The second quarter proved challenging for Horizon’s Spend portfolios as losses for both stocks and core bonds deepened, continuing their volatile price action since the start of the year. These losses highlight the importance of maintaining a liquid reserve to fund current spending needs while not foregoing a potential recovery in the investment portion as part of a retirement spending solution. Per the design of our “intelligent rebalancing” program, the Spend portfolios did not replenish their spending reserves in the second quarter. Risk Assist® also engaged in the second quarter as losses across stock and bond markets deepened, although de-risking activity in the Spend models was more muted than in comparable Protect portfolios due to differences in portfolio construction.
Spend Portfolio Positioning
The core allocation decision of the Spend portfolios, tilted away from core bonds and toward equity markets, is designed to support retirement spending in today’s low interest rate world. This tilt, while not beneficial during the second quarter as global stocks [MSCI ACWI Index (MXWD)] under performed core bonds [Bloomberg U.S. Aggregate Index (LBUSTRUU)], was somewhat mitigated by the spending reserve and the hedging activity of the Risk Assist® algorithm. Our underlying allocation changes were modest last quarter. Similar to our activity after the first quarter, the lack of a spending reserve replenishment led to a slight increase in the investment portion of the models, in line with our standard portfolio rebalancing practices.
Spend Contributors and Detractors
In the equity allocation of the Spend portfolios, exposures to small cap domestic low volatility, domestic dividends, and international low volatility stocks contributed the most to returns in the second quarter. Holdings in the domestic large cap space, including value, growth, and core exposures, contributed the least last quarter. In our fixed-income holdings, exposure to senior loans contributed the most to performance, while our long-term investment grade corporate bond exposure lagged.
All throughout the post-global financial crisis era, investors have been conditioned to expect salvation, in the form of central bank easing, any time equity markets experience significant turbulence. The price action in 2020 was the apotheosis of this dynamic, showcasing a phenomenon so powerful as to christen an entirely new cohort of retail traders whose creed, “stocks only go up,” plainly expressed what many investors had privately felt during the prior decade-long expansion. However, we do not believe that this model is well suited to today’s environment. That is because inflation, not growth, is the number one concern of central bankers, politicians, and the general public. Given that backdrop, we believe market volatility is likely to remain elevated in the coming months as investors grapple with the macroeconomic and geopolitical outlooks. While our views on these top-down issues have been the driver of our conservative portfolio positioning for the past few months, earnings season, starting in mid-July, may provide valuable bottom-up information to supplement our outlook. One thing is certain – volatility uncovers potentially attractive investment opportunities. The investment team at Horizon Investments looks forward to continuing to execute on our innovative portfolio strategies in order to help our clients meet their financial goals in the years ahead.
Past performance is not indicative of future results. The investments recommended by Horizon are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This information should not be considered to be a recommendation to buy or sell any security or to adopt a particular investment strategy. It should not be assumed that any of the transactions, holdings, or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein.
RiskAssist® is NOT A GUARANTEE against loss or declines in the value of a portfolio; it is an investment strategy that supplements a more traditional strategy by periodically modifying exposure to fixed income securities based on Horizon’s view of market conditions. While Risk Assist was designed with the goal of limiting drawdown, Horizon is not able to predict all market conditions and ensure that Risk Assist will always limit drawdown as designed. Accounts with Risk Assist® are not fully protected against all loss. Furthermore, when Risk Assist® is deployed (whether partially or entirely) to mitigate risk for an account, the account will not be fully invested in its original strategy, and accordingly during periods of strong market growth the account may underperform accounts that do not have the Risk Assist® feature.
The Real Spend® retirement income strategy is NOT A GUARANTEE against market loss and there is no guarantee that the Real Spend® strategy chosen by an investor will lead to successful investment outcomes for part of, or for the entirety of an investor’s retirement. This strategy is not an insurance product with payments guaranteed. It is a strategy that invests in marketable securities, any of which will fluctuate in value. Before investing, consider the investment objectives, risks, charges, and expenses of the strategy. Keep in mind investing involves risk. The value of an investment will fluctuate over time and will gain or lose money.
Horizon Investments, the Horizon H, Gain Protect Spend, Risk Assist and Real Spend are all registered trademarks of Horizon Investments, LLC.
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NOT A DEPOSIT | NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED | CLIENTS MAY LOSE MONEY | PAST PERFORMANCE NOT INDICATIVE OF FUTURE RESULTS