Login to access your documents and resources.
The client portal are currently unavailable
Which type of investor are you?
Institutional investor?
Mountain range

2019 midyear outlook: asset allocation

The Nuveen Solutions team discusses views on cross asset risk-adjusted return potential over the next 6 to 12 months.

Portfolio construction views from the Nuveen Solutions team

 

Nuveen Solutions draws upon the Nuveen Global Investment Committee’s investment outlook and asset class views to assess risk-adjusted return potential across asset classes for the next 6 to 12 months. These forward-looking views help drive positioning within diversified portfolios designed for common investor outcomes. Here, we discuss asset allocation views for a long-term growth investor and address how these views might shift for investors with different objectives or in different market environments.

 

Asset allocation highlights for growth investors

Following are our broad views on growth investing for the next 6 to 12 months: 

  • Favor a defensive stance within equities. Higher-quality companies (those with higher return on equity and stable cash flow) should outperform in more volatile markets. We prefer U.S. large caps over developed non-U.S. markets and still prefer growth over value.
  • Look to higher quality in taxable fixed income. Investment grade corporates look more attractive than high yield and loans. However, we believe municipal spreads have room to compress further and we also have a favorable view toward high yield municipals.
  • Across sectors, stick with a neutral duration position. We believe U.S. Treasury rates will remain range-bound, with a slight downside bias. Investors could consider shortening duration in taxable assets and lengthening in municipals.
  • Focus on debt over equity in emerging markets (EM). While we see value in emerging markets equity over other global equity markets, we prefer EM debt over EM equities. EM equity benchmarks are more heavily weighted toward the Asia- Pacific region, which may continue to come under pressure caused by trade tensions. Hard currency EMD could benefit from trade conflicts.
  • Within alternatives, U.S. core real estate looks attractive for growth investors. While real estate is perhaps fully valued, it still offers attractive income prospects. Manager selection remains critically important when it comes to alternatives, particularly in the latter stages of the economic cycle.
 
Asset allocation views for income investors

Here, we offer additional suggestions specific to investors focused on current income:     

  • To increase portfolio yield, overweight emerging markets debt compared to high yield and loans. EM debt enjoys better relative valuations, improving fundamentals and would benefit from U.S. dollar weakness.
  • Amid volatility, consider short-term fixed income. Short-term fixed income looks attractive relative to longer-term Treasuries, given similar yield levels.
  • For higher tax-exempt yields, consider a focus on longer-dated municipals. Although municipals have outperformed Treasuries in 2019, we think relative value still remains, especially at the longer end of the yield curve (including municipal high yield).
  • Harness the liquidity premium with private real estate. Private real estate has the potential to offer stable cash flows with relatively low volatility. Such an investment could be paired with short-term bond allocations to provide needed liquidity.

 

Asset allocation views for different scenarios

The preceding are based on the views expressed in our midyear outlook. But what if we are wrong?     

  • What if we experience a stronger “risk-on” environment? In this scenario, cyclical sectors (U.S. small caps, U.S. large cap value) would be more likely to perform in-line with their defensive counterparts. We would also be less negative on U.S. credit and think longer-dated core plus fixed income sectors could outperform core strategies.
  • Conversely, what if we move toward a “risk-off” world? For such a scenario, we would suggest increasing allocations to highly liquid, short-term fixed income investments (cash equivalents). Lower yields would make longer-dated Treasuries more attractive and we would expect high yield municipals to under-perform. We would also suggest even more focus on defensive equity strategies, particularly those with healthy dividends.

 

Additional considerations: 
  • Views for investors with ultra-long investment horizons who have little concern for intermediate liquidity: Investors such as pension plans or insurance general accounts may want to increase their allocations to private equity relative to listed equity, and private credit relative to public credit. We also think investments in such asset classes as farmland make sense for these investors. We think the liquidity premium for such investments is worth the possible benefit of greater capital appreciation over time.


Download
U.S. Institutional Sales
Profille image of Dimitrios Stathopoulos
Dimitri Stathopoulos
United States

Endnotes
Sources 
All market and economic data from Bloomberg, FactSet and Morningstar. 

Glossary
S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. 


This material is provided for informational or educational purposes only and does not constitute a solicitation of any securities in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. 

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the view s of Nuveen as a whole or any part thereof. 

Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate.

This information does not constitute investment research as defined under MiFID.


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. Foreign 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 excludes 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 suitable 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.