Q3 Commentary from Envestnet | PMC
By Michael Pajek
Multi-Asset Research Analyst, Envestnet | PMC
The second quarter of 2023 was an impressive one, driven by high-flying U.S. mega-cap technology names leading the way and most asset classes witnessing positive performance. Yet there continues to be a significant level of market uncertainty as the yield curve still is deeply inverted and leading economic indicators are showing signs of cracking. Challenging as this may seem, this current environment serves as a backdrop for how professionally managed portfolios can help advisors and their clients navigate the challenging markets.
The effectiveness of dynamic and tactical asset allocation has been challenged by academia and others who believe that you can’t consistently outperform the market. However, because asset price correlations have varied over time, there are periods when a more dynamic or tactical asset allocation approach might be more effective in accounting for the changing correlations and managing through market volatility. Through our analysis, we have found that, on average, managers with a seasoned investment team and a sound, repeatable investment process may adapt to the changing market environments. This type of approach can help investors navigate volatility and the changing market leadership throughout different market cycles.
Year-to-date as of June 30, 2023, the average Rep as a PM moderate portfolio on the Envestnet platform returned 7.76%, trailing the peer group comprised of dynamic and tactical Approved – Qualitative Fund Strategists portfolios, which returned 9.95% and 9.31%, respectively, over the same time.
For the most part, these Fund Strategist managers were adept at capturing the market’s rotation back to domestic equities and growth. Many successful managers also benefited by reducing their commodities and alternative exposures at the beginning of 2023 after capturing the outsized gains from commodities and the uncorrelated performance of alternatives in 2022. Furthermore, some managers were able to reduce equity allocations to limit drawdowns when the stock market showed weakness during 2022 and the banking crisis in the first quarter of 2023. In contrast, when they expected continued market gains after the banking crisis in March, certain managers were able to increase their equity exposures above their benchmarks to capture the rebound in the second quarter. While these more active approaches can experience specific periods of underperformance, the long-term benefits of professionally managed portfolio solutions and parsing out the emotions from investing can outweigh short periods of underperformance.
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