Portfolio Commentary: Multi-Asset Income
Narrator: This is Lord Abbett's Portfolio Commentary.
Mike Weldon: This is Mike Weldon, Partner and Director of Marketing at Lord Abbett. Joining me today is Steve Lipper, Investment Strategist. Steve, welcome, thanks for being here today. Why don't we start with an overview of how you and your team go about adapting this portfolio to the current market conditions?
Steve Lipper: Yes, we have three consistent inputs that we look at, Mike. One is central bank behavior, both in and outside the U.S., really seeking to anticipate what the next moves might be. The second is relative value. How are different asset classes selling compared to where they've been in history? And the third thing is around economic outlook, really what's the probability of a recession in each of the major economies.
Mike Weldon: So Steve, this portfolio is majority fixed income, so let's start there. How are you allocated within fixed income?
Steve Lipper: Right, exactly, following that process about, let's start with the central bank and the outlook there. You know, they have been pretty clear and Janet Yellen's recent testimony has talked about inflation and really the unacceptably low level of inflation, she wants to see inflation higher. We think the consequence of that is short rates are going to stay lower for longer than many expect, however, gradually they will go up. We think that gradually inflation will go up as well.
So our outlook is sort of transitional, the Federal Reserve is doing tapering, so we're getting rid of quantitative easing, but we still have short rates. So they're sort of in-between, supportive but not as supportive as they have been. Inflation we think increases, but doesn't get to runaway inflation. And interest rates get somewhat higher, but don't leap higher. Where does this have us? Well, we want to protect the portfolio from increases in inflation, we've taken some steps there. We want to protect the portfolio, have less in interest rate sensitive. But because we see an absence of a recession, we think credit based fixed income is where you want to be. And most of our fixed income is in that area.
Mike Weldon: Okay, let's turn our attention to the equity portion of the portfolio. What's happening there?
Steve Lipper: Yes, I mean, though the Fed, as we said, is being less accommodative than they have, they're still generally being supportive. We don't see a recession on the horizon. We look at relative value. Our view is we're still on the cheap side of fair value as equities, the broad U.S. equity asset classes have continued to see advances this year. So that says to us, stocks will continue to outperform fixed income and we're over-weighted there.
Now what's changed for us, is that we always have some amount in U.S. equities and some amount in international equities. And then some amount that we rotate back and forth based on what we think of relative value. A year ago, all of that tactical amount that we rotate, was in the U.S. And today, all of that amount is international equity.
Mike Weldon: So what has changed over the past year that you and the team have seen fit to allocate more outside the U.S.?
Steve Lipper: Yes, two changes really. One around central bank behavior, one on relative value. So on central bank behavior, we think that the ECB's announcement on June 5th was meaningful. They took a series of steps to address what has been persistently low inflation and low economic growth inside the Eurozone. And we think it's likely that that will be supportive, that they've reduced the risk of both recession and deflation. And in that environment, we think that equities can progress. Remember, equities are forward looking and so they will tend to do better before the economy.
The second is relative value. It's just really a fact that the U.S. had a great year last year in terms of U.S. equities. And the U.S. is closer to fair value in our view than internationals, so we take the opportunity to still be in equities, but to rotate over the course of last year, some amount from domestic to international.
Mike Weldon: Okay, thanks very much, Steve. This has been Lord Abbett's Portfolio Commentary. Thanks for watching.
Narrator: For more information on this topic, or to access other videos, audio files, articles, or commentary, please explore Lordabbett.com.
A Note about Risk: The Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks; the Fund is subject to the particular risks of an underlying fund in proportion to a respective investment. Because the Fund will be more heavily invested in fixed-income funds than equity funds, it will be more affected by interest rate risk, credit risk, liquidity risk, and other risks associated with debt securities. These risks are greater for high yield debt securities. The underlying funds' equity investments are subject to greater risk and market volatility than fixed income investments. Foreign investing, especially in developing countries, carries additional risks, such as currency and market volatility, and political and social instability. The Fund is subject to the risks associated with derivatives, which may be different from and greater than the risks associated with investing directly in securities and other investments. These factors can affect Fund performance.
No investing strategy can overcome all market volatility or guarantee future results.
Diversification does not guarantee a profit or protect against loss in declining markets.
Markets may not perform in a similar manner under similar conditions in the future.
The portfolio is actively managed and may change significantly over time.
All references to "QE" refer to Quantitative Easing. Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.
European Central Bank "ECB"
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The views and opinions expressed by the Lord Abbett speaker are those of the speaker as of the date of the broadcast, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Neither Lord Abbett nor the Lord Abbett speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.
The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Please consult your investment professional for additional information concerning your specific situation.
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