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Five portfolio construction themes
In line with our broad cross-asset allocation views, as well as considerations and best ideas within specific asset classes,offers a broad set of portfolio construction themes for our clients to consider as we enter 2022.
1. Look for rebalancing opportunities
The key word here is “rebalancing.” The beginning of the year is a natural time to reassess long-term portfolio goals, adjust asset allocation if needed and rebalance portfolios based on market movements.
But we’re aware that many investors don’t regularly rebalance, which could mean being exposed to unintended risks. Our view is that all institutional and individual investors should explicitly choose and manage their portfolio exposure risks in line with their long-term goals and the prevailing market environment. Whether those are achieved via a risk-budgeting approach, diversification and asset allocation or through asset class-specific positioning, all of these exposures should be intentional.
2. Balance economic growth and inflation risks
As reflected in the title of our overall 2022 outlook, we expect global economic growth to be a notch slower than it was in 2021, but still above the long-term trend. And we also think inflation pressures will continue through the coming year. We expect this combination to likely result in a multiyear trend of decent growth and some upward pressure on interest rates (perhaps somewhat similar to between 2016 and 2019).
When it comes to “balance,” investors should focus on “growth + inflation” investments rather than explicit inflation hedges. For now, we think key elements of the reflation trade we have been discussing for some time still have legs. Fixed income credit sectors, U.S. small cap equities and public and private real estate and real assets all look like good opportunities in a modest growth, modest inflation, modestly rising rates environment.
3. Stick with that wider net for income
We’ve been hitting this point for a long time and the basic message holds true: With ultra-low yields across traditional fixed income asset classes, investors need to expand their universe. As such, we suggest exploring different areas of the fixed income landscape, dividend-paying equities and alternatives such as real estate, real assets and private credit.
In doing so, it is critical to understand the associated risks and to be deliberate in choosing those risks. To aid this process, we broadly categorize asset classes into buckets of interest rate risk, credit risk and equity risk. Each offers a different yield and volatility profile, and we suggest investors diversify across income opportunities and risks, as shown in Figure 5.
4. Benefit from ESG factor investing
The acceleration of responsible investing themes and environmental, social and governance factors shows no sign of slowing down. And for good reason: At Nuveen, we believe ESG investing is not about excluding certain types of investments, but rather a tool to help examine opportunities as part of a broader approach designed to enhance our return generation and risk management processes.
The pandemic exhibited how strong corporate governance, business continuity, human capital and supply chain management are critical to driving performance across asset classes. We do not see that changing. Likewise, climate change-related risks and opportunities are expanding across portfolios. We are increasingly uncovering a variety of ideas in areas such as renewable energy, clean technology, food sustainability and investments that focus on diversity, inclusion and employee well-being across public and private markets.
5. Harness active management as the cycle ages
In the coming years, we expect rising volatility and harder-to-find investment returns. This is an implicit argument for the importance of active management. Without exception, all members of our Global Investment Committee and portfolio management teams are finding investment ideas that are highly idiosyncratic and fast-moving. Selectivity, research, nimbleness and confidence can make all the difference.
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
Nuveen provides investment advisory services through its investment specialists.