Gain Strategies
Global stocks continued their upward march in the second quarter, powered higher by continued economic resilience and investor enthusiasm around the AI-theme. Despite new all-time highs for the S&P 500 and the MSCI All Country World Index (ACWI) of global stocks, breadth was poor in the second quarter. Only emerging markets, helped by a rebound in Chinese equities, managed to beat U.S. large-caps. Within the U.S. equity market, the incredibly bifurcated performance harkened back to the extreme market environment we saw during the beginning of the Covid pandemic. Growth beat value by almost 12% last quarter, its widest margin since the second quarter of 2020, while large-caps increased their year-to-date margin versus small-caps to 16.0%, wider than we saw for the first six months of 2020. Trends within the international space were volatile during the quarter as surprise election results in France, Mexico, and India jolted markets. China was a notable standout internationally as extreme negative sentiment collided with continued pledges by policymakers to support their economy and markets. However, by the end of the quarter, some of this optimism around China was starting to fade.
Compared to the last few years and to the dispersion we saw within the global equity market, the fixed income universe enjoyed a relatively quiet quarter. Treasury yields drifted higher, and the yield curve steepened as investors came to terms with a patient Federal Reserve that is waiting for greater confidence that inflation is truly under control. Despite the acceleration of inflation readings that we saw in the first quarter and early in the second, a soft patch in the economic data and improvements in the inflation outlook caused market implied measures of inflation to fall throughout the quarter. Corporate credit spreads widened modestly last quarter but remain near multi-year lows. Total returns were mixed during the quarter; core investment grade bonds were flat, while shorter duration exposures such as loans, high-yield credit, and short duration U.S. Treasuries notched modest gains. Meanwhile, longer duration Treasuries and investment grade credit, as well as less liquid allocations like preferred equities and convertible bonds, experienced minor losses last quarter.
Horizon’s Gain models maintained a full equity allocation during the quarter. We began the quarter with a substantial overweight to domestic equities, and especially large-cap growth stocks, balanced with domestic energy, mid-cap, and quality dividend exposures. Internationally, we favored Japan over Europe and emerging markets, tilts we maintained in varying sizes throughout the quarter. Our one equity reallocation during the quarter consisted of focusing our expression of the AI theme domestically, as well as slight decreases in our domestic overweight by adding broad international exposure and decreasing our European underweight. We ended the quarter with a domestic large-cap growth overweight and underweights to small-caps, domestic value, and internationals.
The fixed income allocation of the Gain models began the quarter with a heavy preference for corporate credit, a slight underweight to duration, and a meaningful underweight to U.S. Treasuries. We also held diversifying positionings in currency-hedged international bonds and Treasury Inflation Protected Securities (TIPS). After rising early in the quarter, the 10-year Treasury yield fell about 50 basis points from the end of April to late June, affording us the opportunity to further shorten our duration positioning by trimming mortgages, core bond exposures, and other long duration holdings in favor of short-term investment grade corporate credit. We also slightly increased our positioning in the diversifying allocations, as these segments tend to behave with less interest rate sensitivity than the benchmark. Throughout the quarter, we maintained a sizable allocation to high-yield corporate credit, but given the low levels of credit spreads, we viewed this tilt as a hold, not an add.
Gain Equity Contributors and Detractors
Allocations to domestic large-caps, specifically quality, growth, and mega-cap technology, contributed the most to the equity portfolio’s performance last quarter. As a testament to how strong market trends have been this year, these same holdings also contributed the most to the portfolio in the first quarter. Japan, domestic large-cap value, and domestic mid-caps contributed the least to returns last quarter.
Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, broad high-yield corporate credit, short-term investment grade corporate credit, and an active core bond holding contributed the most to performance last quarter. Long-term investment grade corporate credit, currency-hedged international bonds, and higher quality, longer duration high-yield corporate credit contributed the least to performance in the second quarter.
Protect Strategies
Horizon’s Protect models entered the second quarter fully invested in their underlying allocations. Global equities began the quarter with a mild drawdown of about 5%, only to reverse higher from their mid-April lows and make new all-time highs in June. Core bonds, meanwhile, traded in a relatively tight range, reflecting lower levels of bond market volatility and higher current income than in past years. The price action early in the quarter did not breach any of the de-risking levels of the Risk Assist algorithm, which remained in its default “off” position for the entire quarter. All Protect models ratchetted1 during the quarter, an important feature that establishes new levels for measuring future portfolio drawdowns.
As is standard with our portfolio construction process, the tactical tilts in our Protect equity portfolios were generally broader and less focused than in our Gain portfolios. We began the quarter with an overweight to domestic stocks, and especially large-cap growth, and underweights to internationals across developed and emerging markets. We intentionally positioned our Protect equity portfolio to have slightly lower volatility than our Gain equity portfolio in order to improve the interaction with the Risk Assist algorithm in shallow equity market drawdowns, such as the one we saw at the start of the second quarter. Given the persistence of the trends in the market and our broader expressions in this portfolio, we did not reallocate our Protect equity portfolio in the second quarter.
In the fixed income component of the Protect portfolios, our changes mirrored those in the Gain portfolios during the quarter. We maintained an overweight to corporate credit, including a sizable allocation to high-yield, throughout the quarter as a reflection of our positive outlook on the economy. Modifying our duration exposure was the main adjustment in our portfolio in the second quarter. We began with a slightly below benchmark duration profile, as well as exposure to high-quality, non-benchmark allocations such as currency-hedged international bonds and TIPS, to provide additional diversification with a shorter duration bias. We further shortened our duration stance after the retracement lower in bond yields toward the end of the quarter. We accomplished this by increasing our short-term investment grade credit holding and our diversifying allocations at the expense of mortgages, core bonds, and long duration Treasuries.
Protect Equity Contributors and Detractors
Last quarter’s biggest contributors to performance in the Protect equity portfolio were the same as in the Gain equity portfolio, specifically domestic large-cap quality, growth, and mega-cap technology. International low volatility, domestic large-cap equal weight, and domestic large-cap value contributed the least to performance in the second quarter.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, broad high-yield corporate credit, short-term investment grade corporate credit, and an active core bond holding contributed the most to performance last quarter. Long-term investment grade corporate credit, currency-hedged international bonds, and higher quality, longer duration high-yield corporate credit contributed the least to performance in the second 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 second quarter was another positive one for global equities, although the market environment was narrow and led primarily by domestic large-cap growth stocks. Core bonds, meanwhile, had a relatively flat quarter in terms of total return as the increases in benchmark yields partially offset the interest received during the quarter. All Spend models began the quarter fully exposed to their underlying growth allocations and saw no Risk Assist de-risking or re-investing activity during the quarter. In addition, given the equity markets’ performance during the first quarter, Spend models were also ratchetted multiple times.
Spend Portfolio Positioning
The core design feature of Horizon’s Spend portfolios, featuring a tilt toward risk-managed equity, an underweight to core fixed income, and an appropriately calibrated liquidity reserve, was a tailwind to performance in the second quarter. Global stocks, as represented by the MSCI ACWI Index, exceeded core bonds, as represented by the Bloomberg US Aggregate Index, for the third straight quarter. Over longer time periods, this observation holds as well; for the last 5 years, global stocks have outperformed bonds by about 11% per year. The equity allocation in Horizon’s Spend models slightly underperformed global stocks last quarter, primarily due to the narrowness of the market and our allocations to lower risk segments such as low volatility and dividends. Our credit-heavy fixed income allocation roughly matched core bonds on the quarter, while cash and cash-like instruments exceeded core bonds for the second straight quarter. Outside of the rebalancing activity discussed above, the allocations in the growth portion of the models changed little during the quarter.
Spend Contributors and Detractors
The biggest contributors to performance in the equity portfolio last quarter were domestic large-cap core and growth exposures. Allocations to domestic mid-caps and domestic large-cap value contributed the least to performance in the second quarter.
In our fixed-income portfolio, exposure to broad core investment grade bonds contributed the most to performance, while our intermediate-term corporate credit allocation contributed the least to performance.
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
