Investment Outlook

Highlights from the week of September 16 – September 22, 2022.

We expect inflation to ease despite a surprisingly high CPI reading for August, allowing the Federal Reserve to temper its aggressive pace of rate increases.

Target date funds (TDFs) have traditionally consisted of either actively or passively managed portfolios. But in recent years, TDFs that blend both styles have grown in popularity, offering many benefits.

Stocks and bonds have pulled back since the Fed clarified its commitment to fighting inflation. Despite volatility, we believe equities will stay within a broad trading range and not retest earlier lows. Rising yields, particularly among spread assets, should make bonds appealing compared to equities.

Elevated volatility is here to stay, and that means many risk assets may become oversold, providing opportunities for investors to profit from mispriced risks.

June’s decline in funded ratios reinforced the need for pension plan sponsors to de-risk portfolios through higher fixed income allocations. We see a lot to like in intermediate corporates, high-quality private placements and securitized credit. 

In Q2 2022, US CLO tranches were not immune from the macro volatility and broader market sell-off. Given the high correlation to loan market dynamics, especially at the lower Mezz levels, CLO tranches delivered negative returns* across the board at at -1.42%, - 3.05%, -3.97%, -5.85%, -6.94%, -8.6% for AAA, AA, A, BBB, BB and B rating cohorts, respectively.

Risks are rising: the Fed must thread a narrowing needle-eye to stop inflation without causing a recession. We’ve lightened equity positioning and reduced risk within fixed income segments of portfolios.

These are the six major themes influencing positioning across our fixed income portfolios for the second half of 2022.

Now that yields have reset higher, bonds are positioned to protect portfolios while delivering higher income.