Our Investment Strategy Team met this week and affirmed the weightings of our model asset allocation strategies.1 As depicted in Figure 1, we are overweighted, relative to our benchmarks, in equities. We are underweighted in fixed income securities—nominal bonds and cash equivalents combined. We are especially light on core bonds, such as U.S. Treasuries and investment-grade corporate and municipal debt. We continue to allocate to non-core bonds, such as speculative-grade floating-rate notes, and are overweighted in those assets by definition, because they are not included in our strategies' benchmarks. We retain our half-of-benchmark stakes—5% versus 10% in all strategies—in real assets, which include inflation-linked bonds and commodity- and real estate-related securities.
Our model asset allocation strategies' broad asset class weightings relative to our benchmarks' allocations, in percentage points
The length of the bars representing stocks and nominal bonds and cash equivalents reflects the varying amounts by which our model strategies are overweighted and underweighted, respectively, relative to their benchmarks. We maintain a variety of model strategies, to address the needs of aggressive to conservative investors. The diamond representing inflation hedges— inflation-linked bonds and commodity- and real estate-related securities—reflects the identical, 5- percentage-point underweight to that asset class across all models.
Why we are overweighted in stocks
The big picture
The big picture is that we have been migrating toward more equity-centric portfolios, in keeping with our belief that the recovery would continue and because we recognized that bonds became riskier as their yields reached historic lows. Twelve months ago, the stock allocations of our model strategies either matched our benchmark allocations or were a percentage point or two higher. We were more overweighted in fixed income securities and had the same half-of-benchmark allocations to inflation hedges. Our migration over the last 12 months toward greater investment risk and opportunity—really, two sides of the same coin—coincided with a sharp rally in stock prices and a decline in bond prices, as interest rates rose. Our allocation to non-core bonds, especially speculative-grade floating-rate notes, has been intended to limit the price declines of diversified fixed income portfolios, relative to those fully invested in core bonds, as interest rates rose, as they have done since mid-2012.
As ever, we welcome your questions, and we thank you for investing with Wilmington Trust.
1 The construction of our model asset allocation strategies generally reflects a combination of asset-class valuations and momentum, overlaid by the judgment of our Investment Strategy Team. The extent to which—and speed with which—strategy-following client accounts reflect the Investment Strategy Team's models may vary, reflecting client-specific circumstances such as tax sensitivity, liquidity, and investment horizon.
Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Investment management and fiduciary services are provided by Wilmington Trust Company, operated in Delaware only, and Wilmington Trust, N.A., a national bank. Loans, retail and business deposits, and other personal and business banking services and products are offered by Manufacturers and Traders Trust Company (M&T Bank), member FDIC. Wilmington Trust Investment Advisers, Inc., a subsidiary of M&T Bank, is a SEC-registered investment adviser providing investment management services to Wilmington Trust and M&T affiliates and clients.
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