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Q4 2023 – Strategies in Review​

Gain Strategies

In a topsy-turvy year for investors and economists alike, 2023 ended on a high note with strong rallies across equities and fixed income. But the fourth quarter was not without its share of volatility. The quarter began with a continuation of the negative market trend that broadly characterized the third quarter. Long-end interest rates were in the driver’s seat throughout the quarter, and with the 10 year yield touching 5.0% in mid-October, equity markets, and especially interest rate-sensitive sectors like small-caps, were under pressure early on. Buyers soon stepped into the bond market, aided by a change in the supply of long-term bonds from the Treasury’s Quarterly Refunding Announcement at the end of October. The 10 year yield then fell over 100 basis points in a dizzying move, leading to a quarterly return of almost 7% for core bonds, their largest quarterly gains since 1989. Spreads on riskier fixed income assets, including high-yield credit and mortgage-backed securities, declined in tandem and drove strong total returns for these market segments in the fourth quarter.

Lower bond yields also fed into equity valuations, helping reverse the losses from October and supporting a broad-based equity rally in the year’s final two months. Domestic small-caps, which gained almost 24% from trough to peak during the quarter, notched their best quarterly returns since the Covid recovery trade of the first quarter of 2021. Despite material weakness from the dollar during the quarter, international stocks lagged behind the S&P 500 in the fourth quarter.  Economic weakness in China and distrust over their stance toward foreign investors led to modest losses for the Chinese equity market during the quarter, no doubt contributing to the underperformance of international stocks, and especially emerging markets. Within the U.S., despite the large gains for the year-to-date laggards and small-caps, the tech sector and the mega-cap heavy NASDAQ 100 still outperformed the S&P 500 during the quarter. As the quarter ended, the Federal Reserve all but confirmed their pivot toward easier policy at their final meeting, setting up a new year in which monetary policy shifts from a headwind to a tailwind for investors.

Horizon’s Gain models maintained a full equity allocation during the quarter. We began the quarter with a large domestic overweight, focused on the large-cap growth and quality parts of the market.  Internationally, our positioning featured an overweight in Japan and underweight in Europe and emerging markets. We adjusted this positioning three times during the quarter, opportunistically rotating through various factors and small- and mid-cap exposures as market volatility rose. Toward the end of the quarter, we increased our exposure to the parts of the global equity market that had lagged substantially behind market-cap weighted indices in 2024. This exposure included meaningful additions to small-cap domestic exposure, broad international exposure (primarily Europe and emerging markets), and domestic value allocations. We funded these allocations to laggard market segments by trimming our domestic large-cap core and growth holdings and lowering our overweight to Japan.

Despite the volatility in interest rates during the quarter, the fixed income allocation of the Gain models was relatively consistent. We began the quarter with a slightly overweight duration relative to the Bloomberg US Agg Index, overweight credit and mortgages, and underweight in Treasuries.  We held off-benchmark allocations to high-yield credit and Treasury inflation protected securities (TIPS) based on our views of a more resilient economy and the valuations for real interest rates. As interest rates peaked and then began to fall, we increased risk in the portfolio by adding to duration and high yield credit exposures, while keeping our mortgage allocation relatively unchanged. We also added small allocations to emerging markets and internationally developed bonds to diversify our government holdings. Lastly, we rotated out of some of our core bond holdings in favor of more granular expressions to increase our ability to position for what we expect to be another year of large changes in interest rates.

Gain Equity Contributors and Detractors

Last quarter, the biggest contributors to performance in the equity portfolio were allocations to domestic large-caps, specifically quality, growth, and value. Currency-hedged Japan, domestic small-caps, and the domestic energy sector contributed the least to returns.

Gain Fixed-Income Contributors and Detractors

In the fixed-income portfolio, longer duration exposures, specifically higher quality high yield corporate credit, mortgage-backed securities, and a tactical core bond holding, contributed the most to performance last quarter. Emerging market local debt, short-term investment grade corporate credit, and internationally developed bonds contributed the least to performance in the fourth quarter.

Protect Strategies

As the fourth quarter began, Horizon’s Protect portfolios were fully invested with the Risk Assist algorithm in its default “off” position despite the modest losses across stocks and bonds in the third quarter. However, the drawdown for both asset classes continued in October, triggering modest de-risking activity across the Protect models. This de-risking was quickly reversed as markets rallied strongly to close out the year; all Protect models ended 2023 fully invested in their underlying asset allocations. Furthermore, all Protect models ratchetted1  during the quarter, establishing new levels from which future drawdowns will be measured against. Recalibrating future de-risking activity in this way can be important in helping manage portfolio values if the positive equity trend meaningfully reverses course in 2024.

The tactical tilts in our Protect equity portfolios were generally broader and less focused than in our Gain portfolios, in line with our standard portfolio construction design. We began the quarter with an overweight to domestic stocks, specifically large-cap growth and quality, as well as small allocations to low volatility and mid-caps. As the quarter progressed, we increased our domestic overweight while increasing our tilt toward large-cap growth. We funded this reallocation by lowering smaller size domestic tilts and trimming our international allocations. 

The changes to the fixed income component of the Protect portfolios mirrored those in the Gain portfolios. Broadly speaking, we increased portfolio risk across duration and high yield credit after interest rates peaked and began to fall. We also added small diversifying exposures to non-U.S. bonds. We ended the quarter with a meaningful overweight to high yield credit and a large underweight to U.S. Treasuries. We ballasted this more risk-on positioning with a longer duration profile than core bonds, which we continue to view as an effective buffer against any widening in credit spreads due to concerns about economic growth.

Protect Equity Contributors and Detractors

Last quarter, the most significant contributors to performance in the equity portfolio were domestic large-cap value, broad international developed markets, and domestic large-cap quality. Factor exposures to international low volatility and domestic small-caps and mid-caps contributed the least to performance in the fourth quarter.

Protect Fixed-Income Contributors and Detractors

In the fixed-income portfolio, longer duration exposures, specifically higher quality high yield corporate credit, mortgage-backed securities, and a tactical core bond holding, contributed the most to performance last quarter. Emerging market local debt, short-term investment grade corporate credit, and internationally developed bonds contributed the least to performance in the fourth quarter. 

1A 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.

Spend Strategies 

Markets closed the year out on a high note as both stocks and bonds rallied strongly amid continued economic resilience, further signs of peak interest rates from the Federal Reserve, and a lowering of the perceived riskiness of long-term bonds. All Spend models began the quarter with eleven quarters of spend, one less than their default position due to the modest losses across markets in the third quarter. After the quarter ended, the spending reserves were rebalanced back to their full twelve quarters of spend, in line with our standard rebalancing practice. The Risk Assist algorithm was also active during the quarter; the market pullback in October saw modest de-risking activity across the models that quickly reversed as markets recovered. By the end of the quarter, all Spend models were fully invested and had ratchetted multiple times, thereby resetting the levels from which future Risk Assist activity is measured.

Spend Portfolio Positioning

The supportive market environment of the fourth quarter saw strong gains for global stocks and core bonds, a welcome development after their modest losses in the prior quarter. While core bonds had their best quarter since the late 1980s, their return was bested by that of global stocks by over 4%. This return spread acted as a tailwind to Horizon’s equity-heavy Spend models, partially offset by the small de-risking and reinvesting activity discussed above. Meanwhile, while yields on cash and cash-like investments are higher than they have been in the past decade, the return on the spending reserve in the Spend models did not keep up with the investment portion of the portfolio in the fourth quarter. 

Regarding the underlying allocations in the growth portion of the models, the fourth quarter saw relatively modest shifts. We increased our overall domestic equity allocation at the expense of internationally developed market exposure. As a part of this reallocation, we also increased our domestic large-cap growth exposure by adding quality factor exposure. Selection changes in domestic dividends and mid-caps, as well as a trim to our domestic low volatility allocation, decreased some of our value tilts and lowered the overall expense ratio of the portfolio. The fixed income portion of the Spend models maintained an overweight to corporate credit during the quarter. 

Spend Contributors and Detractors

The most significant contributors to performance in the equity portfolio last quarter were broad international developed markets and domestic large-cap growth exposures. Allocations to international low volatility and domestic mid-caps contributed the least to performance in the fourth quarter.

In our fixed-income allocation, exposure to long-term investment grade corporate credit contributed the most to performance, while our intermediate-term investment grade credit allocation contributed the least to performance.

Market Outlook

2023 was another year for the record books, made all the more confusing because it was, in many ways, the mirror opposite of the year that preceded it. But a simple story emerges when viewed from the valuable perspective that the holiday season can bring. Monetary policy headwinds turned to tailwinds as inflation eased, the U.S. consumer kept the economy humming despite myriad fears to the contrary, and the power of technological innovation captivated investors and economic actors alike. We think this broad outline still applies as we turn the page to 2024. There will be shocks and scary moments along the way – the regional banking failures last March and war in the Middle East immediately spring to mind – but our overarching view headed into 2024 is optimistic for both markets and the real economy. It is also likely to be a year in which investors unlearn their cash-loving habits of the past 18 months and start to re-engage with long-term investments that can help power their financial plans. Horizon Investments is committed to helping you navigate that process through our innovative goals-based portfolio solutions, differentiated market analysis, and advisor-facing support. Thank you for your continued trust in what will likely be another volatile and unfamiliar year, but we hope an ultimately positive one.


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. Opinions referenced are as of the date of publication and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change.

The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Dow Jones U.S. Select Dividend Index aims to represent the U.S.’s leading stocks by dividend yield. The S&P 500 Value Index is comprised of the value stocks in the S&P 500 Index. The Bloomberg US Agg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The S&P Small Cap 600 Index consists of 600 small-cap stocks.  A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion. The MSCI Europe Index is designed to measure the performance of the large and mid-cap segments of the European market. The MSCI ACWI ex-U.S. captures large and mid-cap representation across 22 Developed Markets and 24 Emerging Markets countries, excluding the U.S. The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets countries. Individuals cannot invest directly in any index. Indices are unmanaged and do not have fees or expense charges, which would lower returns. References to indices or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change.

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 losses. 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. 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.

© 2024 Horizon Investments, LLC.



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