Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute, sees most markets ending the year “about where they are right now.”
According to McMillion, the markets have already made the majority of their gains for the year.
“Within, say, the S&P 500, we were expecting mid- to lower single-digit returns, and we’ve already achieved that,” she told ThinkAdvisor.
“There’s not a lot of opportunity from point to point if it’s a straight line, but we don’t expect it to be a straight line,” McMillion said. “We think there’s going to be volatility along the way, maybe points where those markets are above our targets or below our targets. So we’ll have some opportunities to make some tactical adjustments along the way.”
Investors will have opportunities to do some rebalancing, she added.
During a visit at ThinkAdvisor’s New York office, McMillion discussed these opportunities and a new report –The Agile Investor – from the Wells Fargo Investment Institute.
Being an agile investor – “ready to make portfolio adjustments as opportunities arise” – may help investors achieve their long-term investment goals, according to the report.
Through the rest of the year, McMillion expects more volatility then what’s been seen in the first four months. This is also the first time McMillion and the Wells Fargo Investment Institute team have predicted something like this.
“We haven’t anticipated a period where virtually all of our returns were achieved in the first few months of the year,” she told ThinkAdvisor. “But if we close the books on the markets today, I think we’d still have a pretty good year because most asset classes are up. And that’s not a condition we expect to persist, that all the asset classes – with the exception of commodities – are higher.”
In the report McMillion and the team make suggestions for opportunities in today’s environment and investments that may reward agile investors.
“We suggest that equity investors remain broadly and globally diversified, regularly rebalance holdings to target allocations, and exploit periods of volatility to add high-quality stocks to a diversified portfolio.”
The report recommends that investors overweight the industrials, consumer discretionary, financials and health care sectors. And, the Wells Fargo Investment Institute team says it is underweight the energy, utilities and consumer staples sectors.
Looking ahead, Wells Fargo expects opportunities to emerge in industries that should benefit from trends such as globalization, growing and aging populations, and alternative energy.
Wells Fargo favors the intermediate portion of the U.S. yield curve and recommends moving up in credit quality.
“We are underweight developed market as yields remain below those of U.S. Treasury securities, and further U.S. dollar appreciation would negatively affect performance,” the report says.
According to the report, longer-term fundamentals favor, yet there is the potential for wide swings in the currency’s value as markets adjust to normalizing interest rates and inflation.
“We believe investors also should consider currency factors and oil prices when adding international bond exposure,” the report says.
As interest rates continue to rise, active strategies should be poised to better capture market dislocations and potentially mitigate downside risks.
Real estate investment trusts should benefit from their relatively attractive yields and potential for growth as the recovery continues to support demand for real estate, according to the report.
“We expect commodity prices to trade within a fairly narrow range of values in the coming year, offering tactical opportunities in this asset class,” the report says.
“Given alternative investments’ potential to enhance both returns and diversification while also protecting against the downside, we believe that financially sophisticated, qualified investors seeking to build more agile portfolios will increasingly look to alternative investments, especially as the economic and credit cycles mature,” the report states.
In this environment, the Wells Fargo Investment Institute team prefers strategies that have low net exposure profiles, such as “equity hedge” and “relative value.”
Strategies like these allow investors to participate in global equity, credit and fixed income markets without having to take directional exposure, according to the report.
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