Gain Strategies
Despite returns of over 5% for both global stocks (MSCI All Country World Index) and core bonds (Bloomberg US Aggregate Index), the third quarter was a choppy, volatile one, especially on the equity side of the ledger. Early in the quarter, the lighter than expected June CPI release kicked off a sharp rotation away from large-cap domestic growth and in favor of small-caps and value. After the Bank of Japan hiked interest rates at the end of July, a further unwind of popular positions across asset classes led to a sharp selloff in equity markets, a dramatic plunge in bond yields, and the largest single day spike in the VIX on record. This price action reversed almost as quickly as it came on, only to be followed by some further weakness in semiconductor stocks and large-cap growth in late August and early September. Markets then found their footing and reversed higher. Toward the end of the quarter, a dramatic series of stimulus announcements from Chinese authorities kicked off one of the sharpest rallies in Chinese equities on record. For the quarter, Chinese equities gained over 20%, their biggest up quarter since 2009. This price action bled over into other international markets, leading to the first quarterly outperformance of international stocks over domestic ones since the fourth quarter of 2022.
Fixed income markets, by contrast, saw more defined trends in the third quarter. Government bond yields continued to slide from their late April highs as focus shifted from the inflation outlook to the labor market, especially after the June CPI report. As concerns around a soft patch in economic data spread, messaging from the Federal Reserve (Fed) prepared the market for the start of their long-awaited easing cycle in mid-September. The Fed delivered a 50 basis point cut toward the end of the quarter, seen by the market as a bold step to prolong the economic expansion. This aggressive action caused long-term yields to rise and credit spreads to fall toward cycle lows. All-in-all, core fixed income enjoyed its best quarter since the end of 2023, with longer duration market segments outperforming due to their higher interest rate sensitivity. High-yield corporate bonds managed to put in a strong quarter as well despite their lower duration; this riskier market segment posted its eighth consecutive quarter of gains.
Horizon’s Gain models maintained a fully invested allocation during the quarter. We began the quarter with an overweight to domestic equities, focused in large-cap growth, higher quality allocations, and select cyclicals like metals and mining and energy. Our international allocations maintained an overweight to Japan and underweights to Europe and emerging markets throughout the quarter. In late July we increased our domestic overweight, adding to our top-heavy growth allocations, low volatility, and energy, at the expense of internationals, value, and the momentum factor. The market volatility in August and the poor market response to Nvidia’s earnings report led us to pare back our portfolio tilts in favor of a more neutral, domestically-focused portfolio in early September. Specifically, we reduced our domestic growth overweight, adding small-caps, equal weight-large caps, and a diversified quality holding, all allocations that would benefit from a broadening of the market’s price action. Internationally, we trimmed our Japan overweight in favor of broader positioning as market volatility rose.
Due to the persistence of the trends in the fixed income market in the third quarter, the debt allocation of the Gain models saw little activity. We maintained a shorter than benchmark duration profile, a sizable allocation to high-yield corporate credit, and diversifying exposures to currency-hedged international bonds and Treasury Inflation Protected Securities (TIPS) throughout the quarter. Our more positive economic view was also reflected in our sector allocations, which featured a strong underweight to U.S. Treasuries and an overweight to corporate credit.
Gain Equity Contributors and Detractors
Allocations to domestic large-caps growth and quality, as well as domestic quality dividend exposure, contributed the most to the equity portfolio’s performance last quarter. A focused semiconductor holding, the domestic energy sector, and domestic mega-cap technology contributed the least to returns last quarter.
Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, broad high-yield corporate credit; longer duration, higher-quality high-yield corporate credit; and an active, mortgage-focused core bond holding contributed the most to performance last quarter. A separate active core bond allocation, as well as long-term U.S. Treasuries and TIPS, contributed the least to performance in the third quarter.
Protect Strategies
Horizon’s Protect models were fully invested in their underlying allocations throughout the entirety of the third quarter. While both global stocks and core bonds registered gains during the quarter, there was a drawdown in equity markets in late July and early August. This sharp pullback was not deep enough to trigger any Risk Assist activity; the algorithm remained in its default “off” position for the entire quarter. Equity markets recovered quickly from their August lows and ended the quarter with fresh all-time highs for both U.S. and global stocks. Furthermore, all Protect models ratchetted1 during the quarter, an important feature that establishes new levels for measuring future portfolio drawdowns. From our vantage point, the last two quarters illustrate the importance of calibrating a risk management program to look through short-term noise in markets and to focus on the underlying trends.
The tactical tilts in our Protect equity allocation followed our standard portfolio construction process in the third quarter. By implementing our active views in a broader and less focused way than in our Gain portfolios, and by carrying a slightly strategic defensive bias, the Protect models were able to benefit from the uptrend in stock and bond markets. We began the quarter with our long-standing domestic overweight, focused predominantly in the large-cap growth section of the market. As growth stocks continued their leadership early in the quarter, and volatility rose across equity markets, we decreased our growth overweight in favor of a more balanced domestic allocation. We moved further in this direction in September, ending the quarter neutral on growth versus value but still overweight domestic stocks versus global equities.
In the fixed income component of the Protect portfolios, our allocation mirrored that in the Gain portfolios during the quarter. We maintained our longstanding overweight to corporate credit, including a sizable allocation to high-yield, throughout the quarter as a reflection of our positive outlook on the economy. For similar reasons, our fixed income portfolio featured a large underweight to U.S. Treasuries and modestly shorter than benchmark duration exposure. We sought portfolio diversification through our exposures to currency-hedged international bonds and TIPS in the third quarter rather than via our duration positioning.
Protect Equity Contributors and Detractors
Last quarter’s biggest contributors to performance in the Protect equity portfolio were domestic large-cap growth, broad international developed markets, and domestic large-cap quality. International low volatility, the domestic energy sector, and domestic mega-cap technology contributed the least to performance in the third quarter.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, broad high-yield corporate credit; longer duration, higher-quality high-yield corporate credit; and an active, mortgage-focused core bond holding contributed the most to performance last quarter. A separate active core bond allocation, as well as long-term U.S. Treasuries and TIPS, contributed the least to performance in the third quarter.
1A ratchet refers to the resetting of the target loss tolerance threshold for the portfolio to a new (higher) value. Typically, in normal markets, Protect models ratchet with every 3%-5% appreciation in the portfolio’s value.
Spend Strategies
The third quarter was another positive one for markets as global equities and core fixed income markets rallied strongly. Trends across equity markets were mixed in the third quarter, but broader participation in the rally was a welcome development. On the fixed income side, generally falling interest rates across the core bond universe acted as a tailwind in the third quarter. Horizon’s Spend models were fully exposed to their underlying growth allocations as the Risk Assist algorithm remained in its default “off” position. Additionally, all of the Spend models ratchetted during the third quarter. Per our standard rebalance process, all Spend models were rebalanced back to twelve quarters of spend after the third quarter ended.
For the fourth quarter in a row, the core design of Horizon’s Spend portfolios, featuring a tilt toward risk-managed equity exposure, an underweight to core fixed income, and an appropriately calibrated liquidity reserve, was a tailwind to overall model performance. The broader equity market price action benefitted the equity portfolio in our Spend models, while the outperformance of international markets acted as a headwind. Our credit-heavy fixed income allocation generally matched core bonds on the quarter. Outside of the standard liquidity reserve rebalancing activity, the allocations in the growth portion of the models were little changed during the quarter.
Spend Contributors and Detractors
The biggest contributors to performance in the equity portfolio last quarter were broad international developed markets and domestic large-cap value. Allocations to domestic mid-caps and domestic low volatility contributed the least to performance in the third quarter.
In our fixed-income portfolio, exposure to broad core investment grade bonds contributed the most to performance. Intermediate-term corporate credit allocation contributed the least to performance last quarter.
Disclosures
Past performance is not indicative of future results. The investments recommended by Horizon are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This information should not be considered to be a recommendation to buy or sell any security or to adopt a particular investment strategy. It should not be assumed that any of the transactions, holdings, or sectors discussed were or will be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Opinions referenced are as of the date of publication and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change
The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance. The MSCI ACWI ex-U.S. captures large and mid-cap representation across 22 Developed Markets and 24 Emerging Markets countries, excluding the U.S. Individuals cannot invest directly in any index. Indices are unmanaged and do not have fees or expense charges, which would lower returns. References to indices or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change.
RiskAssist® is NOT A GUARANTEE against loss or declines in the value of a portfolio; it is an investment strategy that supplements a more traditional strategy by periodically modifying exposure to fixed income securities based on Horizon’s view of market conditions. While Risk Assist was designed with the goal of limiting drawdown, Horizon is not able to predict all market conditions and ensure that Risk Assist will always limit drawdown as designed. Accounts with Risk Assist® are not fully protected against all losses. Furthermore, when Risk Assist® is deployed (whether partially or entirely) to mitigate risk for an account, the account will not be fully invested in its original strategy. Accordingly, during periods of strong market growth, the account may underperform accounts that do not have the Risk Assist® feature.
The Real Spend® retirement income strategy is NOT A GUARANTEE against market loss, and there is no guarantee that the Real Spend® strategy chosen by an investor will lead to successful investment outcomes for part of or for the entirety of an investor’s retirement. This strategy is not an insurance product with payments guaranteed. It is a strategy that invests in marketable securities, any of which will fluctuate in value. Before investing, consider the investment objectives, risks, charges, and expenses of the strategy. Keep in mind investing involves risk. The value of an investment will fluctuate over time and will gain or lose money.
Horizon Investments, the Horizon H, Gain Protect Spend, Risk Assist, and Real Spend are all registered trademarks of Horizon Investments, LLC.
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NOT A DEPOSIT | NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED | CLIENTS MAY LOSE MONEY | PAST PERFORMANCE NOT INDICATIVE OF FUTURE RESULTS
