Broker Check

Total Return

<p class="">4-30-23





2022 was full of challenges for the global financial markets in both stocks and bonds. It included a bear market in stocks and the worst year in the history of the bond market, with the Bloomberg Aggregate Bond Index falling 13%, as the Fed raised policy rates seven times totaling 4.25%, which presented challenges even for the conservative-growth Total Return Account. Total Return seeks to maintain an allocation of 40% Stocks and 60% Bonds over time, while up to 15% can be invested in Alternatives. Bonds typically provide a ballast against stock volatility; however, 2022 was an anomaly that saw extreme volatility in both.  The catalyst of the volatility was when the Fed started aggressively raising interest rates last March to fight high inflation and end its Covid-19 emergency Quantitative Easing policy. On the bond side of the Total Return portfolio, we were defensively positioned against rising interest rates, with 40% in Short-Term Bonds (relative to Bonds), which helped to a nice degree. It was a generational shift in fixed income overall, as interest rates rose sharply across the yield curve.

Along with ongoing portfolio management, we are in the process of converting Total Return from mutual funds to Exchange Traded Funds (ETFs) along with our other WAM Accounts, as noted and detailed in Important News. This is a result of the Charles Schwab and TD Ameritrade merger which will be completed 9-5-23.  We are excited about ETFs' benefits of lower expenses, no trading costs, and better tax-efficiency, which are all in the Best Interest of our ClientsThe ETF conversion began in October 2022 with a share-class exchange and non-taxable conversion of Vanguard Total Stock Market Admiral shares to ETF shares (fractional shares were sold and a taxable event in taxable accounts). During the conversion, we are replacing some longstanding positions and partnerships (PIMCO, DoubleLine, Lord Abbett, MFS, Goldman Sachs, Carillon, Victory, and T. Rowe Price) with ETFs that have the same or similar investment objectives, including Dimensional Fund Advisors (DFA), Fidelity, SSGA-SPDR, iShares, JPMorgan, and Schwab and strengthening existing ones like Capital Group and Vanguard. As of the end of April, we have converted Total Return to 62% ETFs and the ETF conversion will be completed by 6-30-23

While the 2022 downturn was very rough for both stock and bond investors, it did create attractive forward return expectations for stocks, with more attractive valuations, and also for bonds, with a foundation of higher yields, that were less attractive ending 2021. In December 2022, we began a monthly process of moving towards a Neutral Bond Allocation in Total Return for an eventual normalized interest rate environment. We call this process a Duration Twist, gradually reducing our Short-Term allocation in 5% monthly increments (relative to Bonds) and adding it to our Intermediate-Term allocation in Fidelity Total Bond ETF, SPDR Portfolio Aggregate Bond ETF, and Vanguard Intermediate-Term Bond ETF. We have incorporated our Duration Twist with our conversion to ETFs, accomplishing two objectives simultaneously.  We completed Phase 1 of the Duration Twist process in April, bringing our Short-Term Bond allocation to 15% and raising Intermediate-Term Bond to 85% (relative to Bonds). While the yield curve is still 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 Total Return in advance.

While largely absent last year and a rare occurrence, we anticipate a return of the virtues of diversification and the traditional risk relationship between stocks and bonds, with bonds again providing a ballast against stock risk and volatility. The Fed has been aggressively raising interest rates to combat high inflation, including two 0.25% hikes in Q1 and nine times overall since last March totaling 4.75% (ending April). We are close to the end of that process, as inflation has been steadily trending down since last June, though at 5.0% (March) it has remained stubbornly above the Fed's 2% target ending.

Given the more attractive valuations in stocks created in 2022, we began scaling out of our defensive Alternatives Allocation in April and reallocating back to stocks. We added back to US-based Vanguard Total Stock Market ETF thus far, though the last 1% will go to our International allocation as we move closer to a neutral International position given the attractive long-term valuations overseas. 

[Update]: We expected another 0.25% at the early May Fed meeting, and that is what the Fed delivered with its 10th straight rate hike totaling 5.00%. While a pause is now expected, as recession risks have risen, the market is pricing in one or more interest rate cuts by year-end; however, the Fed is not projecting a rate cut until 2024.  

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 at least a 25% savings in investment expenses for our clients! Our projected Total Return Model Weighted Expense Ratio is 0.15%, which is a 56% savings! The Total Return Weighted Expense Ratio will fluctuate with allocation changes over time with a max cap of 0.25%.

Volatility remains in the forecast for the market, including interest rates and bonds, as recession risks remain elevated. We will continue to prudently manage those risks with a long-term focus on conservative growth and income with below-market risk for our Total Return Account

All Content is CLIENT APPROVED. Most brochures, guides, and presentations, are in PDF (Adobe Acrobat Reader), Microsoft PowerPoint, or video formats, which may require downloading the applicable program or player to view.

Investor Note

Mutual Fund and 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 funds/sub-accounts. Changes in interest rates may affect the performance of fixed income (bond) funds; if rates increase, bond values decrease and vice versa. Investors should consider the investment objectives, risks, and charges and expenses of the Mutual Fund and/or Variable Annuity carefully before investing.

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