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Five portfolio construction themes
While valuations across asset classes are looking fuller, economic growth appears to be slowing down. At the same time, investors remain concerned about inflation and are increasingly focused on prospects for tighter monetary policy. No doubt the investing environment is looking more challenging, with both growth and income opportunities becoming increasingly hard to come by. So how to build portfolios?offers a set of portfolio construction themes for our clients to consider.
1. Balance inflation risks with growth risks
We still appear to be in the early phases of the current economic cycle, with central banks encouraging (or at least tolerating) higher inflation. Monetary policy is slowly becoming less accommodative and fiscal policy is likely to become more volatile.
From a broad macroeconomic and investment perspective, we’re slowly becoming less focused on inflation risks and more focused on how the eventual economic landing will look. As of now, we still see opportunities from the “reflation trade,” and are particularly favorable toward U.S. small caps, fixed income credit sectors (especially loans and preferred securities) and select opportunities across emerging markets debt and equities. We also see compelling investments in areas such as industrial real estate, public infrastructure benefiting from increased economic reopening and higher-yielding municipal bonds.
But we’re also increasingly looking to complement these views by considering investments that can prosper in a slower growth environment. This includes areas such as select growth at reasonable prices in equities (like health care), as well as a variety of private real estate and real assets that offer diversification and resilience.
2. Continue casting a wide net for income
Yields remain stubbornly low, even as the global economy has recovered over the last year. The search for income is going to be a long-term challenge for institutional and individual investors around the world. This means investors should consider different areas of the fixed income landscape, dividend-paying equities and alternatives, such as real estate, real assets and private credit as tools to build a sustainable income portfolio.
In casting this wider net, however, investors should understand which risks are entailed to generate more income and how these risks work together. Among a number of tools and options, we broadly categorize possible asset classes into buckets of interest rate risk, credit risk and equity risk. Each offers different yield and volatility profiles (Figure 5), and we see value in diversifying across different income opportunities and risks.
3. Take advantage of illiquid assets
We believe many (if not most) investors are under-allocated to alternatives in general and illiquid investments in particular. We see compelling opportunities across the alternatives landscape, including private equity driven by rising M&A activity and middle market private debt, which looks attractive on both a valuation and fundamental basis. We also see value in alternative real estate sectors (including self-storage and medical offices) as well as select farmland and timberland investments, especially those focused on low- or zero-carbon emissions.
It is important that investors understand their illiquidity tolerance, ensuring that investment time horizons match their need for capital. But taking on additional liquidity risk in exchange for diversification and return potential is a strategy we think both institutional and individual investors should consider.
4. Focus on ESG factors that matter
Investors have been increasingly focusing on environmental, social and governance factors in recent years. And for good reason: For us, ESG investing is not about excluding certain types of investments, but rather a tool to help generate returns and manage risks.
We’re continuing to focus on both governance and environmental factors (especially as climate risk grows as an important investment theme), and have also been seeing increased value in leveraging the “S” in ESG factors. In our view, human capital and labor market dynamics are becoming increasingly important as investment themes. For example, companies that provide more flexible work schedules, those that invest heavily in workforce training and those that make diversity and inclusion a core part of their corporate culture appear relatively advantaged.
5. Selectivity, selectivity, selectivity
Finding relative value across and within asset classes is becoming an increasingly important and growing theme for all investors, especially as the current cycle is starting to age and as volatility may pick up. In all areas of both public and private markets, we’re finding that opportunities are increasingly idiosyncratic and fast moving.
This makes selectivity (and diligent research, nimbleness and flexibility) critical to contributing to investment success.
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.