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Tactical Allocation Update | Sean Barron

The trust department (following Northern Trust’s recommendation) recently updated our strategic asset allocation (for more detail on our asset management process, click here). The world has become more global and fiscal policies play a much larger role than they ever have in the past. Risk assets (global developed equity, emerging markets, real estate, natural resources, high yield) have become highly correlated and we expect this trend to continue. This has led to a financial markets responding positively and driving up the value of risk assets or negatively, with a corresponding rise in risk control assets. This new dynamic has led to slight changes in our allocation targets. The main change has been a higher long-term weighting to fixed income as a risk control asset and re-categorizing gold as a currency substitute.

From a short term, tactical perspective, macro uncertainty surrounding U.S. fiscal policy and continuing Euro imbalances will remain high through 2013 and high volatility in markets will most likely persist. On the other hand, there is slow but positive growth in the U.S., increasing momentum of emerging market economies, and non-existent inflation pressures in the developed world. These should lead to strengthening corporate balance sheets.

In this environment, we continue to favor risk based assets. Emerging markets and U.S. equities are favored over European and Japanese stocks. We continue to have a negative tactical outlook on high grade fixed income given low absolute yields. Finally, most of the futures market remains in contango (future price above the spot price) and the collateral yield is low (because of low interest rates), therefore we are using a more equity based approach to commodity exposure where we are purchasing the owner of the commodity instead of a contract on the price of the commodity. We believe this one of the best inflation hedges available.

All of these changes are specific to the risk level of the client and their personal asset allocation target. None of this information should be construed as individual advice. Please call us at 907-0323 or email if you wish to discuss management of your account with our portfolio manager.

Sean Barron 

 

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