Investors still face many hurdles, but financial advisors can turn to model portfolio strategies to diversify their portfolios and navigate the challenging market environment.
In the recent webcast, WisdomTree’s 2023 Market Outlook: Balancing Risk and Reward, Kevin Flanagan, head of fixed income strategy at WisdomTree Asset Management, helped outline the current outlook of ongoing inflationary pressures, elevated interest rates, and slowing economic growth. The U.S. real GDP is projected to only rise 0.4% for 2023 with year-over-year CPI at 4.1% and unemployment rates at 4.3%. Meanwhile, the Fed Funds rate is expected to hover around 4.35% for 2023.
In this type of plateauing economic condition, Scott Welch, chief investment officer of model portfolios at WisdomTree Asset Management, argued that financial advisors can still diversify and enhance their portfolios through WisdomTree’s Model Portfolio Investments. The model portfolios are global in nature, ETF-focused to optimize cost and tax efficiency, maintain an “open-architecture” methodology including both WisdomTree and third-party products, take a “core/satellite” approach to optimize potential for outperformance, and don’t come with any strategist fee on top of ordinary expense ratios collected for fee capture.
Through better control, financial advisors can implement model portfolios for varying time horizons and investment objectives. Based on those granular needs, WisdomTree has developed a models approach that provides a model type for most clients, consisting of strategic, tactical, asset class, and outcome-focused strategies, where each can be tailored to individual customer preferences.
“Our Modern Alpha ETF Model Portfolios combine the performance potential of active approaches with the discipline of passive methods to help your clients pursue their investment objectives for growth, income, and wealth preservation in an open architecture approach,” Welch said.
Welch noted that all eyes remain on the Fed and future earnings guidance.
“We continue to believe that U.S. and global GDP growth will be flat to slightly positive for 2022 but see a heightened risk of recession as we head into 2023,” Welch said.
Rising rates continue to pose headwinds for large, rate-sensitive growth stocks. Meanwhile, value, dividends, and size factors could lead the way, according to WisdomTree. Additionally, quality companies with stronger earnings, cash flows, and balance sheets could move to the forefront as inflation remains “sticky” and margin “squeezes” ensue.
In the fixed income space, WisdomTree sees relative opportunities in U.S. floating rate treasuries, IG and high yield credit, and interest rate hedged bonds.
“We partially closed our duration underweight but expect interest rates to grind higher,” Welch said.
Investors may continue to use alternatives like commodities to maintain diversification.
“We maintain our conviction in the role of real assets and commodities as risk diversifiers. We remain generally neutral on the broader commodity complex,” Welch added.
Looking ahead, Welch highlighted WisdomTree’s primary investment themes for 2023. For example, the dividend and value themes could continue to outperform, and investors may see an increased importance of the quality trait as the economy cools. Alternatives, including commodities, could help hedge inflation risk and volatility in stocks and bonds. There will be a return to “normal” in the fixed income space. In addition, investors shouldn’t overlook the opportunity in small caps where there are attractive valuations.
Flanagan also pointed to some fixed income ETF solutions to help investors capture the higher income potential in the current market environment. For example, the WisdomTree Floating Rate Treasury Fund (USFR) could help investors play the continued Fed rate hikes with a more “pause and hold” mentality. The WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY) offers enhanced yield while maintaining familiar risk characteristics. Additionally, the WisdomTree U.S. High Yield Corporate Bond Fund (WFHY) provides a quality-screened position in U.S. high yield to help mitigate potential default risk.
Jeff Weniger, head of equity strategy at WisdomTree Asset Management, highlighted some areas of weakness, notably the housing market where home buyer traffic has fallen precipitously. The housing market risks could also be the next catalyst for waning consumer confidence. The downward consumer confidence outlook could point to downward earnings revisions, which runs counter to the currently upbeat Wall Street consensus.
Consequently, Weniger underscored the benefits of maintaining a quality tilt in case of any further risks. However, different indexers have varying definitions of “quality”. For example, WisdomTree focuses on return on equity, return on assets, and leverage.
Financial advisors who are interested in learning more about investment ideas for 2023 can register for the Thursday, December 1 webcast here.