Portfolio construction and Model building
Portfolio construction is an important part of investing.
Assessing a client’s risk tolerance and performing a needs analysis through a financial plan helps decide an appropriate risk level and portfolio for the client. Furthermore, retirement accounts and non-retirement accounts may call for different allocation and investment styles. In addition, some clients need to focus on growth and others on income. Each approach requires a different portfolio. No single portfolio makes sense for everyone.
Customizing portfolios designed to meet our clients’ needs is something that we take seriously. We combine our research, the information provided by companies with which we have sales arrangements and our understanding of market conditions to craft responsive portfolios that serve the needs of our clients in times of market change. We are constantly attempting to take advantage of market opportunities and as a result, help provide the best risk adjusted return possible. Meaning, given a client’s risk tolerance, how much of the market’s potential returns may be captured while trying to minimize losses?
In my portfolios, I make macro decisions on the US economy, the US stock market, the Global markets and the investments that I should use. I actively choose what markets, what investments and potentially specific sectors to invest in without a requirement to invest in any or all. This differs from a passive style, target date or indexed investment, where the client is invested in many different types of investments based on more general selection criterion – an allocation of stocks and bonds simply based on their age, for example. I believe that 2018 was the start of a period where different types of investments haven’t gone in the same direction and that the active investing style I practice can make a difference over passive investing.
For instance, an advisor can choose Growth vs Value, US investments vs International, Short duration bonds vs long duration bonds, and many more options that can potentially make a big difference in clients yearly returns if the advisor is correct about the economic and market conditions and how they will play out in the future. See the following slides and the differences in returns in different investment types.
Source: Ivy Investments and Morningstar Direct. Assumes the reinvestment of all income, but does not consider taxes or transaction costs. Large-Cap Stocks represented by the Russell 1000 Index; Small-Cap Stocks by the Russell 2000 Index; Foreign Stocks by MSCI EAFE Index; Long-Term Corporate Bonds by Bloomberg Barclays Global Aggregate Bond Index; High Yield Bonds by Bank of America-Merrill Lynch U.S. High Yield Master II Index; Treasury Bills by Bloomberg Barclays U.S. Treasury Bill 1-3 Mo Index. Treasury bills are guaranteed by the U.S. government and offer a fixed-rate of return. Stocks and bonds are not guaranteed, and stocks have traditionally been more volatile than other asset classes. Additional risks are associated with an investment in small-cap stocks and foreign stocks. An investment cannot be made directly into an index. Past performance is no guarantee of future results.
Source: Bloomberg, FactSet, as of 12/31/18. International equities are represented by the MSCI Europe, Australasia, and Far East (EAFE) Index, which tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. U.S. equities are represented by the S&P 500 Index, which tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. Past performance does not guarantee future results.
Request a prospectus or summary prospectus from your financial advisor, by visiting jhinvestments.com, or by calling us at 800-225-5291. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should consider carefully before investing.
The opinions expressed are those of the contributors as of 12/31/18 and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. John Hancock Funds, LLC, John Hancock Advisers, LLC, and their affiliates, employees, and clients may hold or trade the securities mentioned in this commentary. Past performance does not guarantee future results.
Asset manager views are compiled throughout the preceding calendar quarter through in-person discussions, reviewed research, and on-site visits. These inputs are complemented by third-party research collected during the calendar quarter. Our views reflect John Hancock Investments’ proprietary weighting of these inputs.
A bearish reading indicates the potential for an asset to underperform its class or subclass on a risk-adjusted basis. A bullish reading indicates the potential for an asset to outperform its class or subclass on a risk-adjusted basis. A neutral reading indicates the potential for performance in line with the asset’s historical averages.
Stocks and bonds can decline due to adverse issuer, market, regulatory, or economic developments; foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability; value stocks may decline in price; growth stocks may be more susceptible to earnings disappointments; the securities of small companies are subject to higher volatility than those of larger, more established companies; and high-yield bonds are subject to additional risks, such as increased risk of default. Fixed-income investments are subject to interest-rate and credit risk; their value will normally decline as interest rates rise or if an issuer is unable or unwilling to make principal or interest payments. Liquidity—the extent to which a security may be sold or a derivative position closed without negatively affecting its market value, if at all—may be impaired by reduced trading volume, heightened volatility, rising interest rates, and other market conditions. Hedging and other strategic transactions may increase volatility and result in losses if not successful. Currency transactions are affected by fluctuations in exchange rates. This material is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise. John Hancock Investments and its representatives and affiliates may receive compensation derived from the sale of and/or from any investment made in its products and services.
Past performance is not a reliable indicator of future performance
*Valuation adjustment represents the total return after dividends, real earnings growth, and inflation have been subtracted out. It may represent P/E changes, share count reduction, and other factors.
Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Russell. See Additional Disclosures on the last page.
© 2019 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. Used with permission.
Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell.
The Russell 1000® Growth Index is an index of U.S. common stocks designed to track the performance of the largest and most growth-oriented companies in the Russell 3000® Index. Russell 1000 is a registered service mark of Frank Russell Company.
The Russell 1000® Value Index is an index of U.S. common stocks designed to track the performance of the largest and most value-oriented companies in the Russell 3000® Index.
Russell 1000 is a registered service mark of Frank Russell Company.
The Russell 3000® Index is composed of the 3,000 largest U.S. companies by market capitalization, representing approximately 98% of the U.S. equity market. Russell 3000 is a registered service mark of Frank Russell Company.
Investing involves risk including the possible loss of principal.
