Uncertain Time.” Investors today face a high degree of uncertainty, from geopolitical transformation to economic transition to fragile market fundamentals. As we have seen in recent months, the broad market has been more than willing to react to that uncertainty by making big short-term bets. This was most recently seen in the extreme reaction to the election of President Trump, when investors moved aggressively at the end of 2016 into companies that might benefit from policies that the new administration might establish and that might produce the outcomes envisioned at the time. We cannot remember a time when it was more important to reinforce patience, balance and discipline in the face of uncertainty, and to assure clients that we are investing their capital in a manner that minimizes exposure to any specific near-term risk.
In writing this report, we set out to accomplish two goals:
Provide a window into our asset allocation philosophy and process, which emphasize a long-term view. As we will discuss in this paper, two overarching principles guide our work. First, we build each of our clients’ portfolios in support of their specific long-term goals and see great risk in deviating meaningfully from those long-term plans because of events, opinions and other factors that may drive short-term market movement or forecasts.
Second, we are fundamental, value-conscious investors and always seek to build portfolios based on a bottom-up view of a given investment’s price relative to its inherent value and risks. This bottom-up analysis is essential to our asset allocation work and of particular import when examining alternative options, such as real estate, private equity and hedge funds, where managers can add considerable value through highly differentiated strategies. This approach is quite different from the top-down method used by many firms to allocate portfolios, but we believe that the further we move away from examining individual investments, the more difficult it becomes to predict outcomes. Additionally, we integrate our asset allocation and manager selection research, which helps us extract valuable information from our managers and target our capital effectively.
Provide our asset allocation perspective as it stands at the beginning of 2017—also based on a longer-term view. In this paper, we will provide our current perspective about the investment landscape as of the beginning of the year, lay out our long-term (10-year) thinking about the major asset classes in our portfolios, examine our mediumterm outlook for those asset classes through the lens of various economic and market scenarios that may evolve in the next 18 to 36 months, and discuss our approach to opportunistic investing and how we seek to take advantage of market dislocations when they occur. We hope to reinforce through this discussion our belief that a balanced and cautious approach is warranted in an environment characterized by low growth, low interest rates and above-average valuations.
We want to be clear that the output of our asset allocation research is not a “model portfolio” used by all of our clients. Quite the opposite: We use this research as an essential foundation for our work with clients, but it is only a starting point from which we build each client a portfolio reflecting a high degree of customization to their specific circumstances.
We hope this document will help shed light on our current views of where opportunities and risks lie in capital markets, as well as our core philosophy on asset allocation. Please fill out the form below if you are interested in downloading the full paper, including our 2017 asset allocation outlook by asset class.