We believe many of the uncertainties that clouded the horizon in 2012 are slowly being resolved or constructively contained. In fact, we also see domestic economic strength that would indicate an earlier hike in interest rates than is currently priced into the market. Money velocity (an important measure of money usage) has picked up, inflation is closing in on the Fed’s 2.5% target, growth is increasingly led by robust domestic private investment and monthly job growth (though anemic) is high enough to reach the Fed’s 6.5% unemployment target within 12 to 18 months.
As a result, on the defensive side we will continue to build out the Low Correlation Defensive portion of portfolios and further rein in interest rate exposure in the Core Defensive strategies. On the growth side of portfolios, we will be adding selectively to Core Growth strategies that benefit from equity market growth and inflation. We continue to favor high quality, higher dividend strategies because we believe that even at higher tax rates, these will deliver better risk-adjusted returns. Larger, high quality, higher yielding companies have exhibited less than half the market exposure of small, low yielding, low quality companies in the junk rally of the past four years, and we think they will be a far more defensive way to capture growth as interest rates normalize.
This is an excerpt from our article “Low Correlation to the Rescue” published December, 2012.