Five portfolio construction themes
Economic conditions have steadily improved over the first half of 2021. But that brings with it rising concerns about valuations and inflation. Despite better growth, yields remain frustratingly low, making it difficult to generate income. The bottom line: Returns may be tougher to come by in the months ahead. However, investors’ long-term plans, goals and needs remain unchanged. So how to build portfolios? Nuveen’s Global Investment Committee offers a set of portfolio construction themes for our clients to consider.
1. Differentiate between short- and long-term inflation risks
As discussed in our outlook, there is a difference between short-term inflation risks that are sparking ongoing volatility and prospects for long-term persistent inflation. For the former, we encourage investors to stick with their long-term portfolio allocations. We expect monthly readings to soften in the months ahead. For the longer-term risks, we do not expect inflation to rise to a level that could cause a shift in central bank policies or drag on growth any time soon.
We believe investors should explore the advantages of ongoing reflation trade as global economic growth improves and yields experience upward pressure. A focus on high yield, bank loans, preferred securities and emerging markets makes sense in fixed income markets. We also see value in high yield municipals. Regarding public equity markets, we suggest focusing on areas such as U.S. small caps and emerging markets. Additionally, we see potential in public and private real estate and real assets as a natural hedge should inflation start to rise.
2. Continue casting 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 types of risks this entails 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 different yield and volatility profiles, and we suggest investors diversify across income opportunities and risks (Figure 5).
3. Harness the benefits of ESG investing
Investors have been increasingly focused on environmental, social and governance factors in recent years. And for good reason. At Nuveen, ESG investing is not about excluding certain types of investments, but rather a tool to help examine opportunities 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. We are increasingly focusing on climate change-related risks and opportunities across portfolios. In the process, we are 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.
4. Consider relative value across asset classes
At our most recent Global Investment Committee session, we discussed how investing during a period of peak growth creates unique challenges and whether opportunities are drying up. Our answer is no, but we acknowledge returns are getting tougher to come by. While some areas appear fully valued, we think investors should focus on relative opportunities across and within asset classes.
Within equities, the growth vs. value debate has taken a backseat to finding attractively valued individual securities with favorable earnings prospects across industries, styles and geographies. In regard to fixed income, we are emphasizing credit risks above duration risks. We are also focusing on careful selectivity in an environment where spreads are unlikely to compress much further. We also see opportunities across high grade and high yield municipal bonds, especially those centered on the reopening trade.
We are focusing on alternative and niche real estate such as single-family rentals, medical offices and lab space, as well as public and private industrial real estate benefiting from the shift to e-commerce. We see many opportunities across public and private real assets, including farmland, renewables and infrastructure.
5. A broader reach can help achieve income goals
This final theme is a continuation of the one prior. Given current valuations, long-term returns across asset classes may face headwinds. 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.
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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.
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