QUARTERLY RECAP

Strategies in Review

QUARTERLY RECAP

Strategies in Review

Gain Strategies

Horizon’s Gain equity portfolio maintained a full equity allocation throughout the quarter, albeit with a more cautious stance than earlier in the year. We began the quarter with a slight bias for higher quality exposures, specifically larger cap U.S. shares, and an overweight to domestic equities broadly. Our international exposure, substantially smaller than our benchmark, was focused in developed markets. We began 3Q with no emerging markets exposure and maintained this stance throughout last quarter’s volatility.

In mid-July, we made our only portfolio adjustment for the quarter, further increasing our large-cap and quality overweights in the domestic portion of our portfolio. We trimmed exposure to the value style by altering our dividend exposures and removing the last of our mid-cap positioning. One notable addition to the portfolio was low volatility factor exposure; it was intended to lower overall risk if market conditions deteriorated. Internationally, we moved in favor of Europe over Japan as their handling of Covid has improved the growth outlook on the continent.

Toward the end of the second quarter of this year, we took advantage of the fall in long-term interest rates by decreasing our duration profile in our Gain fixed-income portfolio. Despite the volatility in interest rates in the third quarter, we maintained this stance throughout, which was ultimately accretive as yields rose. Our longstanding credit overweight, however, lagged slightly as spreads widened. Due to our higher holdings in various parts of the high-yield market, including fallen angels and bank loans, we kept our hybrid equity allocations relatively small with a preference for preferreds over convertible bonds.

Gain Equity Contributors and Detractors
Our biggest contributors to performance in the quarter were once again in the domestic large-cap space, specifically mega-cap technology, momentum factor exposure, and growth exposure. Exposures to the low volatility and quality factors in the domestic large-cap space contributed the least to returns last quarter. Broad international developed positioning also lagged.

Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, our higher yielding tilts were some of the biggest contributors to performance last quarter. Specifically, core high-yield corporate bonds, higher quality high-yield corporate bonds (fallen angels), and bank loans contributed the most to performance. Hybrid securities, including convertible bonds and preferred equities, contributed the least to performance as equity volatility rose. Emerging-market dollar bonds also lagged on the quarter.

Protect Strategies

Horizon’s Protect portfolios began the third quarter fully allocated to global equities, as they have been since July of last year. All Protect portfolios achieved new ratchets1 in the third quarter, establishing new levels from which to measure drawdowns and calibrate future de-risking activity. 

Our underlying equity allocations in the Protect portfolios were similar to those in the Gain equity portfolio. These tactical tilts were expressed in a broader and less-focused manner than in the Gain portfolios, in line with our standard portfolio construction design.

The quarter began with a slight bias for higher quality exposures, specifically larger cap U.S. shares, and an overweight to domestic equities broadly. Our total international exposure was smaller than our benchmark’s and focused mainly in developed markets. In contrast to our Gain equity portfolio, we began the quarter with a core allocation to the low volatility factor in an effort to improve the interaction with the Risk Assist algorithm in shallow equity market drawdowns.

Mirroring the change in the Gain equity portfolio, in mid-July we increased our large-cap and quality overweights in the portfolio to increase the defensiveness of our portfolio. We also lowered our value exposure in favor of growth by altering our dividend exposures and removing the last of our mid-cap positioning. On the international side of the portfolio, we removed our small allocation to emerging markets in favor of broad developed exposure.

Horizon’s Protect fixed-income portfolio was unchanged last quarter after the adjustment made in late June to take advantage of the fall in long term interest rates. Our shorter-than-benchmark duration stance was accretive as yields rose, while our longstanding credit overweight lagged slightly due to wider credit spreads. Within the credit markets, we spread out our high-yield exposure across various market segments, including fallen angels and bank loans. Due to this higher risk exposure in credit, our hybrid equity allocations were relatively small and included a preference for preferreds over convertible bonds.

Protect equity contributors and detractors
Due to their broadly similar tactical tilts, the leaders and laggards in the Protect portfolios in the third quarter were similar to those in the Gain portfolios. The top contributors were in the domestic large-cap space, specifically mega-cap technology, momentum factor exposure, and growth exposure. Broad international developed market exposure, domestic defensive dividend factor exposure, and domestic large-cap quality factor exposure contributed the least last quarter.

Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, our higher yielding tilts were some of the biggest contributors to performance last quarter. Specifically, core high-yield corporate bonds, higher quality high-yield corporate bonds (fallen angels), and bank loans contributed the most to performance. Hybrid securities, including convertible bonds and preferred equities, contributed the least to performance as equity volatility rose. Emerging-market dollar bonds also lagged on the quarter.

Spend Strategies

Horizon’s Spend portfolios maintained a full allocation to their investment portfolio in the third quarter. Equity markets were choppy, especially in September, and global stocks finished slightly down for the quarter. Core bonds provided little return as well; the Bloomberg U.S. Aggregate Bond Index was roughly flat in 3Q. Spending reserves were not replenished across models, and, there was no Risk Assist® activity last quarter.

Spend Portfolio Positioning
The primary design of the Spend portfolios consists of a tilt away from core bonds and toward equity markets in order to support retirement spending in today’s low interest rate world. We did not replenish the spending reserve back to its full twelve quarters of spend, which caused the investment portion of each of the overall models to increase relative to the spending reserve, and all models began 4Q with 11 quarters of spend, one shy of their maximum levels. Concurrent with this quarter end activity, we increased domestic equity positioning, funded by emerging markets, in line with our strategic views. Our debt allocation – positioned overweight to credit in both the high-yield and investment-grade corporate market segments – was unchanged in the quarter.

Spend Contributors and Detractors
On the equity side, some of our domestic allocations in the large-cap market segment, specifically growth, core, and dividend exposures, contributed the most in the quarter. International holdings, both developed and emerging, as well as domestic large-cap value contributed the least last quarter. In our fixed-income holdings, contributions were led by our high-yield corporate bond exposure, while longer duration investment-grade corporate bonds lagged.

MARKET OUTLOOK

The recent volatility in equity markets has not surprised us; we have been flagging many of the risks that recently grabbed investor attention for some time now. So where to from here? In terms of domestic politics, the showdown around the debt ceiling is likely to make for an acrimonious few weeks, but ultimately this should be resolved. The ongoing regulatory crackdown in China is not over, in our view, with longer-term negative implications for global growth at the margin. That means we will be paying particular attention to U.S. consumers as the driver of the global economy – not necessarily a bad thing given the current health of household balance sheets. We view the coming taper of asset purchases by the Federal Reserve as a non-issue for markets and the economy, but investors may overreact to headlines in an already shaky environment. Zooming out, we believe the trend in equity markets should continue to be upward sloping, but with greater risks ahead than we have seen for a while. Core bond yields are likely to remain low, which would harm the returns to traditional fixed-income portfolios for years to come. Times like these demand new approaches to investment portfolios to meet client goals, and Horizon is excited to meet those challenges in today’s ever-changing world.

1 A ratchet refers to the resetting of the target loss tolerance threshold for the portfolio to a new (higher) value. Typically, in normal markets, Protect models ratchet with every 3%-5% appreciation in the portfolio’s value.
2 A ratchet refers to the resetting of the target loss tolerance threshold for the portfolio to a new (higher) value. Typically, in normal markets, Real Spend models ratchet with every 3%-5% of appreciation in the portfolio’s value.

There is no guarantee of the future performance of any Horizon product. The opinions expressed are those of Horizon Investments as of the date of publication. We do not intend and will not endeavor to provide notice if and when our opinions or actions change.

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.

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

 

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