Tony Roth, Chief Investment Officer for Wilmington Trust Investment Advisors, Inc. View bio
Where are the investment opportunities in 2021 and beyond?
One of many defining features of 2020 has been the disconnect between the near-term trajectory of the economy and the record-breaking stock market levels. This disconnect is one of the reasons we maintained a slightly cautious stance in our client portfolios through October, but with a tactical tilt toward growth-oriented equities.
As we enter 2021, that gap between our 12-month economic outlook and equity market valuations is starting to close, and we find the backdrop of an improving economy, potential for a divided government, and a supportive Federal Reserve to be one of the most constructive for equities since before the pandemic hit. Therefore, in November 2020, we added to equities, bringing this asset class to a slight overweight and overall portfolio risk in line with our strategic benchmark. Promising vaccine developments and expectations for accelerating productivity growth are leading to a broadening of equity market strength in different regions and more cyclical areas of the market. But the structural shift toward digitization in all areas of the economy means growth equities, particularly in the U.S. and emerging markets, remain a compelling investment over a multi-year horizon.
The road to recovery is one that includes some rocks, detours, and potholes, and we caution that the near-term outlook for financial markets could include some volatility. We recognize the continued political uncertainty ahead of two key Senate runoff races in Georgia. Should the Democrats win both seats, it could result in a greater chance of higher taxes, regulation, or sweeping policy change that may in turn weigh on corporate profit margins. On the other hand, if the Georgia election results in a divided government, additional fiscal stimulus to support struggling businesses and consumers would likely be harder to come by. With this base case in mind, we would advise clients with excess cash to use any market dips as potential opportunities for getting fully invested. It is also critical to speak with your advisor about ways to stress test your portfolio to better appreciate the long-term implications of future volatility on your ability to achieve your investment goals.
We expect—and hope—that 2021 will look very different from 2020, and with it will come new challenges and investment opportunities that we will continue to seek on behalf of our clients’ portfolios. The world has changed dramatically over the past 12 months. What has not changed is our investment philosophy, core tenets, and focus on helping our clients achieve their investment goals.
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U.S. Large Cap
- Digital disruption and the Fed’s commitment to low interest rates will continue to benefit the tech-heavy U.S. large-cap equity asset class, but this is countered by high valuations
- Vaccine distribution could benefit the market’s laggards
- Large firms are better placed to shift supply chains and to invest in new, productive technologies
- For more information, refer to Theme 1 on Accelerating Productivity and Supply Chain Rethink; also, Theme 3 on Digitization of the Consumer
U.S. Small Cap
- Small caps stand to advance the most from a faster economic recovery, but near-term economic risks remain
- M&A activity could result in disruption—and selective investment opportunities—over the next 12 months
- For more information, refer to Theme 1 on Industry Consolidation
- Labor markets in Europe and the UK have been cushioned somewhat by protective labor practices, but we expect this to impair long-term productivity growth
- Fiscal debt management continues to be challenging in the eurozone
- For more information, refer to Theme 1 on Accelerating Productivity, and Theme 2 on Government Debt
- This asset class stands to prosper from the structural acceleration of tech adoption around the world, and local firms are likely to adopt new productive technologies
- Emerging markets—China, in particular—should profit from a more benign trade backdrop under a Biden administration and expectations for a weaker dollar
- Valuations of emerging markets growth equities still look attractive relative to the U.S.
- For more information, refer to Theme 1 on Accelerating Productivity and Theme 3 on Digitization of the Consumer
- Lower-rated municipalities, airports, public transportation, and higher education could benefit from fiscal stimulus and an economic recovery in 2021
- Current valuations offer better risk vs. reward relative to investment grade
- For more information, refer to Theme 2 on Government debt and Corporate debt
- We recently added to Treasury inflation-protected securities (TIPS) but remain underweight, and we hold neutral allocations to real estate investment trusts (REITs), and commodities
- We see the record levels of stimulus and early-stage economic recovery as supportive for commodities; inflation expectations present potential upside for TIPS
- For more information, refer to Theme 2 on Inflation
- A more constructive stance on equities leads us to reduce liquid alternatives to a neutral allocation
- Structural changes to the market and the potential for periods of higher volatility in the future necessitate a full allocation to the asset class
- For more information, refer to Theme 3 on Market Fragility
- We maintain a benchmark-weight to cash as incredibly low rates offset the opportunity cost of maintaining “dry powder” for future opportunities
Understanding the chart
Current tactical (short-term) positioning to that asset class is underweight versus our long-term strategic target. The further from the N (neutral), the more underweight.
Current tactical positioning to that asset class is neutral versus our long-term strategic target.
Current tactical positioning to that asset class is overweight versus our long-term strategic target. The further from N, the more overweight.
This material is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Opinions, estimates, and projections constitute the judgment of Wilmington Trust Investment Advisors, Inc. and are subject to change without notice. Allocations presume a long-term investment horizon. Source: WTIA.
An overview of our asset allocation strategies
Wilmington Trust offers seven asset allocation models for taxable (high-net-worth) and tax-exempt (institutional) investors across five strategies reflecting a range of investment objectives and risk tolerances: Aggressive, Growth, Growth & Income, Income & Growth, and Conservative. The seven models are High-Net-Worth (HNW), HNW with Liquid Alternatives, HNW with Private Markets, HNW Tax Advantaged, Institutional, Institutional with Hedge LP, and Institutional with Private Markets. As the names imply, the strategies vary with the type and degree of exposure to hedge strategies and private market exposure, as well as with the focus on taxable or tax-exempt income.
Model strategies may include exposure to the following asset classes: U.S. large-capitalization stocks, U.S. small-cap stocks, developed international stocks, emerging markets stocks, U.S. and international real asset securities (including inflation-linked bonds and commodity-related and real estate-related securities), U.S. and international investment-grade bonds (corporate for Institutional or Tax Advantaged, municipal for other HNW), U.S. and international speculative-grade (high-yield) corporate bonds and floating-rate notes, emerging markets debt, and cash equivalents. Model strategies employing nontraditional hedge and private market investments will, naturally, carry those exposures as well. Each asset class carries a distinct set of risks, which should be reviewed and understood prior to investing.
Each strategy is constructed with target weights for each asset class. Wilmington Trust periodically adjusts the target allocations and may shift away from the target allocations within certain ranges. Such tactical adjustments to allocations typically are considered on a monthly basis in response to market conditions. The asset classes and their current proxies are: large–cap U.S. stocks: Russell 1000® Index; small–cap U.S. stocks: Russell 2000® Index; developed international stocks: MSCI EAFE® (Net) Index; emerging markets stocks: MSCI Emerging Markets Index; U.S. inflation-linked bonds: Bloomberg/Barclays US Government ILB Index; international inflation-linked bonds: Bloomberg/Barclays World exUS ILB (Hedged) Index; commodity-related securities: Bloomberg Commodity Index; U.S. REITs: S&P US REIT Index; international REITs: Dow Jones Global exUS Select RESI Index; private markets: S&P Listed Private Equity Index; hedge funds: HFRI Fund of Funds Composite Index; U.S. taxable, investment-grade bonds: Bloomberg/Barclays U.S. Aggregate Index; U.S. high-yield corporate bonds: Bloomberg/Barclays U.S. Corporate High Yield Index; U.S. municipal, investment-grade bonds: S&P Municipal Bond Index; U.S. municipal high-yield bonds: Bloomberg/Barclays 60% High Yield Municipal Bond Index / 40% Municipal Bond Index; international taxable, investment-grade bonds: Bloomberg/Barclays Global Aggregate exUS; emerging bond markets: Bloomberg/Barclays EM USD Aggregate; and cash equivalents: 30-day U.S. Treasury bill rate.
Chief Economist Luke Tilley provides an overview of the implications of the COVID-19 recession on firms’ productivity, profitability, and equity performance.
Head of Investment Strategy Meghan Shue shares her insights on the trend of industry consolidation—what's shrinking, what's growing, where, and why.
The landscape of business is evolving due to the pandemic, along with accelerating trends. So when the COVID dust settles, which industries will have toppled—and which will be left standing?
Attention municipalities: Agencies and investors are carefully judging you on your overall financial health. Hear what Wilmington Trust’s Head of Municipal Fixed Income Dan Scholl has to say on this and the anticipated market trajectory.
Director of Taxable Credit Research and Senior Portfolio Manager Randy Vogel, CFA, shares the pandemic’s impact on credit quality, the Fed’s supportive actions, and the role of investment-grade debt in client portfolios.
Head of Fixed Income Dominick D'Eramo, CFA, looks at why inflation is important for fixed income investing, the risks at play, and how he’s aiming to manage them.
Does your portfolio reflect the accelerating trend toward heightened consumer digitization? Head of Investment Strategy Meghan Shue connects the dots.
An alternative to volatility and drawdown? Head of Equities, Nontraditional Investments & Manager Research Matt Glaser reveals where he finds the potential for differentiated, compelling returns.
Let's have a conversation about what the insights and trends revealed in our 2021 Capital Markets Forecast could mean for your investment portfolio and overall wealth management plan.