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Second Quarter 2017 Research Call Replay

Jul 20, 2017 / Portfolio Updates, Asset Class Research

This is a replay of our second quarter 2017 Litman Gregory research team webcast, held July 20, 2017. Topics covered (among others): U.S. stock valuations, portfolio allocations, managed futures, and socially conscious investing. The presentation slides are available at the bottom of the page under Resources.


Audio of the full call:
Second Quarter Recap and Market Overview with Peter Sousa, Senior Research Consultant:
We are having a good year, but U.S. stocks seem expensive. Are you thinking about taking some money off the table/selling some U.S. stock funds?
Your models are underweight to global equity risk, which has detracted from performance. Absent a downturn, are there other circumstances you foresee that would cause you to bring the equity allocation back to equal weight?
During our last investment committee meeting, we talked about GMO’s recent forecast. GMO is considering cases where mean reversion could happen over seven years, 15 years, and 25 years. Jeremy Grantham recently said higher valuations are here to stay. It seems that lower interest rates, coupled with a surge in corporate profits and profit margins, may be the primary driver of persistently higher price-to-earnings ratios—or an extension in time frame for a reversion to the mean. What does your team think about this?
Can you address managed futures again? It’s been a number of years since these strategies seem to have worked, and we struggle immensely to explain their performance to clients, especially as there appears to have been some major trends to capitalize on recently, but performance hasn’t reflected that. We’re questioning whether better or faster information flow has changed the entire landscape for these strategies. We realize the back-testing is compelling; however, access to information and market efficiency seems to be vastly different in 2017 than it was before the Internet age, etc.
Are there any model portfolio changes that you’re thinking about implementing in the nearer term?
The fixed-income side of a portfolio can be seen as a volatility dampener. However, I'm not sure that the current funds in the model portfolios will achieve that goal in the event of a market downturn. It appears much of the overall allocation is invested beyond 20 years and has a junk rating or is simply not rated. Reaching for yield can be beneficial if the environment works in your favor, but when markets don’t behave, won't these types of vehicles perform like equities, thus reducing their diversification benefits? Ultimately, if we're going to take on risk, why not do it on the equity side?
Have you ever considered including closed-end funds in your model portfolios and/or Recommended List?
I fully agree with having an alternatives allocation across the balanced model portfolios but am having a hard time using five funds for an 11% allocation. Your investment policy statements show that you have the latitude to go as high as a 45% weighting to alternatives. Do you see this position size increasing any time soon?
I read an article that stated many of the largest mutual fund managers in the foreign space weren’t allocating to Europe and emerging markets yet due to the risks/uncertainties, and I’ve also read that many hedge fund managers have been heavily weighted to these markets and have done very well. You’re positive on both relative to U.S. stocks. Will you please provide a high-level update on your analysis of the attractiveness of both markets in absolute terms? Why shouldn’t we have more of an overweight given the lack of other compelling opportunities?
I occasionally get requests from clients to implement a socially conscious investment strategy. Have you considered publishing or implementing a socially conscious portfolio model? If not, how do you respond to requests for this service in your own wealth management business?
DoubleLine Capital is a firm you work with and respect. Have you looked at any of their other products or strategies, on either the bond or stock side?



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