LSA Revisions – June 2019

LSA Revisions – June 2019

LSA will be making revisions to the following model portfolios, (Private Client Tax Efficient, ETF, and ETF Tactical). All the other mutual fund models will be targeting a rebalance at this time.

LSA will be making revisions to the following portfolios:

Posted Wednesday, June 19th: Private Client Tax Efficient, ETF, and ETF Tactical – Targeted Trade Date – Wednesday, June 26th.

*The Mutual Fund and ETF revisions will impact the NTF models as well.

*As a reminder, the Revision Explanation Presentation/Video will be posted in the “News & Announcements,” section on the LSA Beta home page and will be posted at the end of the business day June 20th.

Investment Rationale:

As volatility picks up, LSA will be recommending changes to the PC Tax Efficient, ETF and ETF tactical portfolios over the next week to address a couple of  investment themes and to continue with our movement of reducing risk or correlations in the portfolios.  As market volatility picked up in the fourth quarter of 2018, we believe this will be a continued trend moving forward especially around the Federal Reserve’s attempt to balance the process of unwinding QE, and the conundrum of where to go with rates, the fears of a trade war, strong dollar, and a gridlocked congress.  The IPC will be recommending funds in the models with the attempt to reduce risk and to provide solid downside protection or to improve diversification in the models targeting more attractive valuation opportunities.  The market rebound in the first half of 2019 has generated an opportunity to rebalance most of the LSA mutual fund models but the IPC wanted to focus in on the PC Tax Efficient and ETF models that did not make the November 2018 changes due to capital gain issues.  The IPC continues to believe that the probability of a recession in the next couple of years has increased greatly over the last few quarters.  The June 2019 model changes are not targeting big shifts in asset class exposures, as we believe the portfolios handled well in recent volatility, but we will continue to explore additional ways of addressing risks to the portfolios.

There will be a focus on two general themes with this round of revisions:

  1. With the mutual fund and ETF models, the IPC is focusing our efforts to clear out some underperforming fund positions. Over a short period of time we have had a couple of managers underperform their appropriate benchmark.  We addressed some of these underperformers in the MF/ETF models in November 2018 and want to continue this effort for the PC Tax Efficient and ETF models in June of 2019.  The LSA IPC would like to take this round of revisions to introduce replacements to these positions.
  2. The IPC is addressing some duration concerns with our fixed income allocations. This is predominately in the ETF models where we have directed the models to be well diversified for a normalizing (rising interest rate) environment.  This has served the fixed income sleeve well for the last several years.  That said there has been a significant change in direction from the Federal Reserve in 2019.  Powell and company have moved from hawkish in 2018 rising rates to dovish in 2019 using language that suggest no rate hikes for the year and a market that is starting to price in the probability in rate cuts.  This has given the advantage to duration in the bond markets where we have been light in the PC Tax Efficient and ETF models.  Some of the recent changes are to focus on bringing a little duration back to the ETF models to help participate in the event that the Fed remains in a stale mate favoring duration more in the coming months and quarters.

 

LSA continues to follow our high level thesis in which we believe that in late 2018 the US economy began to realize a couple of difficult headwinds that has increased the probability of a recession in the coming years.  We experienced firsthand some of these headwinds in the fourth quarter of 2018.   These headwinds are not limited to, but include, the idea that the Fed rate hikes that started in December of 2015 will be thirty plus months in play and getting long in a typical normalization cycle.  We are also dealing with uneasy trade policy discussions with China, a softening in corporate earnings and a deficit that is rapidly growing.  The markets will also be facing the unwinding of bonds purchased by the Fed in the numerous QE programs.  Although our current recession indicators are not sounding the alarms just yet we do have three of our seven indicators starting to raise flags.  The LSA IPC will be looking to slowly reduce risk from the portfolios over the course of the next year and believe that more strategic shifts will happen early fourth quarter.  We believe such model changes could be particularly helpful during conditions of weakness for equities and/or other equity-correlated risk assets.

 

 

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