Horizon’s Gain equity portfolio maintained a full equity allocation throughout the quarter. But once again, it was positioned somewhat defensively in anticipation of heightened market gyrations, which came to fruition both at the broad index level and among styles and factors.
Volatility jumped as investors struggled to digest a new variant of the coronavirus, the policy machinations out of Washington, D.C., and stubbornly high inflation in the U.S. Heightened market nervousness caused us to decrease our active risk versus our benchmark twice during the fourth quarter.
We entered the period with a substantial overweight to domestic equities, with a concentration in larger cap and higher quality holdings. Internationally, our exposure was solely in developed markets, with a preference for Europe over Japan. In mid-November, we slightly trimmed our quality bias and added a small allocation to domestic mid-cap stocks. In early December, we decreased our domestic overweight and added broad international exposure, anticipating that investor rebalancing flows could dominate market action at the end of the year. Throughout the quarter, we carried a balanced stance on growth versus value exposures, a reflection of better opportunities elsewhere.
The fixed income market shared in the volatility during the fourth quarter, especially as investors repriced the Federal Reserve’s likely interest rate path for 2022 and 2023. After beginning the quarter with a shorter duration profile and a more risk-on stance in our alternative fixed-income allocations, in mid-October we sought to take advantage of the expected repricing of the Fed’s rate path by increasing our exposure to the long-end of the yield curve and increasing the quality of our credit exposure. We also decreased our overall alternative fixed-income exposure as a reflection of the higher volatility we anticipated in the bond market. Late in November, we readjusted some of our core holdings to avoid capital gains distributions, but did not meaningfully alter our tactical tilts.
Gain Equity Contributors and Detractors
Our biggest contributors to performance last quarter were once again in the domestic large-cap space, specifically mega-cap technology, quality factor exposure, and growth exposure. Contributing the least to returns were exposures to domestic mid-caps, domestic large-cap dividends with a value tilt, and Europe.
Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, it was an idiosyncratic quarter as the yield curve twisted flatter and credit spreads widened. Long-term U.S. Treasuries, recently downgraded investment grade corporate bonds, and preferred equities contributed the most to performance last quarter. Contributing the least to performance were convertible bonds – a tactical core holding – and medium-term investment grade corporate bonds.
Horizon’s Protect portfolios began the fourth quarter fully allocated to global equities with our Risk Assist® algorithm in the “off” position, just as they have been since July of 2021. All Protect portfolios achieved new ratchets1 in the fourth quarter, establishing new levels from which to measure drawdowns and calibrate future de-risking activity. Updated ratchet levels are designed to help preserve portfolio values if the positive equity trend meaningfully reverses course.
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 an overweight to domestic equities, with a concentration in larger cap and higher quality holdings, and a defensive bias. Our positioning around the value and growth styles was balanced, something we maintained all quarter, as a reflection of better opportunities elsewhere. Our international positioning was solely in developed markets.
In line with our changes to the Gain equity portfolio, we acted in anticipation of heightened volatility and uncertainty by decreasing our active risk twice during the quarter. In November, we lowered some of our quality bias in favor of domestic mid-caps. In early December, we increased our international positioning through a broad, diversified holding and trimmed some of our core domestic holdings.
Horizon’s Protect fixed-income portfolio navigated the volatility in the fourth quarter as well. Our shorter duration stance was beneficial early in the quarter as interest rates rose. In mid-October, we sought to take advantage of this price action and increased our exposure to the long-end of the yield curve. Anticipating a further repricing in Federal Reserve rate expectations, we also increased the quality of our credit exposure and decreased our alternative fixed income exposure. We readjusted some of our core holdings to avoid capital gains distributions in late November, but this did not meaningfully alter the tactical tilts in the portfolio.
Protect equity contributors and detractors
Due to their broadly similar tactical tilts, the leaders and laggards in the Protect portfolios were similar to those in the Gain portfolios. In a repeat of the prior quarter, the top contributors were in the domestic large-cap space. Specifically, quality and low volatility factor exposures, as well as mega-cap technology, contributed the most for the quarter. Contributing the least were domestic mid-caps, domestic dividends with a value tilt, and international developed low volatility factor exposure.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, it was an idiosyncratic quarter as the yield curve twisted flatter and credit spreads widened. Long term U.S. Treasuries, recently downgraded investment grade corporate bonds, and preferred equities contributed the most to performance last quarter. Contributing the least to performance were convertible bonds – a tactical core holding – and medium-term, investment-grade corporate bonds.
Horizon’s Spend portfolios maintained a full allocation to their investment portfolios in the fourth quarter. Global equity markets trended higher, with notable strength in October and December briefly interrupted by a volatile late November period as investors grappled with a new variant of the coronavirus and elevated inflation in the U.S. Core bonds provided little return once again; the Bloomberg U.S. Aggregate Bond Index was roughly flat for the second straight quarter and finished 2021 with a negative total return. All Spend portfolios were able to replenish their spending reserves in the fourth quarter. There was no Risk Assist® activity last quarter.
Spend Portfolio Positioning
The Spend portfolios are constructed to support retirement spending in today’s low interest rate world by tilting the underlying asset allocation away from core bonds and toward equity markets. The spending reserves for all Spend portfolios were replenished back to their full allocations, 12 quarters of spend. Our underlying allocation changes were modest over the quarter, and consisted of an increase in domestic equity positioning. The debt allocation in the Spend portfolios – positioned overweight to credit in both the high-yield and investment-grade corporate bond market segments – was unchanged in the quarter.
Spend Contributors and Detractors
In the equity portfolio, domestic large-cap exposure led for the second straight quarter. Specifically, domestic large-cap core, growth, and value exposures contributed the most in the quarter. Emerging markets, as well as low volatility factor exposures in the international developed and domestic small-cap universes, contributed the least last quarter. In our fixed-income holdings, contributions were led by our high-yield corporate bond exposure, while core investment grade bond exposure lagged.
As we embark on a new year, it is helpful to take a step back and reflect on just how volatile this recovery has been. From surprise election results leading to multiple rounds of fiscal stimulus, to variants of the coronavirus snarling supply chains and driving inflation to 30+ year highs, the past year has brought many twists and turns. Looking out into 2022, our focus remains primarily on Fed policy and the potential for policy normalization, as well as the nuances of supply and demand in the markets for labor and goods. While economic growth is set to slow, corporate earnings and the economic recovery remain on firm footing, supported by robust consumer balance sheets and easy financial conditions. The robustness of the recovery is unlikely to fade this year, even if interest rates do rise slightly, but elevated volatility across equity and fixed income markets is likely to persist. With volatility comes opportunity, and Horizon is excited to continue to execute on our innovative portfolio strategies in order to help our clients meet their financial goals in the years ahead.
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.
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.
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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