Asset Allocation Outlook: How Are We Positioning for Change

12.10.2018 - Viraj B. Patel, CFA, FRM, CAIA


Handle 'Normal' with Care

As volatility returned to more normal levels in 2018, investors were reminded that there is heightened uncertainty in this environment of evolving monetary policy, trade tensions and a maturing business cycle. While these risks should continue for the foreseeable future, we expect markets to be supported by strong economic and corporate fundamentals, aided by fiscal thrust that remains in the pipeline, even if the initial benefits have taken effect.


While the path may feel bumpy at times, we feel the environment should continue to benefit investors willing to maintain a moderate risk-on allocation.

Equities: A supportive backdrop

In the US, we are overweight mid and small-cap equities. Smaller companies should reap the rewards of continued economic growth—albeit at more moderate levels—and residual benefits from tax cuts and deregulation. With trade issues carrying over into 2019, we are reiterating our bias toward companies with domestically focused revenues that may act as a hedge against any trade-related volatility.

In international developed markets, we continue to have a positive outlook for Japanese equities. Japanese stocks should enjoy the benefits of a recent surge in capital expenditures, improved corporate governance and a weaker yen.

In emerging markets, we maintain a neutral view. The sell-off in 2018 has forced domestic governments and central banks to re-adjust current policies. Selectivity remains key as some countries are further along this process than others.

Fixed Income: Slightly improved

Rising rates remain at the forefront of investors’ minds as the calendar flips to 2019. This year, the US 10-year Treasury yield hit a cycle high thanks to better economic growth expectations, a recalibration of the Federal Reserve’s rate hike path, rising oil prices and increased supply.

Within our taxable fixed income allocation, we prefer US investment-grade credit and are maintaining our short duration bias relative to our benchmark to guard against interest rate risk. For investors in high tax brackets, the municipal bond market continues to offer tax-advantaged income.

Alternatives: An opportune market

With more idiosyncratic events taking place in markets, we think this presents a good opportunity for alternative funds to generate alpha. Alternatives could also offer valuable downside protection for multi-asset-class portfolios, as the volatility we saw in 2018 isn’t likely to abate anytime soon.

This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2018, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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