Second quarter asset allocation positioning

Columbia Management, Investment Team | May 14, 2013

  • Within equities, we maintained an overweight to U.S. stocks, with emphasis on large-cap stocks and high-quality, dividend-paying equities.
  • For fixed income, we continue to prefer investment grade corporate bonds.
  • We believe low correlation absolute return strategies should continue to be a part of diversified portfolios.

The Columbia Management Asset Allocation Team meets to review global economic investment conditions and markets. Team members discuss and evaluate the relative attractiveness of equities, fixed-income and alternative investments within various sectors, investment styles, markets and countries. The consensus opinion of the team is published quarterly in the Investment Strategy Outlook. Below is a summary of the team’s current positioning.

Neutral on stocks

Within U.S. capital markets, we remain overweight large-cap stocks particularly of high-quality, dividend-paying large companies. We maintain an underweight in the small- and mid-cap segments of the domestic market. We prefer U.S. stocks over international stocks, and although the financial stresses in Europe have abated somewhat, we continue to underweight European stocks. Growth prospects in the region are improving slowly but will trail the U.S. Equity valuations are somewhat attractive in Europe overall but the region remains vulnerable to financial crises. In a low growth environment, we continue to favor high-yielding dividend-paying, defensive stocks with some potential for capital gains. We also continue to advocate caution in portfolio allocations and emphasize risk diversification.

Search for yield remains strong in fixed income

We made no material changes to our fixed-income positioning during the first quarter of 2013. In general, our portfolios remain overweight in investment-grade and high-yield corporate bonds, although in some portfolios we have reduced exposure to traditional bond issues and added to senior secured bank loans. We modestly reduced exposure to emerging market debt, although we remain overweight in the sector. We remain underweight in cash, TIPS and developed foreign market bonds and are mostly neutral with respect to securitized bonds.

Against a backdrop of slow growth and relatively low inflation, we believe the room for additional spread tightening is limited and expect returns for fixed-income spread sectors to be primarily driven by the absolute level of yields, which have compressed over the past few years. We do not believe government bonds offer attractive relative value. However, high-quality fixed-income sectors tend to outperform in economic downturns, and we believe they should account for a portion of assets in a well-diversified portfolio.

With a potential for volatility spikes, low correlation absolute return strategies should continue to be a part of diversified portfolios. In addition, select commodities and hybrid strategies with low correlation to equities can also add diversification benefits to the portfolios.

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Asset allocation and diversification does not ensure a profit or guarantee against a loss.

There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is more pronounced for longer-term securities.

Investments in small- and mid-capitalization companies involve greater risks and volatility than investments in larger, more established companies.