The March 2022 Dashboard: Our Three Layers of Risk Management

Our Cash Indicator methodology acts as a plan in case of an emergency. This is analogous to the multiple safety systems in a modern automobile, which includes an airbag. Importantly, each of these systems work together to potentially help smooth the ride.

We manage risk within our strategic, long-term allocations based on diversification across equity, fixed income, and alternative assets and a focus on more attractive relative values.

We manage risk tactically over the short-term by investing across a broad array of themes and asset classes including cash. We can either invest opportunistically or defensively depending on the environment.

Cash Indicator: Markets are functioning properly but we expect continued volatility.

Our proprietary Cash Indicator (CI) provides insight into the health of the market by monitoring the level of fear using equity and fixed income indicators. This warning system is designed to signal us to either a 25% or 50% cash position to potentially protect principle and provide liquidity to reinvest at lower and more attractive valuations.

While the CI has risen recently, it remains in an acceptable range, and we are fully invested. Despite recent volatility, equity and fixed income markets reflect a well-functioning market. The CI is not signaling elevated risk of a systematic issue that would support a cash raise.

Strategic View: Equity valuations have become more attractive due to the recent market declines.

Equity Valuations: With this year’s market declines combined with our 2022 earnings expectations, equities are somewhat more attractive. While we anticipate a near-term rebound, broad valuations continue to be stretched. We expect modest returns for the coming 3-5 years.

Equity Favorability: We are still broadly emphasizing U.S. equities. Emerging markets continue to be vulnerable due to a myriad of risks despite relatively attractive valuations. Though we favor U.S. equities overall, select developed mar-ket foreign equity earnings remain attractive.

Fixed Income Valuations: Long-term interest rates will likely move higher in fits and starts as economic growth and inflation persist.

Fixed Income Favorability: As short-term interest rates move higher, floating rate and variable rate structures should perform well. We like exposure to alternative income sources as well, such as collateralized loan obligations and bank loans, in addition to short and intermediate duration investment grade corporate and asset-backed securities.

Tactical View: We favor consistent earnings combined with attractive valuations.

Despite headline risks, our work suggests that the U.S. economy is strong, and that economic growth will continue. The U.S. economy has likely moved into the second phase of the business cycle with persistent growth that slows towards its long-term trend. Our current equity sector focus is on information technology, financials, health care, and global natural resources. We have positioned our fixed income allocations in preparation for risking interest rates with a focus on floating and variable rate investments.


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