Strategies in Review
Strategies in Review
Gain Strategies
Equity and fixed income markets experienced considerable volatility in the first quarter of 2022. In line with our portfolio design for Gain stage investors, our accumulation models maintained a full equity allocation throughout the quarter. However, our equity positioning carried a defensive posture versus both our strategic benchmark1 and broad equity indices, a reflection of our view that risks are more elevated today than they have been for some time. We also extended that defensive stance to our fixed income allocation as volatility in the bond market rose.
In our Gain equity allocation, we entered the quarter with relatively neutral positioning in terms of value versus growth, a bias for more defensive large caps, and a slight overweight to the U.S. As interest rate expectations repriced quickly to start the year, we increased our defensive tilt, moving toward value stocks and adding direct energy exposure. We also increased our tilt to Asia and away from Europe through allocations to emerging markets and Japan. We maintained these general tilts throughout the quarter and kept our overall risk budget low, looking for tactical opportunities internationally as volatility increased. Toward the end of the quarter, we increased our domestic overweight at the expense of a portion of our emerging market exposure and maintained a fairly substantial value tilt.
The fixed income market was extremely volatile in the first quarter as inflationary pressures and messaging from the Federal Reserve continued to cause a dramatic repricing in short-term interest rate expectations. The move up in interest rates was sharp, especially in the front end of the curve, and core bonds, as measured by the Bloomberg U.S. Aggregate Index, had their worst quarter since the early 1980s. Our fixed income allocation began the quarter positioned for a flatter yield curve, yet still overweight credit and underweight government debt with a higher quality stance than we have had since the market turmoil in the first half of 2020. As yields shot higher in January, we increased our quality stance and lowered alternative fixed income allocations and mortgage-backed securities, two portions of the market we view as vulnerable to higher volatility and a balance sheet unwind by the Fed.
Gain Equity Contributors and Detractors.
The biggest contributors to performance last quarter were domestic exposures with a value tilt, specifically energy exposure, large cap dividend factor exposure, and small caps. Contributing the least to returns were exposures to emerging markets, large cap domestic growth, and domestic mega cap technology.
Gain Fixed-Income Contributors and Detractors.
In the fixed-income portfolio, interest rate sensitivity was the main driver of returns due to the large increase in interest rates. Short-term U.S. Treasuries, mortgage-backed securities, and short-term high yield debt contributed the most to performance last quarter. Contributing the least to performance were medium- and long- term U.S. Treasuries, as well as a tactical core bond holding.
Protect Strategies
Horizon’s Protect portfolios began the new year quarter fully allocated to global equities with our Risk Assist® algorithm in the ‘’off’’ position, as they have been since the summer of 2021. Equity and fixed income markets were volatile during the quarter, driven by a rapid repricing of interest rate expectations and the war in Eastern Europe. As the equity sell off deepened throughout the quarter, Risk Assist engaged to systematically de-risk the Protect portfolios. The sharp reversal in overall market direction in mid-March triggered the portfolios to begin systematically re-investing. Consequently, by the end of the quarter, some Protect portfolios had reached full exposure to global equity markets.
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. In a difficult and choppy quarter, this more balanced stance added value versus our more aggressive positioning in the Gain equity allocation.
The quarter began with a slight defensive stance and relatively neutral positioning on both growth versus value and U.S. versus international equities. Interest rate expectations quickly repriced higher at the start of the year, leading to heightened equity market volatility. We moved to further increase defensiveness and value exposures while increasing our tilt to Asia through increased emerging market exposure. As the Risk Assist algorithm engaged, we tilted our portfolio to be less defensive and more market-like, in line with our research around mitigating the impact of a sharp reversal in markets.
Horizon’s Protect fixed-income portfolios navigated the elevated volatility in the first quarter as well. To start the year, the sharp move higher in short-term yields was beneficial to our positioning for a flatter yield curve. Market volatility caused us to increase the quality profile of our fixed income allocation through a higher rated corporate credit mix, increased government debt exposure, and lower alternative fixed income allocations. We also decreased our mortgage-backed securities allocations, an area of the market that we view as vulnerable to higher interest rate volatility and the potential for quantitative tightening by the Federal Reserve.
Protect equity contributors and detractors.
Due to their broadly similar tactical tilts, the leaders and laggards in the underlying equity portion of the Protect portfolios were similar to those in the Gain portfolios. Domestic exposures with a value tilt were the top contributors last quarter, with domestic large cap dividends, domestic small caps, and domestic large cap value exposures contributing the most to performance for the quarter. Contributing the least were broad international developed exposure, domestic large cap low volatility factor exposure, and domestic mega cap technology stocks.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, interest rate sensitivity was the main driver of returns due to the large increase in interest rates. Short-term U.S. Treasuries, mortgage-backed securities, and short-term high yield debt contributed the most to performance last quarter. Contributing the least to performance were medium- and long- term U.S. Treasuries, as well as a tactical core bond holding.
Spend Strategies
Horizon’s Spend portfolios weathered the weakness and volatility in equity and fixed income markets in the first quarter. Last quarter’s losses across both broad equity and core bonds markets, while challenging from a returns-generating standpoint, highlight the importance of utilizing multiple risk management techniques and maintaining a spending reserve as components of an effective retirement solution. As such, the Spend portfolios did not replenish their spending reserves in the first quarter, while the differences in portfolio construction and positioning led to less Risk Assist activity occurring within these models than in their Protect counterparts.
Spend Portfolio Positioning
The underlying construction of the Spend portfolios, featuring a tilt away from core bonds and toward equity markets, is designed to support retirement spending in today’s low interest rate world. During the first quarter, this positioning proved beneficial as global stocks [MSCI ACWI Index (MXWD)] outperformed core bonds [Bloomberg U.S. Aggregate Index (LBUSTRUU)] last quarter, as well as on a trailing 1-year, 3-year, and 5-year basis. Our underlying allocation changes were modest last quarter, while 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 portfolio, our leaders were similar to those in our GAIN and PROTECT portfolios: domestic exposures with a value tilt. Specifically, value and dividends exposures in the large cap space contributed the most to returns in the quarter. International developed market exposure and domestic large cap growth contributed the least last quarter. In our fixed-income holdings, exposure to senior loans contributed the most to performance, while our core investment grade bond exposure lagged.
Market Outlook
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 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.
170% S&P Global BMI NR USD / 30% BlbgBarc 1-3YR Treasury
DISCLOSURES
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.
© 2022 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
HIM042022
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
