March 14, 2019
Earlier this week, three members of The Joseph Group team (Mark Palmer, Aaron Filbeck, and Travis Upton) attended the 6th Annual Ohio Institutional Investment Forum. The event largely consisted of panel discussions of Chief Investment Officers and Portfolio Managers from organizations such as The State Teachers Retirement System of Ohio, the Cleveland Clinic, and Kentucky Retirement Systems along with multiple investment professionals from institutional asset managers and consultants. The event was a terrific opportunity to gain perspective on what big institutions, who are responsible for multi-billion (with a “B”) investment portfolios, are doing to navigate the markets. Here some key highlights from our notes regarding the event:
- The risk of recession in the near term was seen as low. While the question of a recession was brought up a number of times, public funds and institutional managers seemed to agree a recession is NOT imminent. Those willing to put a timeframe to their forecast pointed to the risk of a recession being low until at least 2021. An institutional asset manager who started the event talked extensively about the difference between a general market pullback where the market dips and snaps back quickly, and a recessionary pullback where the market declines and takes a long time to recover. The manager shared their proprietary “Recession Risk Dashboard” which consisted of multiple indicators flashing “green” at the end of 2018. They then showed the history of their Dashboard and focused on how positive the current readings are compared to past environments when the economy was rolling into a recession.
- Institutions see interest rates remaining low. At one point during the conference, one of the speakers took an informal poll of the audience and asked how many of the attendees expected the benchmark 10-year Treasury rate, which is currently sitting at 2.6% to end their year higher than 3.0%. Less than 2% of the audience raised their hands. Richard Robben, Chief Investment Officer for Kentucky Retirement Systems offered his agreement with the audience. “With the Fed on hold and other areas of the world (Europe) cutting their interest rates, nothing I see makes me think rates will move materially higher anytime soon.”
- Among asset classes, foreign stocks, especially emerging markets were a favorite. Multiple institutional firms talked about foreign stocks vs. U.S. stocks moving in cycles and that the current trend of U.S. stock leadership being extended relative to history. One manager stated, “I really like emerging markets long-term, but they are volatile and in the short-term, who knows? If you have a longer time horizon, you are likely to be rewarded.”
- Institutional managers were largely “neutral” across their target allocations and not taking big bets in any single asset class. When it comes to asset allocation, the institutions talked about positioning portfolios near their long-term targets in terms of allocations to stocks, bonds, real estate, and other asset classes. One institutional consultant explained it this way:
“Earnings are good, interest rates are stable, and the economy is pointing to sustainable, reasonable growth, which is terrific for growth assets like stocks. However, there are some big questions out there we do not know the answer to. It’s like asking one of those Magic 8-Ball things. Will the U.S. and China come to a trade agreement? Reply hazy. Try Again Later. Will Brexit actually happen, and if so when and how? Ask again later. The uncertainty leads us to be neutral across our asset allocation – this is not a time to take any big bets in any one asset class.”
- We love the analogy and when we look at the portfolios we are managing here at The Joseph Group, we agree. The backdrop for earnings and valuations is positive, but there are big uncertainties which suggest having some dry powder and managing risk. As a result, target allocations for our objective-based portfolios are also close to “neutral” with slight “overweights” in Global Stocks and Short-term Bonds and slight “underweights” in Credit and Real Assets.
The pension funds and endowments represented at The Ohio Institutional Investment Forum have similar goals as The Joseph Group – create investment portfolios which can navigate the uncertainties of the current global economic environment while achieving long-term returns which can make dreams and objectives a reality.
Have a great week!