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.
- 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.