The markets still face a number of headwinds. Consequently, investors should consider specific hurdles and look toward asset allocation opportunities.
On the recent webcast, Tactical ETF Strategy in an Easy Mutual Fund Package, Deborah Frame, President and Chief Investment Officer of Frame Global Asset Management, pointed to a stagnation outlook, with waning strength in the U.S. dollar.
“Three key developments explain the US dollar’s slide against other major currencies since its peak on 20th January – higher commodity prices, increased appetite for safe havens and a scaling back of expectations for tighter Fed policy,” Frame said.
Foreign exchange moves may be a considerable risk to financial advisors’ portfolios as many have diversified with foreign exposure. For instance, in survey of financial advisors on the webcast, 55% of respondents revealed they had 10% to 25% of their portfolio allocated outside of the U.S.
The diversification to overseas economies may also reflect advisors’ increased importance placed on these foreign markets. For instance, 62% of surveyed advisors on the webcast revealed that they felt the global economic is very important to the U.S. growth outlook.
Related: Love International Stocks? This ETF Could be for You
Meanwhile, stock returns have been lackluster, as the market remains stuck in a sideways range. The Federal Reserve’s December 2015 rate hike signaled that the economy was “heating up,” but the bond market corrected for over pricing the rate hike while the S&P 500 went sideways.
“Clearly the market has reflected a view that the economy is not, at least for now, ‘heating up,'” Frame said.
In an environment of elevated volatility and uncertainty, Frame pointed to portfolio management with a downside risk focus. Post modern portfolio theory or downside risk focus recognizes all uncertainty does not lead to losses and losses do not equal gains over time.
Additionally, as markets experience heightened asset correlation or more lockstep moves, investors are better off with an asset allocation strategy over active stock selection, Frame added. Specifically, she cited a Mark Krtizman paper from 2002 that looked at stock selection versus asset allocation from the perspective of correlations, which concluded that when correlations within an asset class become twice as high as the correlation among asset classes, asset allocation becomes the dominate contributor to portfolio returns.
[related_stories]For instance, the Rx MAR Tactical Moderate Growth Fund (MGZIX) and Rx MAR Tactical Growth Fund (MGMIX) utilize broad ETF-based asset allocation strategies to mitigate downside risk. Charles McNally Chief Portfolio Strategist at RiskX Investments, explained that “MAR” refers to “Macroeconomic Assessment of Risk,” which is used to define a tolerance for downside risk and is key to macroeconomic environment analysis utilized in portfolio construction.
Related: Traditional Fund Managers See Opportunity with ETF Wrapper
The four MAR Portfolios range from tactical conservative to tactical aggressive plays. However, Frame currently only offers the MAR Tactical Moderate and Tactical Growth strategies in mutual funds.
The moderate growth portfolio includes about a 40% tilt toward fixed-income, 48% in equities, 10% gold and 2% cash. The growth portfolio holds 40% fixed income, 53% equities, 5% gold and 2% cash. The moderate growth portfolio includes a larger position in gold and U.S. large-caps than the growth portfolio.
Financial advisors who are interested in learning more about ETF investment strategies can watch the webcast here on demand.