For our portfolio changes and positioning, we slightly increased stock allocations above target this past quarter, which benefited returns. For example, our moderate risk portfolio on Diversidex® contains about 63% stock and 37% bond while that option with our Flex portfolio is running about 68% stock and 32% bond. When we “flex out” that stock holding drops to about 40%. We did not “flex out” during the first three months of 2024 and remained fully invested. We’re maintaining a growth tilt toward stocks due to earnings momentum during Q1 and earnings forecast for 2024. I expect we will look to broaden that view into the back half of the year with more exposure to value-style stocks and smaller capitalization companies assuming the economic strength continues.
We lengthened our bond duration by about half a year to an average of six years across our main portfolios and remain optimistic that the bond allocation will help if we see some weakness in the equity markets.
We want to offer a few details on how we manage portfolios. We target adjusting holdings about every three months, but this can be longer or shorter pending catalysts in the market. For example, we just adjusted Diversidex® earlier than normal in March due to the strength of tech earnings. We receive investment research from a broad range of sources and compile that in our investment committee for discussion on positioning.
We set ranges of stock or bond exposure that’s acceptable to our investors based on their risk tolerance. Broadly, once we decide on the overall stock exposure, we then break that down into a mix of domestic vs. international stocks. We further define holdings based on tilts or factors such as size, quality, low volatility, growth, value, and several others where we believe we can outperform the average. Once we’ve aligned on that exposure level, we will select an investment which targets that part of the market. This can be an actively managed ETF or mutual fund (one that targets select exposure to individual stocks), or we can select an index ETF or mutual fund which will own a large basket of holdings in that targeted area. The expenses of the fund are a large consideration as we keep them as low as possible. Once the allocation is constructed, we update an individual’s portfolio when the targeted position drifts outside of an acceptable tolerance or the next allocation is implemented.
In terms of actual trade execution, we work with our custodian to gain the best pricing on blocks of securities. That means we consolidate all our client’s trades on a single purchase and then allocate them to individual client accounts. We use limit orders to help clients obtain better pricing where it makes sense.
Then, between larger changes, we have a review process in our weekly investment committee meeting where actual vs. intended performance is tracked. Our team reviews opportunities on a set schedule across our investment choices and current allocations. This schedule includes weekly, monthly, quarterly, and annual checks as well as analysis for any area that’s off track. This process provides a loop of accountability to ensure we have what we feel are the best choices for our clients.
We’ve enjoyed the start to 2024 and are hopeful for a continued broadening of the rally to more parts of the US and global stock and bond markets. It’s likely by our next discussion that we’ll have further clarity on the first Fed rate cut and the strength of the US economy. Let’s hope for a bountiful Spring!
If you have any questions or would like to talk further, please contact your advisor.