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Strategic Asset Balanced

2-29-24

2-29-24

12-31-23

12-31-23

12-31-22

12-31-22

Commentary

2023 was a year of transitions for our moderate Strategic Asset Balanced Account (SAB). Following 2022, the worst year in the history of the bond market, 2023 was going to be a challenge given the Fed's aggressive interest rate policy that began in March 2022 to fight high inflation and end its Covid-19 emergency Quantitative Easing policy. In anticipation of ultimately winning that battle, particularly with steady signs of progress of reducing the rate of inflation towards the Fed's 2% target, we started reducing our rising interest rate defense in Strategic Asset Balanced in December 2022 and continued into 2023Bond exposure in Strategic Asset Balanced is strategically targeted at 40% of the portfolio and provides a ballast against stock volatility associated with the remaining 60% in Stocks. In difficult market environments Bonds traditionally provide defense against stock downside risk. 

By the end of 2023, headline CPI inflation declined to 3.4% from its high of 9.1% in March of 2022. The Fed raised policy interest rates four times in 2023 for a total of 1.00%, with the last 0.25% hike in July. The bond market was negative for most of 2023; however, the Fed pivoted in early November following its FOMC meeting and acknowledged it was done with raising interest rates as inflation was trending towards its 2% goal. That messaging put a charge into the bond and stock market, and was the catalyst for a huge rally in November and December. The bond market finished up 5.5% for 2023, as measured by the Bloomberg Aggregate Bond index. 

This tactical shift in our Bond strategy has been a process we call a Duration Twist (a term borrowed from the Fed itself), gradually reducing our relative 40% Short-Term Bond allocation in relative 5% monthly increments and adding it to our Intermediate-Term allocation to pursue a Neutral Bond Allocation in Strategic Asset Balanced for a normalized interest rate environment. We completed Phase 1 of the Duration Twist process in April, bringing our relative Short-Term Bond allocation to 15% and raising Intermediate-Term Bond to 85%. Phase 2 and progress toward the Neutral Bond Allocation, will consist of lowering our relative Short-Term Bond allocation to 10% and further diversifying the portfolio. While the yield curve remains inverted, with short-term rates higher than longer-term and a leading indicator of a recession, we anticipate a return to a normal, positively sloped yield curve over time (short-term rates lower than longer-term) and we are prepping Strategic Asset Balanced. The disruptive 2022 bond market created attractive total return expectations for bonds going forward and we want to be positioned to benefit.

The Stock side of the Strategic Asset Balanced portfolio provided strong gains in 2023 and a welcomed rebound from a rough 2022. Stock markets around the globe began recalibrating the recession risk that prevailed in 2022 early in 2023 as those risks were reduced dramatically. After a very strong start to the year through July, stocks ran into a rough patch in the summer as the "higher for longer" narrative for Fed policy gripped the markets. However, when the Fed pivoted in early November, as noted above, stocks surged in November and December to cap a very good year for stocks overall. Not only did the widely forecasted recession never come, the US economy outperformed expectations all year and GDP hit all-time highs. Those gains extended overseas as well. We have been slowly moving towards a Neutral International allocation in our Strategic Asset Balanced Account, including a 1% bump in May 2023, since we started raising International exposure in 2017. We are now just one small move away from Neutral International. International markets remain very attractive from a valuation perspective.

The second transition in 2023, was the historic process of converting Strategic Asset Balanced from mutual funds to Exchange Traded Funds (ETFs) along with our other WAM Accounts, which began in November 2022. It was a scheduled monthly process that went very smoothly, and we completed the transition at the end of June 2023. A direct benefit of our conversion to 100% ETFs is a big reduction in investment expenses. Low investment expenses have always been a priority in our WAM accounts, giving our clients access to Institutional and Advisor mutual fund shares. ETFs will further our low-expense mandate and as a result, we've put a weighted expense cap at 0.25% for our WAM accounts. This means a 31% weighted average savings in investment expenses for our clients! At year-end 2023, our Strategic Asset Balanced Model Weighted Expense Ratio was 0.13%, which is a 63% savings from the previous mutual fund portfolio! The Strategic Asset Balanced Weighted Expense Ratio will fluctuate with allocation changes over time with a max cap of 0.25%.

With our conversion to ETFs, we were still able to maintain the integrity of our Strategic Asset Balanced account by providing diversification, Multi-Manager access, and also Active and Passive (Index) management. ETFs are the future of investing for Registered Investment Advisors (RIAs) like NSI and we are proud to be on the cutting-edge for our Managed Account Clients. 

The third transition in 2023, was the merger of TD Ameritrade and Charles Schwab, which was completed September 5, 2023. Charles Schwab is now your Custodian and we will continue to manage your Strategic Asset Balanced account as usual.  

To begin 2024, we continued our transition to a Neutral Bond Allocation in Strategic Asset Balanced by reducing our Short-Term Bond exposure an additional 1% by further reducing our iShares 0-5 Year TIPS ETF position, and adding it to Core-Plus Intermediate-Term Capital Group Core Plus Income ETF and Fidelity Total Bond ETF

Volatility remains in the forecast for interest rates and bond; however, a soft-landing for the economy in 2024 is now the prevailing narrative and we remain cautiously optimistic for 2024. US market indexes like the Dow, S&P 500, and Nasdaq have hit new all-time highs in 2024, as well as the MSCI World All-Cap index. The Fed is forecasting 3 interest rate cuts by the end of 2024, and while the market was expecting more at the end of 2023 it has modified its expectations more inline with the Fed. We will continue to prudently manage those risks with a long-term focus on conservative growth and total return for our Strategic Asset Balanced Account

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Investor Note


ETF (Exchange Traded Fund) investment strategies, which include investing in specific sectors, foreign securities (both developed and developing markets), high yield securities, or small and medium sized securities may increase the risk and volatility of the ETFs. Changes in interest rates may affect the performance of fixed income (bond) ETFs; if rates increase, bond values decrease and vice versa. Investors should consider the investment objectives, risks, and charges and expenses of the ETF carefully before investing.

The ETF prospectus (and summary prospectus, if available) contains this and other information. Please read carefully before investing. An ETF prospectus can be obtained by calling your Nelson Rep at 800-345-7593 or the ETF company directly.

Publisher: Nelson Securities, Inc.

Managed Account Insight is published semi-annually by Nelson Securities, Inc., a Registered Investment Advisor. All rights reserved. It is a violation of U.S. copyright laws to duplicate or reproduce any commentary, charts, allocations, or portion of this publication without the written permission of the publisher.

Information and historical market data contained within this newsletter are taken from sources we believe to be reliable but, we can not guarantee its accuracy. Nelson Securities, Inc., or the publisher, will not be held responsible for actions taken based wholly or partially on information contained herein. Recommendations are of a time-sensitive nature and not a substitute for a comprehensive plan for investing. Each investor must consider suitability with regard to risk prior to investing.