Gain Strategies
The choppy, volatile market environment continued in the final quarter of 2024. Still, in contrast to the prior quarter, global equities (MSCI All Country World Index) and core bonds (Bloomberg U.S. Aggregate Index) experienced modest total return losses. Two additional rate cuts from the Federal Reserve, uncertainty around the U.S. election, and weaker growth trajectories in Europe and China were key themes that impacted markets during the quarter. But from our viewpoint, higher interest rates and a steeper yield curve were the major developments that influenced cross-asset price action in the fourth quarter. The U.S. dollar posted its strongest quarterly gains since the fourth quarter of 2016, weighing on international equities relative to domestic stocks. In fact, U.S. stocks outperformed international stocks in the fourth quarter by the widest margin since 2008. Within the domestic equity market, small-caps experienced a sharp rally after the election, which subsequently reversed into the end of the year. Price action for the quarter as a whole was exceedingly narrow and dominated by the mega-cap tech names at the top of the market. Despite a sharply higher dollar and increases in volatility measures across equities and fixed income, spreads on corporate credit and other riskier parts of the fixed income universe were well-behaved last quarter.
Horizon’s Gain models were fully invested across their equity and fixed income allocations during the quarter. The GAIN equity allocation generally favored domestic, especially growth stocks, over internationals during the quarter. The quarter began with a strong domestic growth tilt, small exposures to domestic small-caps and regional banks, a neutral position on emerging markets, an overweight to Japan, and an underweight to Europe. Positioning adjustments were relatively small during the quarter. As many so-called “Trump trades” rallied prior to the election, the Gain equity portfolio broadened out its regional bank and dividend positioning in favor of small-caps and large-cap value. After the post-election volatility subsided, the Gain equity allocation increased its domestic positioning at the expense of Europe. The quarter ended with a domestic overweight relative to global stocks and neutral positioning across the growth and value styles. Software, semiconductors, small-caps, and domestic banks were key focus areas within the domestic portfolio, while Japan remained the favored international allocation.
The positioning of the Gain models’ fixed income allocation was relatively consistent throughout the quarter. The investment team’s positive view on corporate fundamentals and economic growth was reflected in the portfolio’s credit positioning, which featured a sizable allocation to corporate and structured credit, especially the below-investment-grade market segment. Regarding duration positioning, the quarter began with a shorter than benchmark duration profile and sizable allocations to diversifiers such as currency-hedged international bonds and Treasury Inflation Protected Securities (TIPS). As interest rates rose during the quarter, these diversifiers were a source of funds for modest adds to positioning in longer-term coupon bonds.
Gain Equity Contributors and Detractors
Domestic large-cap growth and quality allocations and a focused regional bank holding contributed the most to the equity portfolio’s performance last quarter. Domestic large-cap value, broad international developed markets, and emerging markets contributed the least to returns in the fourth quarter.
Gain Fixed-Income Contributors and Detractors
In the fixed-income portfolio, short-term investment grade corporate credit, currency-hedged international bonds, and broad high-yield corporate credit contributed the most to performance last quarter. Two separate active core bond holdings, one multi-sector and the other focused exclusively on mortgages, as well as long-term U.S. Treasuries, contributed the least to performance in the fourth quarter.
Protect Strategies
Horizon’s Protect models were fully invested in their underlying allocations throughout the fourth quarter despite the small quarter-over-quarter losses for global stocks and core investment grade bonds. Markets experienced an intra-quarter drawdown after the positive initial reaction to the U.S. election, but this action was not significant enough to trigger any Risk Assist® activity. The algorithm remained in its default “off” position for the entire quarter, as it has for all of 2024, helping investors participate in the market rally. Furthermore, all Protect models ratcheted during the quarter. The ratcheting feature is an important component of the Risk Assist® algorithm that establishes new levels for measuring future portfolio drawdowns.
The tactical tilts in the Protect equity allocation followed Horizon’s standard portfolio construction process in the fourth quarter. Trends within equity markets were relatively choppy, although the domestic large-cap outperformance over international stocks was a notably consistent trend.
Small repositioning adjustments occurred twice during the quarter, first by increasing domestic large-cap value exposure in late October, and later by trimming some defensive, quality, and international developed positioning in favor of core domestic large- and mid-cap exposure. By the end of the quarter, the Protect equity allocation featured a relatively heavy domestic overweight, neutral positioning across growth and value styles, and a smaller-than-usual allocation to defensive sectors.
The fixed income component of the Protect portfolios mirrored that in the Gain portfolios during the quarter. This positioning was relatively steady throughout the quarter and featured a sizable overweight to corporate credit, especially high-yield, reflecting the team’s positive view on corporate fundamentals and the domestic economy. Duration positioning varied during the quarter, beginning shorter than the benchmark due to the portfolio’s credit tilts and other allocations to diversifying market segments such as currency-hedged international bonds and TIPS. As interest rates rose midway through the quarter, these diversifiers were a source of funds for an increase in the portfolio’s duration to roughly in line with broad core bonds. This move was accomplished by additions to existing allocations to long-term U.S. Treasuries and investment-grade corporate credit.
Protect Equity Contributors and Detractors
The biggest contributors to the Protect equity portfolio performance in the fourth quarter were domestic large-cap growth, domestic large-cap quality, and the domestic energy sector. Domestic large-cap value, emerging markets, and international developed markets contributed the least to performance last quarter.
Protect Fixed-Income Contributors and Detractors
In the fixed-income portfolio, short-term investment grade corporate credit, currency-hedged international bonds, and broad high-yield corporate credit contributed the most to performance last quarter. Two separate active core bond holdings, one multi-sector and the other focused exclusively on mortgages, as well as long-term U.S. Treasuries, contributed the least to performance in the fourth 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
Markets took a pause in the fourth quarter after their strong run as global equities posted modest losses. Trends within equity markets were choppy but largely kept with those in place for 2024 as a whole; U.S. beat internationals, growth beat value, and large beat small. In fixed income markets, the sharp rise in U.S. Treasury yields, despite continued cuts from the Federal Reserve, led to total return losses across almost all segments of the market. Horizon’s Spend models maintained their full exposure to their underlying growth allocations as these modest losses across equities and fixed income did not breach any de-risking levels of the Risk Assist algorithm. Additionally, some of the Spend models ratcheted during the fourth quarter. Per Horizon’s standard rebalance process, the spending reserves were not replenished after the quarter ended due to performance. All Spend models enter 2025 with 11 quarters of spend.
The core design elements of Horizon’s Spend portfolios are a tilt toward risk-managed equity exposure, an underweight to core fixed income, and a liquidity reserve calibrated to the desired spending rate. For the fifth quarter in a row, these portfolio tilts were a tailwind to overall Spend model performance. While the narrow market environment was a headwind to the more diversified equity allocation, the model’s tilts toward high-yield credit within the fixed income portfolio were accretive. 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 Spend equity portfolio last quarter were broad domestic large-cap exposures to both core and growth. Allocations to international stocks, both emerging and developed markets, contributed the least to performance in the fourth quarter.
In the fixed-income portfolio of the Spend models, exposure to high-yield corporate credit contributed the most to performance. Core investment grade bonds contributed the least to performance in the fourth quarter.
