Investment Strategy: Strategic Themes and Tactical Positioning

Transcription

1 INSTITUTIONAL ASSET MANAGEMENT SYMPOSIUM Investment Strategy: Strategic Themes and Tactical Positioning Northern Trust Investment Strategy northerntrust.com Northern Trust 21 1

2 CMA: A REVIEW OF THE PROCESS Firm-wide Participation; Firm-wide Implementation 2+ investment professionals participating in a combined 3+ hours of working sessions Collaboration across business units and around the globe; including top-down strategists, bottom-up analysts and clientfacing professionals Foundation for asset allocation processes throughout Northern Trust Forward Looking; Historically Aware Analysis of historical relationships both between asset classes and the economic/ financial market factors that drive returns Acknowledgement that historical relationships can change and identification of where these changes may occur Detailed assumptions in our annuallyreleased Five-Year Outlook Whitepaper northerntrust.com Northern Trust 21 2

3 Cash U.S. Invest. Grade U.S. TIPS Global High Yield Emerging Markets Developed Markets U.S. Europe ex-u.k. U.K. Japan Canada Australia Emerging Markets Natural Resources Global Real Estate Global Listed Infrastructure Private Equity Hedge Funds CMA: A REVIEW OF THE RESULTS Global equity returns are expected to make slow progress in choppy market waters while global interest rates remain anchored at low levels over the next five years. SLOW GROWTH ANGST STUCK-FLATION COSTS OF ULTRA-LOW RATES POPULIST ROULETTE TECHNOLOGICAL TURBULENCE MARKET CYCLES IN A CYCLE-LESS ECONOMY FIVE YEAR ASSET CLASS TOTAL RETURN FORECASTS - % Fixed Income Equities Real Assets Alternatives Sources: Northern Trust Capital Market Assumptions Working Group, Investment Policy Committee. Five year forecasts developed annually; most recent forecasts released 7/18/21. northerntrust.com Northern Trust 21 3

4 Compound annual growth rate (%) Growth (indexed to 1) SLOW GROWTH ANGST The slow growth environment will continue as lackluster demand shows few signs of abating. Concern over future growth will, in and of itself, impede growth further as consumers spend less and companies are hesitant to invest. CURRENT EXPANSION VS. HISTORY Expansion 3. PAST FOUR U.S. EXPANSIONS Current Current* United States United Kingdom Europe Japan Length (quarters) 1 Economic growth during the current recovery has lagged historical growth from The current U.S. expansion is four years shy of being the longest expansion on record (post-world War II), but cumulative output has lagged significantly. Sources: Northern Trust, International Monetary Fund, Bloomberg. *Current expansion continued at current growth rate for five years. northerntrust.com Northern Trust 21 4

5 Inflation rate (%) STUCK-FLATION The combination of supply/demand dynamics (low demand, enough supply) and low future inflation expectations will make it difficult for central bankers to dislodge stuck inflation over the five year horizon. 1-YEAR INFLATION EXPECTATIONS OF SELECT COUNTRIES United Kingdom United States Europe Japan Inflation expectations across most developed markets have persisted below the 2% most central banks target. Inflation expectations have been trending lower lately a consequence of low expected global demand Sources: Northern Trust, Bloomberg. Note: Europe data (proxied by Germany) starts in 29; Japan data starts in 213. northerntrust.com Northern Trust 21 5

6 5-year annualized change (%) 5-year annualized change (%) COSTS OF ULTRA-LOW RATES Recent cost/benefit analyses of ultra-accommodative interest rates are inconclusive as costs rise and benefits are less apparent. Central bankers would like to exit, but the less risky (more likely) approach is more of the same. TOTAL U.S. CREDIT 12 U.S. M3 MONEY SUPPLY Quantitative easing is failing to fully make it into the real economy; negative rates may be hurting banks. U.S. credit and money supply growth data is struggling to reach the levels of previous expansions. Sources: Northern Trust, Federal Reserve, Encima Global. northerntrust.com Northern Trust 21

7 Yield (%) FIXED INCOME: INTEREST RATE EXPECTATIONS We remain lower for longer. As market expectations came down in the wake of Brexit, our expectations have been pushed down further. UNITED STATES 3.5 UNITED KINGDOM 3.5 GERMANY 3.5 JAPAN month year 3-month 1-year 3-month 1-year 3-month Market - /3/215 Market - /3/ NT CMA 21 NT CMA 1-year -.5 Slow growth and lack of inflationary pressures will keep interest rates low over the five-year horizon. The markets have priced in the economic challenges, but do not yet fully appreciate the effect of low rates globally. Sources: Northern Trust, Bloomberg. NT CMA = Northern Trust Capital Market Assumption forecasts. northerntrust.com Northern Trust 21 7

8 Subsequent 5-year return, annualized (%) 5-year return, annualized (%) EQUITIES: GEOGRAPHY-BASED OUTLOOK Developed market equities will face return constraints from slower growth and higher valuations; emerging market equities may benefit from a cyclical rebound. DEV. MARKET VALUATIONS VS. RETURNS 5 /3/21 level 4 EMERGING VS. DEVELOPED MARKETS Cash flow yield (%) Developed market valuations are stretched, but will be supported by continued easy money policy. -1 Emerging vs developed markets Emerging markets Emerging markets haven t underperformed developed markets by this much since the Asian financial crisis of the late-199s Sources: Northern Trust, Bloomberg, MSCI. northerntrust.com Northern Trust 21 8

9 Actual Actual Actual REAL ASSETS Natural resource returns will face global demand headwinds but will benefit from the supply response underway. Global real estate and listed infrastructure will both benefit from lower interest rates, but global demand may affect each in different ways. NATURAL RESOURCES R² =.82 2 GLOBAL REAL ESTATE R² = GLOBAL LISTED INFRA. R² = Predicted Our factor-based models explain over 8% of return variability for all three of our real asset asset classes Predicted Predicted We overlay the returns forecasted by our historically-based models with our forward looking views. Sources: Northern Trust, Bloomberg. northerntrust.com Northern Trust 21 9

10 Premium (%) Correlation ALTERNATIVES While varying by strategy, average manager return forecasts are hurt by lower expectations for alpha magnifying the importance of manager selection. Hedge funds can act as powerful diversifiers for the overall portfolio. FACTOR RETURN PREMIUMS FACTOR RETURN CORRELATIONS Term Market Term Market Size Value Momentum Term vs. Market Size vs. Value vs. Momentum vs. -.5 Hedge funds can access long-short factors, complimenting the portfolio s traditional term and market exposures. Long-short factors have historically provided material return premiums as well as low correlations to term and market. Sources: Northern Trust, Bloomberg, Ibbotson. Factor return premiums are long-term averages, not CMA forecasts. northerntrust.com Northern Trust 21 1

11 5-YEAR OUTLOOK: DECLINING RETURN EXPECTATIONS Asset Class 21 Strategic Asset Allocation 5-Year Return Expectation: 21 Outlook 5-Year Return Expectation: 215 Outlook Cash Fixed Income 35 U.S. Investment Grade U.S. TIPS U.S. High Yield Equities 22 Developed Markets Emerging Markets Real Assets Global Natural Resources Global Listed Infrastructure Global Real Estate Alternatives 35 Hedge Funds Private Equity Total Portfolio Source: Northern Trust. Strategic growth & income perpetual capital model. All figures in percentage terms. northerntrust.com Northern Trust 21 11

12 Total Return (%) HOW DID WE DO? 211 CMA REVISITED EXPECTED 5-YEAR RETURN VS ACTUAL 5 YEAR RETURN 8 5. Expected Actual /4 Fixed Income. Equities U.S. Europe Japan EM Source: Northern Trust. Index proxies: /4 (% MSCI ACWI/4% Barcap U.S. Agg), Fixed income (Barcap U.S. Agg), Equities (MSCI All Country World), U.S. (MSCI U.S.), Europe (MSCI Europe ex U.K.), Japan (MSCI Japan), EM (MSCI Emerging Markets). northerntrust.com Northern Trust 21 12

13 Alternatives Real Assets Risk Assets Equities Risk Control Fixed Income TACTICAL ASSET ALLOCATION PULLING IN BETS ASSET CLASS STRATEGIC WEIGHT TACTICAL POSITIONING Cash 2-2 U.S. Investment Grade 28-8 U.S. TIPS 4 U.S. High Yield 3 5 U.S. Equity 11 7 Dev ex-u.s. Equity 8-2 EM Equity 3 Natural Resources 3 Global RE/Global Listed Infra. 3 Hedge Funds 2 Private Equity 15 Note: Due to illiquid nature of Alternative asset classes, Northern Trust does not make tactical recommendations Percentage points Source: Northern Trust. Allocations above reflect Northern's Perpetual Capital Model (growth & income objective). Tactical recommendations (in the form of over/under/equal weights) are displayed in the bar chart. Allocations as of 9/9/21. northerntrust.com Northern Trust 21 13

14 Total return (%) RELIANT ON JUST THE FED? S&P 5 CUMULATIVE RETURN SINCE S&P 5 S&P 5 ( FOMC decision days) S&P 5 ( FOMC decision days+1) Source: Northern Trust, Bloomberg. Total Cumulative return measured from 12/31/27. northerntrust.com Northern Trust 21 14

15 Days between rate hikes IT S BEEN A LONG TIME NUMBER OF DAYS BETWEET FED RATE HIKES 3 Days between rate hikes Source: Northern Trust, Bloomberg. Data through 9/7/21 northerntrust.com Northern Trust 21 15

16 Return (%) WILL BOTH STOCKS AND BONDS LOSE MONEY? 7 EQUITIES & FIXED INCOME - ONE YEAR ROLLING RETURNS Shaded areas indicate instances of "Double Trouble" Equities Fixed Income Source: Northern Trust, Ibbotson. Index proxies: Ibbotson Associates Stocks, Bonds, Bills and Inflation (IA SBBI) U.S. Large Stocks Total Return for equities and IA SBBI U.S. Intermediate Government Total Return for fixed income. northerntrust.com Northern Trust 21 1

17 A FOCUS ON BOTH RETURN AND RISK GROWTH OF $1K - USD Tactical portfolio (TAA) Strategic portfolio (SAA) /4 portfolio (/4) TRAILING PERFORMANCE - % 3-Month YTD 1-Year 3-Year 5-Year ITD* TAA SAA / CALENDAR YEAR PERFORMANCE - % TAA SAA / TRAILING VOLATILITY - % 1-Year 3-Year 5-Year ITD* TAA SAA / Source: Northern Trust, Bloomberg. Performance data through 8/31/21. Volatility data through 8/2/21. *Inception-to-date (12/31/27). SAA and TAA are model portfolios based on Investment Policy Committee asset allocation decisions and asset class index proxies, w hich cannot be directly invested in and may change over time; return figures exclude any potential transaction costs or expenses. The /4 portfolio comprises the MSCI ACWI total return and BarCap U.S. Aggregate indices, respectively. Trailing 3Yr, 5Yr and since inception returns annualized. All volatility figures are annualized and use w eekly data. northerntrust.com Northern Trust 21 17

18 IMPORTANT INFORMATION The information contained in this report has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. All opinions, projections, estimates and prices reflected herein are as of the date of the report and are subject to change without notice. Information contained in this report may have been communicated to internal Northern Trust personnel prior to publication of the report and such personnel may have acted upon that information on behalf of Northern clients. Northern Trust is under no obligation to update this report and Northern Trust s ability to publish reports on the subject company(ies) in the future may be subject to restricted periods. You should therefore assume that Northern Trust will not update any fact circumstance or opinion contained in this report. Certain outstanding reports may contain discussions and/or investment opinions relating to securities that are no longer current. Always refer to the most recent report relating to a security prior to making an investment decision. The information contained herein may become unreliable because of subsequent market conditions, economic circumstances or for other reasons. Materials prepared by Northern Trust personnel are based on public information. Facts and views presented in this material have not been reviewed by and may not reflect information known to, professionals in other business areas of Northern Trust. Northern Trust, through various of its business units, may have issued and may in the future issue reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and Northern Trust is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security, and should not be construed as a recommendation for any security. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or sell securities must be based solely on existing public information on such security. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any securities. Northern Trust, its affiliates, and their respective officers, directors, clients, where it acts as agent or fiduciary, and employees, including persons involved in the preparation of this report, may from time to time have a position in, or buy and sell, the securities mentioned herein. Neither Northern Trust, nor any director, officer or employee of Northern Trust, accepts any liability, whatsoever, for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. northerntrust.com Northern Trust 21 18

19 IMPORTANT INFORMATION Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Levels and basis for taxation may change. To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. Northern Trust s research personnel's knowledge of legal proceedings in which any Northern Trust entity and/or its directors, officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of Northern Trust in connection with the legal proceedings or matters relevant to such proceedings. Securities discussed in this report are not deposits of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency, or Northern Trust, or its affiliates and subsidiaries. Investments in general involve numerous risks, including market risk. Past performance is not necessarily a guide to future performance. This report is prepared for the use of Northern Trust clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express consent of Northern Trust. Northern Trust are not publicly-available materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets) without first obtaining expressed consent from an authorized officer of Northern Trust. The Northern Trust Company, 5 South LaSalle Street, Chicago, Illinois 75, (312) 3-. northerntrust.com Northern Trust 21 19