Portfolio construction views
Together, Nuveen’s Global Investment Committee and Solutions Team
construct asset class views that assess risk-adjusted return potential
for the next six 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 in different
Asset allocation highlights
- We are broadly neutral toward equities. For investors who are looking
to put money to work, we favour the more defensive characteristics of
U.S. large cap growth, as we expect uneven economic growth and weakening
corporate earnings. As a rebalancing possibility, we are less bearish toward
U.S. large cap value (as relative valuations have become more attractive) and
toward non-U.S. developed markets (earnings prospects now look aligned with
emerging markets). We downgraded small caps based on their more cyclical
nature, weaker earnings momentum and balance sheets and less ability to
handle trade-related supply chain disruptions.
- Given our interest rate views and the benefits of broad diversification within
fixed income, we are more comfortable with duration risk and think
investors could take on more exposure to aggregate fixed income (we still
remain more bullish toward short-term fixed income due to a flatter
yield curve). Given our preference for higher credit quality, we prefer
allocations to investment grade corporates over other credit sectors
and believe securitised assets look attractive for their income and
diversification potential. After a very strong run, preferred securities now
look broadly expensive and represent an opportunity to take profits, but we
continue to see select opportunities. And given strong fundamentals, we’re
seeing strength within municipals given the relative yield advantage
over Treasuries with a bias toward high yield. We are upgrading non-U.S. developed fixed income, favouring the longer duration of those markets with
a preference for higher quality.
- Within alternatives, real estate valuations have gotten more full, but we’d
highlight income potential and we favour debt investments in the private real
estate space. We’re seeing select opportunities across other areas, but manager
selection remains critically important for alternatives, particularly
in the latter stages of the economic cycle.
Asset allocation views for different scenarios
The preceding are based on the views expressed in our fourth quarter outlook. But what if we are wrong?
- The more bearish case: We are already advocating a mostly defensive stance, but what if conditions
worsen and we see economic stagnation, higher inflation and an inverted yield curve? In such an
environment, we would suggest increasing allocations to highly liquid, short-term fixed income
investments (cash equivalents). Lower yields would make longer-dated Treasuries even more attractive,
and municipals and defensive areas of the real estate market would likely benefit. We would also suggest
increased focus on defensive equity strategies, particularly those with healthy dividends.
- The more bullish case: This scenario is further from our base case, but what if we see a surprising
trade war resolution and/or a rebound in global manufacturing sparking a reacceleration in economic
and earnings growth as well as higher rates? Should this happen, we’d sharply reverse many of our base
case positions: Lower quality and lower duration would likely win out in fixed income; cyclicals, value and
small caps would be better plays in equities and less defensive alternatives would look more attractive.
Sources: All market and economic data from Bloomberg, FactSet and Morningstar.
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.
Nuveen provides investment advisory services through its investment specialists.