Gain Strategies
Investors shifted among dominant themes numerous times in what was a volatile but generally positive first quarter of the new year for equities and fixed income. The quarter began with a reversal of last December’s price action; higher beta stocks in the U.S. and abroad strongly outperformed the defensive sectors that led the market in 2022. Consumer staples, healthcare, and utilities, the best performers within U.S. large-cap sectors (along with Energy) in 2022, all experienced negative returns in January as investors reacted to a string of stronger data releases. The trend of more upbeat economic data prints continued throughout February and propelled front-end yields to new cycle highs. Equity markets traded well despite the increase in interest rates, a noticeable change to the cross-asset correlations seen last year. Volatility erupted in early March after three domestic banks failed within the span of just one week. Interest rates plunged, and credit spreads widened as investors adjusted their expectations for monetary policy and credit availability to the real economy. The stock reaction was more isolated, however, as lower quality and more cyclically-oriented market segments, like domestic small caps, underperformed the mega caps in the NASDAQ 100, while broad market benchmarks like the S&P 500 and global stocks (MSCI ACWI) notched gains for the month of March. The dollar continued its decline despite the turmoil in markets, further reinforcing the notion that 2023 is not like the price action in 2022.
Throughout the quarter, Horizon’s accumulation portfolios maintained a full equity allocation. The sharp reversal in trends to start the year caught us off-guard, however, as the defensive positioning we began the year with lagged in the low-quality rally of January and early February. We adjusted our positioning throughout the quarter, increasing our international exposure to Asia and Europe while becoming more market-like and less defensive in our domestic holdings. We also increased our allocation to higher-quality companies in the domestic growth and mega-cap market segments.
In the fixed income allocation of the Gain portfolios, the quarter began with modest overweights to corporate credit and mortgages and a duration slightly longer than the benchmark. We increased our more offensive stance in the portfolio in January by adding small allocations to preferred stocks and emerging market debt and increasing our exposure to higher-yielding credit holdings. As market stress increased around the banking issues in March, we removed our allocation to preferred stocks and adjusted our spread exposures in mortgage-backed securities and credit. Core interest rates traded with extremely elevated volatility during the quarter. This elevated volatility has decreased the risk-reward tradeoff of taking meaningful off-benchmark duration positioning and led us to modestly adjust our interest rate exposure in the first quarter.
Gain Equity Contributors and Detractors
The most significant contributors to the performance of the Gain equity portfolio in the first quarter were domestic mega-cap technology, Japan, and domestic large-cap quality. Domestic small-caps, China, and domestic large-cap value contributed the least to returns.
Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, a tactical core plus bond holding, mortgage-backed securities, and high-quality high-yield corporate credit contributed the most to performance last quarter. Intermediate-term U.S. Treasuries, emerging market bonds, and preferred equities contributed the least to performance in the first quarter.
Protect Strategies
Horizon’s Protect portfolios entered the new year substantially de-risked into short-term U.S. government debt. Risk Assist® was active from the beginning of the quarter, responding aggressively to the rally in markets and reinvesting portfolios as expected. While the quarter was volatile, the Protect models all featured more re-investments than de-risks, and all ended the quarter with a much larger allocation to the investment portion of the models than they began. This Risk Assist® activity caused these portfolios to slightly trail comparable unhedged allocations, but the overall outcome was within our expectations for these portfolios.
The underlying equity and fixed income allocations in our Protect portfolios played a smaller than usual role in overall portfolio performance because of the engagement of the Risk Assist® algorithm. We began the quarter with an equity allocation with a relatively neutral allocation that slightly favored domestic and higher beta exposures, a portfolio designed to incrementally increase potential upside capture in a market rally. As the Risk Assist® algorithm increased the allocation to the equity portion of the models in January, we increased our tactical tilts via exposures to lower volatility stocks and international equities. Concerns over cyclicality and balance sheet strength on the back of the stresses in regional banks led us to lower our domestic dividend exposures in favor of quality and mega-cap allocations late in the quarter. The fixed income portion of the Protect models followed the moves made in our Gain allocations during the quarter. After increasing risk across various spread products early in the quarter, we adjusted that positioning as volatility rose and the banking overhang disproportionately impacted preferred equities.
Protect Equity Contributors and Detractors
Last quarter’s biggest contributors to performance in the equity portfolio were broad international developed markets, domestic mega-cap technology, and domestic large-cap growth. Domestic factor exposures, specifically to dividend growers, equal-weight large-caps, and defensive dividend payers, contributed the least to performance in the first quarter.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, a tactical core plus bond holding, mortgage-backed securities, and high-quality, high-yield corporate credit contributed the most to performance last quarter. Intermediate-term U.S. Treasuries, emerging market bonds, and preferred equities contributed the least to performance in the first quarter.
Spend Strategies
The first quarter was a continuation of the rebound in global equities and core bonds witnessed in the prior quarter, a welcome development after the volatility seen earlier in 2022. Due to differences in portfolio construction and Risk Assist® calibration, our Spend portfolios began the year less de-risked than our Protect portfolios. Executing as designed, the Risk Assist® algorithm responded to the sharp rally in markets to start the year, increasing the allocations to the growth portion of the models. Following the performance across the Spend models in the first quarter, all models were rebalanced back to eleven quarters of target spend per our standard rebalancing process.
Spend Portfolio Positioning
In a strong quarter for bonds and stocks, the core allocation design of the Spend portfolios, which features an overweight to equities funded by an underweight to fixed income, was generally accretive. However, lower risk equity holdings and the reinvestment drag from the Risk Assist® algorithm slightly offset that beneficial tilt. Our underlying portfolio allocation changes were muted in the first quarter but did generally follow our moves in the Gain and Protect models to increase international equity positioning. As noted above, the spending reserve replenishment resulted in a slightly decreased allocation to the investment portion of the models.
Spend Contributors and Detractors
In the equity allocation of the Spend portfolios, exposures to domestic large-cap growth and broad international developed markets contributed the most to returns last quarter. Domestic low volatility factor exposure to domestic small-caps and emerging markets contributed the least in the first quarter. In our fixed-income allocation, exposure to long-term investment-grade corporate bonds contributed the most to performance, while our high-yield corporate bond exposure contributed the least.
Market Outlook
Very rarely does the world’s risk-free asset, the U.S. 2 Year Treasury, trade in a range more akin to that of a developing country, but that is exactly what we witnessed in March. The total monthly trading range exceeded 1.5% for this benchmark interest rate, quite the feat for a yield that began the month at 4.83%. To us, this dynamic is the perfect microcosm to illustrate just how eager the market is to extrapolate single economic data points and shift narratives in a flash. For tactical managers like Horizon, that poses a dilemma – attempt to predict and capitalize on these volatile, high-frequency shifts or zoom out and position portfolios in such a way to cut through the short-term noise. As we embark on a new quarter, we are opting for the latter approach, conducting scenario analysis, and looking for common ways to win across various states of the future while balancing the risk-reward tradeoff in a time of elevated market volatility. Horizon thanks you for your continued trust during a truly unique and unprecedented time for capital markets. We look forward to navigating the changing landscape in the months and years ahead to help our clients meet their financial goals.
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. Any information about performance, allocations, and contributors and detractors is illustrative of Horizon’s model strategies and is therefore hypothetical and not representative of any specific account. 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.
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 the 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. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.
Any risk management processes described herein include an effort to monitor and manage risk, but should not be confused with and do not imply low risk or the ability to control risk.
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 loss. 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, and 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 is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Horizon’s investment advisory service can be found in its Form ADV Part 2, which is available upon request.
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
