Good afternoon. Welcome to the Orion portfolio solution portfolio recipe webinar for the month of May of 2023. I'm Rusty Venneman, the Chief Investment Officer for Orion. And this month our portfolio recipe is balancing defense and offense portfolio Recipe treading carefully in 2023. Now again, the purpose of this webinar is really like all the content the investment strategies team puts out. We're really trying to help advisors put together portfolios using different strategies on the platform. You can reach out to us. You can see our contact information. In the upper right hand corner is our e-mail address OPS research at orion.com. If you have any questions about strategies or the markets, please let us know Now. As for the motivation for this portfolio, recipe number one, we have entered a new era characterized by structurally higher rates. And even though the S&P 500 may be expensive by historical measures, there are fresh discounts across global asset classes. In addition, we will be able to review the insights gathered from thousands of advisor run model portfolios and ensuring that can help advisors understand how to create balanced portfolios. Now our speaker today is Adam Petz. He is the Global Head of Portfolio Construction and Strategy at Janice Henderson. He's been there for six years. Before that, he was at Goldman Sachs for nearly nine years. But before I hand the ball off to Adam, couple housekeeping notes. First of all, we have plenty of time for questions. So you'll see the question box directly below the presentation screen. In addition, we have a lot of resources including today's slide deck. You'll see that in the lower left hand corner. Also there should be a button down below where if you want to review Passport for the rest please you can please do so. So with all that said, again answer ask a lot of questions. I'm going to hand the ball off to Adam. He has a lot of great slides of review today. Adam, welcome to the webinar. All right. Thanks, Rusty. Great to be here. Thanks to everybody in the audience for joining. So I'll jump right into things. But Rusty and I will be keeping an eye on the Q&A. So I'll be happy to break it up with questions as I go. So please lobby any questions that come to mind as I'm working through these slides. So I'll just start at the top that our general view here is an economic slowdown. I think unequivocally that's our view. You can just look at your typical slew of economic indicators whether it's credit tightening, the labor market softening or even inflation coming down which is sort of good for the economy, but that's sort of a result of an economic slowdown at the same time. So with that backdrop also say that we're actually a little concerned that with markets being a forward-looking mechanism that maybe investors are a little too obsessed with that supposed recession and the bear market risk that goes along with it. And maybe investors are a little too fixated on the Fed pivot. So maybe the most important pivot is actually going to be the pivot in your portfolios from defense to offense. So in other words, with all those challenges I laid out for the global economy, they're so negative, but they're so well telegraphed and maybe priced in that we think investors might be looking for that pivot to offense sooner than they had imagined back at the beginning of this year. So on net, like I said unequivocally, we're in a slowdown kind of perspective and we're leaning towards defense in our model portfolios and that's basically consensus, nothing too controversial there. But we're also focused on that right mix of defense and offense and not being onesided in our model portfolios. So a walkthrough the investment implications that we're seeing across equities and fixed income markets and then talk a bit with Rusty about putting all this together into a model portfolio, but. First, by ways of introduction, I want to lay out a little bit of where I'm coming from because I think our team brings a unique perspective to these problems and then we'll get into the fun stuff on markets and investments. So by ways of background, I'm in Janice Henderson's investments division. I'm under the broader multi asset solutions group. So what I'm doing is bringing to bear client resources that we organize in a couple different ways. So first on this slide, it's our multi asset investment expertise. So we've got a fully customizable range of asset allocation tools that drive billions and Janice Henderson, a UM and they're also used to drive individual bespoke clients portfolio solutions. So on the left, we have our strategic asset allocation that's fueled by our forward-looking capital market assumptions. In the middle are dynamic asset allocation, usually monthly or quarterly. That's the tactical asset allocation changes in the short term to complement the long term strategic asset allocation. And in the instrument selection or fund fulfillment, so I think important for you to know that this whole range from SAA to DAA done to fulfillment is customizable. Of course, we've got our own views here at Janice Henderson, but we can customize any and all of this to client views or constraints. So I think for this audience, main point is this usually means turnkey model portfolio solutions like we're mostly focused on today. For also what we call the OCIO or outsourced Chief Investment Officer service for advisors where we can build some of those bespoke model portfolios just as defined by you as an individual client. So like I said, it's not just about our views. We also have our portfolio construction and strategy team, which is our consultative client engagement arm of the broader solutions business. So whether it's portfolios that advisors manage themselves or portfolios that are onboarding. That might be a Janice Henderson other thirdparty model portfolio. We partner with clients through these Oneonone custom engagements field by our team of strategists and our awardwinning proprietary portfolio analysis tools. We offer our outlooks and publications based on those insights we have from all those consultations with you and your peers. And we've done that with over 15,000 models from about 5000 different advisors over the years. So like I said, it's not just about the Janice Henderson view, it's about what we're hearing from all of our clients every day. So on that note, let's go ahead and transition into the market commentary. Hey, Adam, I already have two questions for you on process. So first of all, on a couple slides before, you talked about sort of that dynamic approach to the models and dynamic asset allocation designed to identify shorter term drivers of asset performance. How do you define dynamic and how do you find shorter term and how does that translate into changes in the portfolio? Good question. So the first box, the blue box, I'll start with that, the strategic asset allocation or the SAA. So that's fueled by the capital market assumption. So think about that as kind of the long term somewhat neutral or secular view, call that 7 to 10 years as sort of a proxy for full market cycles. So say if we have a definition of a 6040 benchmark of Aqui and AG, then that's where we're going to look to our capital market assumptions and some of our structural views to how we can twist the longterm starting point of the portfolio to beat that benchmark in a longer run structurally is the goal of any alpha from the SAA. And then the DAA would be, depending on the portfolio situation, in some situations or might not be any shortterm tilts, it might just be an annual SAA update. But anything within the year that's the DAA, what most places might call the TAA or tactical asset allocation. So monthly or quarterly or semiannually, that's where we'll assess current market conditions, current valuations, the objectives and constraints of the portfolio and make those shorter term tilts to be in this environment a little more defensive on that, for example. How does that shape expectations for how often you'll see changes in the portfolio as expressed by a portfolio turnover or number of trades over the course of the year? It obviously sounds like it depends on market conditions, but is there still sort of a rule of thumb or frame of reference? The closest thing to a rule of thumb would be consider if you want to call those changes just rebalances. Broadly speaking, think about for a year is the general target, so that's quarterly. But we're mindful that there's a cost to that, whether it's an objective cost or just objectively for clients having to deal with changes, not to mention taxable consequences for certain portfolios. So we're conscious of those constraints. Those tilts aren't, aren't window dressing. If we have a meaningful view and things are meaningfully changing in the markets like they did in Q1 this year and now into Q2, you're going to see changes from us. But we're we're conscious of trying to minimize those. So I think baseline expectations would be for a year because you have Q1Q2Q3 then Q4 is a combination of the DAA views and also the year end SAA update as those capital market assumptions get refreshed. But I think great question baseline expectations call it four to six adding a couple extra there for wiggle room for kind of emergency in short quarter tilts if we think it's appropriate. Excellent, great. One more question on this page is risk management. So it's embedded at every step, but are there certain risk management objectives that are articulated that investors should be expecting like is relative risk, absolute risk, any sort of objectives we should know about that? The short answer is yes that so when you think about the individual pieces from the SAA, the risk management is against the benchmark parameters that we have from a client which which are the asset class kind of index benchmarks that we have. But also other objectives or constraints, whether it's it's taxes or it's income or other certain specific client situations that we're managing to within the SAA And then within the DAA, we're also looking at the interplay of all these different views and managing risk, thinking about the different pieces that we might be tilting in different directions. In other words, are are we fighting against a certain view from the SAA with the DAA in a structural sense, which that might affect the DAA tilts that we're taking, but those are going to be more. I don't want to say random, but the SAA is a more structural kind of long term change with annual updates. And the DAA is going to be by definition dynamic moving towards overweights or underweights across different line items, different quarters. So it's kind of different styles of risk management at each level. Great, Thank you. Let's talk US equities. OK, Let's go back to US equities. So the. Most confusing, complicated and and and biggest part of the market right now as far as most portfolios are are concerned. So in those client conversations that we've been having, I think what's coming to the surface for us this year is, is the concern among our clients, advisor clients that there's all of these strategist calls for the bear market in this low 3000 target on the S&P. And that's relatively easy. That's the science, that's the math of the market. But the art is the hard part for this group, which is is working to remind your clients why they should stay invested in the long run, which we all know is best even if we're facing a recession in the short run. So what I'm going to cover First off are a couple slides that I think have been particularly helpful for understanding why you'd want to stay invested during a recession. And then I'll talk about how to stay invested in a slowing environment by breaking down the nature of this potential bear market we might be facing. And then what that means in terms of mixing that defense and offense in your equity portfolio. So in that order, this first chart about why to stay invested even if you're feeling certain that we're facing a recession. So what this chart is showing is each line is the S&P, if you invested at the start of the last six recessions going back to 1980 and then the line stopped once you fully recovered from that recession drawdown, which was a bear market a lot of the time. And so why this is we're showing what's really interesting from a lot of people seeing the slide is that First off, you've actually recovered within eight months of most recession starts. But even more important for investors that darkest Before dawn moment, the bottom of the bear market actually usually happened within four months. So that's kind of convenient thing about where we are right now recording this late May of 2023. So that means even if you're certain that we're going to hit a recession, I think you're in good company if you're expecting a milder shorter recession. Line that up against the calendar, we're really talking about a market bottom in 2023 and then there's no telling how soon the market's going to see through that value of weakness into the recovery. And so consider 2024 the recovery period. And so on that basis, what we ran across all six of those historic recessions is if you are flat footed. Not that we advised this, but if you were flat footed, didn't make any change, just stayed invested from the start of the recession through the entire recession through the next 12 months of market recovery. After the recession, the SMP was up 15%, midcap index 24, small cap index about 29% cumulatively. So kind of blend that together to a kind of an all cap equity portfolio, call it a 20% cumulative return between now and the end of 2024. So that's not bad for just pinching your nose and staying invested through a somewhat terrifying situation, but you get 20% cumulative returns for 18 months of work, even lack thereof if you didn't do anything. That's one piece of of why we think it still makes sense to stay invested. Even if there's some certainty of a recession to certain end clients, that's something to talk them through. And then the next part is, is how to stay invested through a recession. So if we do have a bear market and the headlines really start accumulating, I think it's really important for end clients to understand what this bear market might look and feel like. And so the way we're gonna walk through that this anatomy of the potential of bear market is actually by playing a game of Twister together, so. That's the joke. This is as much fun as we'll ever have with earnings and valuations. If you follow me, that looks like a Connect Four. The Connect four-game too. Either or. That's a good one. Rusty, that was the runner up. We also had Battleship, which could have potentially worked too, but I like them all. Yeah, so I went with with at least Twister, but it's the most opposite of how much fun this actually is. But the way that this Twister board works out is going across the top. You have earnings per share. On the S&P and then from top to bottom, you have the Forward P/E. And I think this is really a valuable framework for me and the team and for a lot of our audience throughout the year. We've talked about this because it helps make earnings per share a little less abstract and really makes you appreciate the role that valuations have played over the last year and a half. So there's only four steps to the Twister board. Don't worry, this won't go on for too long. But they're sequential. They're chronological. The first step then is going in 2022, where were we? Well, we had cheap money and a lot of optimism still in the COVID rebound. So the forward P/E was 22. So the market was willing to pay $22.00 for every dollar of earnings. So you follow that across, if I can annotate here, to about 220 earnings per share on the S&P and you simply multiply those two together, you get the 4849 hundred mark, which is where the S&P sort of peaked. So that was entering last year. So then what happened was for all the fear of an economic slowdown last year it was the spike in rates driven by inflation. It was a year of duration and equities, also duration and fixed income, which we'll talk about later. But last year was a year of duration and equities. So if you decompose equity returns across multiples, earnings and dividends, the maroon here across all these indices is that multiple compression, so that brutal rerating or derating that we had in multiples. Money got more expensive. So as money got more expensive, people wanted to pay less P for the same E So P/E's went down and back to our Twister board. That's all that happened. Last year, roughly 20% derating was a 20% market loss within rounding that people had. So what's been interesting going into this year, we came in around that 3700 level and essentially what's happened is the market has convinced itself twice now that 4200 is a better level, which is essentially saying we're optimistic about. Interest rates are optimistic about inflation. We're going to say nineteen's a better multiple for equities. And so multiples have expanded again this year because earnings from last year to this year still they've barely kind of wiggled. They really haven't moved dramatically. And So what worries me and is a cause for defense inequities is nineteen's a little bit rich, I think on equity multiples. So from a historical perspective, we've looked at. Multiples versus interest rates, we've looked at longterm averages and multiples. We've looked at multiples during recessions and outside of recessions. And the short of it is, is we're around 19 on the equity P/E. All else equal, 16 to 17 is more of a normal longterm average and then a recession. It's even more in the 14 to 16 kind of range on multiples. So if multiple derating was a big driver of losses last year and a big driver of gains this year, things are looking a little bit right from historical standards. The market could maintain that. But I think in terms of of hoping for the best and planning for the worst, in your client conversations, you look at a 19 multiple derating back down to that 17 ballpark call that a 10% loss on the index value based just on multiples and then the E of the PE earnings, that piece. We've only had revisions come down around 5% give or take depending how you measure in historical recessions. The last three have been pretty bad COVID, GFC, tech bubble, but they've been more of a 20 to 30% drop. We're only at about 5:00. So again kind of be conservative, plan for the worst, expect another 10% drop in earnings revisions if we get through recession environment when you add those two together. Voila, that's your bear market. 10% drop in multiples from here back to here and then the drop in earnings if multiples don't absorb the earnings weakness. That's how you get to that low 3000 on the S&P planning for the worst, hoping for the best at the whole point of going through this I think is more for my clients, clients. If my clients are mostly advisors, it's helping their clients understand that this is where the bottom could be. This is how you could get to the low three thousands and I think the more that clients. Can see the bottom, the less they're going to worry about the bottom falling out and they might be a little more likely to stay invested throughout. And to me personally, this was interesting thinking about earlier this year, I said we've tapped this 4200 mark roughly twice this year while going in end of January. We are roughly up that 4200 mark on the S&P. And then we had the banking crisis which is is hopefully mostly behind us and then we lost about 8% and got back into the high 3000 range. This looks pretty innocuous in hindsight. But if you remember the headlines at the time and the banking crisis, the 2008 kind of trauma that was pulling up, people were worried that the eight was just the start that was going to be 18% or more. To me it was helpful thinking this is just the market repricing itself. It was running the 19 multiple. Now we're back to 17. This feels a little more rational or think about March of 2020. We all know not to sell low, but in reality when that happens, we were down 30% when the COVID sell off was happening. We know the worst thing you should do is sell out when you're down 30%. But being down 30 wasn't the scary part. It was not knowing if we were going to be down 60 by the time this whole thing was over with. And so that all goes back to that Twister construct to help clients understand where the bottom is and see the bottom. Then they'll worry less about the bottom falling out. Easier said than done, I know. So that that's a bit of the backdrop of some of those bear market calls by different Wall Street strategists and how those numbers really add up and get you there between multiples and earnings. So what do you do about this? What's this mix of defense and offense in US equities? So in that order, If one of the things you're really worried about is earnings weakness driving the market down, what would you do? You obviously look for stable earnings, and that's almost literally a definition of quality and equity investing. So this chart is just your obligatory ubiquitous chart showing that the quality factor outperforms broader US equities during recessions. But the issue I take with this is every recession is different in its own way and quality is multifaceted. So we've brought out a different framework around quality that we've put out talking about the quality equity Mote. So what this is doing, it's mapping aspects of quality to the aspects of this unique slow down that we're facing. So if you're thinking about the market evolving right now from what was so beta driven as a stock market to more of a market of stocks where you're picking the individual stocks that have the best characteristics that survive a slowdown. So if it's inflation you're concerned about, well, that'd be companies with the widest, most stable margins and pricing power to battle the inflation risks if it's the broader slowing growth of the economy that's having quality ownership. It's having competitive advantages. That's the classic Moat from Warren Buffett where we pulled the broader pneumonic from and then tenacity, sorry, a little bit of a stretch on the tee to make the pneumonic work. But as far as rate volatility, having high quality balance sheets, not the asset liability mismatch that we've seen out there, not a ton of leverage at the very least, not a ton of short term financing. So all these add up to make for more dependable cash flows and a little more stability hopefully in earnings. So that would be the piece of defense going up in quality in your large cap equities. But at the same time, if you go back, if you think about the chart that I started with which showed midcap and small cap running almost double the returns of large cap on the rebound, that's where you can look to offense. So a way out of this mess is unless you can count on cheaper money and a lot of multiple expansion anytime soon, you have to grow your way out by growing earnings. And companies that can bootstrap their way out of this market environment. So if you're looking for earnings growth for offense, where do you get that? US Midcap historically has the highest earnings growth in the long run. So that's a target and a thought for portfolios for offense, if that's news to you about Midcap having the best earnings growth. The good news is the trade isn't over because there's meaningful valuation discounts on mid and small cap versus their longterm valuations and also just relative to US large cap. But the grain of salt to go with this offense right now is that small and midcap are that early cycle trade. That's why they rebound so well after a recession. But if we're going into a fresh bear market and a downturn, you don't want to be early cycle into a downturn. So small and midcap is more of that darkest before dawn kind of trade or to channel Warren Buffett again that be greedy when others are fearful trade that's when you start rotating to small and midcap. So what I can say at least is that in all the portfolios we've seen from our advisor clients over the last year, there's a structural overweight to large cap. The average equity portfolio in our database from advisor models is about 6% overweight US large cap versus mid and small. So you would just say use the next couple quarters to think about getting to neutral. And mid and small and then be looking to very, very quickly add to that overweight to mid and small cap once we do get some more glimmer of hope of a real recovery and economic indicators start switching. So that's that the US equity section up in quality and large cap looking at small and mid for that earnings growth and recovery but being conscious of not being too early on small and mid. I'll take a little pause there, Rusty. Go ahead. Yeah, good stuff. Adam, a couple questions here. So one is you did mention earlier it's been very well telegraphed or expected that we would get a recession and we're not really seeing that. And it kind of looks like now earnings is are starting to do better than people expected. Obviously GDP would just revise the first quarter. The second quarter looks a lot stronger than the first quarter. Could that of recession quotation marks around it kind of been the two consecutive quarters of? Earnings growth that was negative year over year could have that have been the recession it, it could have been and it's a great question because are are we in this head fake stage again or we actually found our way out of this mess. How forward-looking are the forward-looking markets going to be in the general view is that milder shallower recession and it points to end of this year early next year, is that recovery and earnings and economic recovery. So how, how quick can we look forward to that? That goes back to one of my earlier kind of subtle comments is that. We're we're not so obsessed with predicting whether it's a recession or not. I don't really care so much is is that is that that technical definition of a recession. It's more that unequivocally it is still broadly speaking a slow down like I mentioned some of the typical indicators the labor market that doesn't typically crack until you're already a couple months into a recession. So it's not such a leading indicator. And then the credit tightening that we're seeing and that was already tightening before we had the banking crises kept, kept kicked off by Silicon Valley Bank. And so that's going to take a while to percolate into the system. And we had the rates being ramped up last year and now here we are really dealing with repercussions of the tighter rates across the environment. So even if credit tightens a lot more from here and becomes an issue in the fall if we get cuts in the fall. There's gonna be a lag before those cuts can then offset some of that credit tightening pain. So hopefully we're, we're out of recession risk and there's not a recession. Maybe there is. But to us, there's no doubt that there's some significant headwinds before we can really be off and running and out of this kind of volatile stage in the markets. Yeah. Well, if if the stock market is a leading indicator of what the economy is going to do, it's now been seven months since the stock market bottom. Now on that point of course it's the leadership we've seen this year has been in the tech sector. So my question to you is that really more defense or offense, is it defense in the sense that people expected to slow down, so one of the high quality large cap companies which is a play before. Or was it offense with the kind of the promise and the buzz of artificial intelligence? Or is it a combination of both? What do you think? It's a good question, and today's May 25th Rusty, I bet you're asking that too with the NVIDIA earnings and news and the AI kind of boom again that that seems to be kicking off. But so tech would be kind of a kneejerk defensive sector to think about in portfolios. Even from a global perspective, it's mostly US exposure and you could argue US is generally more defensive than XUS developed equities in a pure defensive portfolio. So we we have that that a I kind of thematic boost to some tech right now and that's cause for optimism. I I think the rally and the leadership we've seen of tech so far year to date and the market is. Because it's really the right place, the right time. We've had good earnings from technology. So that ties to the quality component that I mentioned in the markets hunger for quality and great cash flows. And tech companies have the largest R&D budgets in the world. And tech by and large, you've already seen a lot of the the vicious cycle of of tech companies that were looking for external financing or just cheap money. Of the cycle was they grew the most and then they fell off the fastest. So a lot of that is shaken out of of that vicious cycle. And we also talk about the virtuous flywheel, these bigger tech companies that have these huge R&D budgets, massive free cash flow, those are very high quality exposures that the markets wanted this year. So it won a tech for high quality. They got rewarded for that with great earnings that piled on more and then these are long duration growth companies and we saw that. COVID, we saw that last year for better or worse duration was a big factor in equities and especially for Tech. So Tech's also been a beneficiary of that optimism about rates that drove valuations back up on our Twister board, especially in Tech. So on the one hand, yes, kind of knee jerk defensive trade for those reasons for duration, for quality, but now what you have is this narrow leadership in the market and multiples are even that much higher within Tech. So now we're starting to question the role of tech as pure defense and we're starting to peel back that overweight to tech, which has been good for defense but almost too good at this point, cuz it's starting to present its own risks. Yeah, great. Thanks. OK. So let's take a trip then outside the US and thanks. Rusty. Keep jumping in with these questions as they're coming in. So then within XUS equities, a similar story of a mix of defense and offense here. So I'll go in that order again. So on defense for international equities, it's not a news flash that valuations are cheap outside the US So if we're running a few percent premium to historical averages on US valuations, so that's the the blue bars current valuations in the orange dot as longer term valuations. On international, look at European equities, it's the opposite where we're running a decent bit below longterm valuations on a relative basis for international equities. So hopefully people can appreciate that in a different way, thinking about our Twister board is that when you have room for valuations to expand, you can actually absorb some earnings weakness by multiples just getting a little bit richer. So if we do have a global slowdown, global recession and you do have an earnings recession in Europe. Well, the multiple could just get a little bit richer, quote UN quote, just to the tune of longterm historical averages. And it doesn't mean investors have to lose money at the index level as a price level cuz the multiples can absorb that earnings weakness. Nobody cared about that during a bull market for the last forever decade or more. But in a slowdown, people might appreciate some markets that are on sale for that extra margin of safety in European equities. There's also a second margin of safety in international equities. Through yields. So this is where you're easily getting double or triple the yields as US equities. And one of the ways to look at this is that the US is roughly 2/3 of MSCI world in the industry portrait, which is the average advisor model in our database. From our consultations with thousands of advisors, the average advisor weight is about 77% US equities. When you look at yield and dividends as that margin of safety and cushion in the slow down, you just scan MSCI World for the stocks that yield more than three percent, 60% of those are outside the US It's opposite the footprint of the average advisory portfolio that we're talking to. So you have to look internationally not just for low valuations, but for higher dividends for defensiveness in this environment And as far as inflation risk, which is structural, it's not transitory. So dark orange and light orange bars here show across different countries that in short dividend yield and dividend growth are the biggest sources of real return and total equity returns going back to 1970. So you have dividends for a little bird in hand cushion to cushion a slow down or loss in price. You have valuations also to help some earnings weakness and it's also inflation, defensiveness. Then in the flip side of it, an offense with international equities. US develop equities are a valuable diversifier versus US equities because on net they're much more cyclical in their sector exposure, which are the orange bars here. These are the sector weight differentials between the S&P and the Aquix US indices. And then when we're looking at implementation across portfolios, one thing that we're conscious of in our models and in our consultations as well is that in our database of the advisors that have international developed equities, 80% of them have a tilt to growth. So if part of the value of international is some of the offense and the cyclicality and a rebound a lot of times for going international in a portfolio, it's a little bit of two steps forward and one step back if you're going international, but going international growth. Couple questions, so let me see here. So first of all, I thought that was a fascinating slide. This is a comment on my behalf. Fascinating on the slide regarding dividend yields and dividend growth for all the different regions. How the United States basically in combination had a very similar level of dividend and they really outperformed due to the valuation expansion. That was really interesting a couple slides before. The question is on the relative valuations going back 10 years, very cool, very interesting. Do you does Janice Henderson also run that on sectors and factors we do not part of this presentation sectors that's. I'm not sure if this is where you were going with it, Rusty, but when you asked about technology a bit ago, that's been an interesting phenomenon this year is that when I mentioned on net valuations of the S&P are above historical averages and tech has pushed a lot of that further ahead. When you start looking at the S&P X fangs or even the bottom 450 of the S&P 500, those are actually attractive valuations before below longterm averages in the US which which points you know to offense and an entry point. Outside of this narrow leadership of these big, call it seven tech names, yeah. And another question on this page here too is why 10 years? So this is a classic question that comes up is why not 20 years, 30 years, 50 years? Why a 10 year look back, good question. So 10 years, no science there. We've looked at valuations across. Various time periods and cause various charts that we have. Some are 10, some are longer. You take the US for example, on 10 you get closer to around like a 17 kind of mark. And if you look further back in history, you know even 20 years about the same. But if you go back 30-40 years, that's where you see closer to a 16 average. On multiples, going further back in history, so that that kind of gets when I was a little soft around what I said long term averages a few slides ago. But thinking about 1617 is more of a home base for multiples. So when you compare that to 19 today, that's where it starts feeling a little rich. One last question on international equities and I'm sure you get this question a lot, but it's still difficult. One is so I'm sure you've had conversations with financial advisors that see slides like this and they are convinced. And so that there's an argument that people should probably have more exposure to international equities. However, they've been making their argument for a few years, in some cases to clients. And they're kind of asking what is the most compelling argument you can make to convince people to go more into international equity? Do you have a go to answer there? It could be a difficult question. It's, it's, it's the hardest question, I think. That for any investor the last couple of decades is that if you've been diversifying, you've been defending having anything outside of the US So I to me there's a couple layers to it and that the primary layer, it's really this, it is the buffer on valuations which have been there for years, but it does feel a lot different in this environment coupled with the dividends. So there's that defensive trade for international, which is the most compelling piece for me. The cyclicality is good for the rebound, but that's kind of a discussion to have hopefully next year when we're in rebound mode. But as far as today what's compelling I think it's the valuations and the dividends and then that this is a relatively lean economy that's been struggling for funding and and waiting for this rally for decades now. And so it there's there's not a whole lot of junk to wash out of that economy in a slow down, there's a lot of operational leverage across these cyclical sectors. So if it's a good entry point now because of a valuation buffer, you have dividend yield. If we do get a sustained rally globally economically that there's leverage in these companies operationally to really be that valuable source of of a cyclical turnaround and that they're not going to rely on duration and rock bottom rates the way the US was in a lot of our sectors. But again, that's the cyclical kind of next year conversation that doesn't create as much urgency as the valuations and dividends for defense. Great. Thanks. Great Okay. Thank you. Rusty, great questions. So on fixed income, I'll be a little bit quicker here because fixed income compared to equities, especially compared to US equities is a lot more straightforward. So we'll talk about core fixed income quickly for defense and then credit for offense. So core fixed income, simple story here is that not only are short term rates high, they're historically high. And what we're seeing as far as the yield you're getting out of these short term fixed income asset classes are extremely compelling. So to us is this balance between short and intermediate, I can give some perspective from our consultations and some perspective from managing our model portfolios. So in the former, in our consultations going into late last year, the average fixed income portfolio that we were seeing was. Call it a barbell of half short duration just for bedrock kind of ballast behavior and the other half was bank loans. That was your typical kind of poster child for 2022 fixed income portfolio. And if you did that, Congrats because you beat the benchmarks by about 10% and you were reaching to the bank loans for 5 to 6% yields without any duration. And so the sequence this year has been kind of a waterfall of first if people have been underweight core, you refill it with short duration first. Because you're getting paid more to own short duration than intermediate, given the inverted yield curve, you usually have to pay a cost for that ballast bedrock part of the portfolio when the curve is normally sloped, not the case right now. So for the real hesitant kind of traumatized duration investors, we talked about short duration or floating rate first investment grade to kind of build back the core. Then the other piece is it's not just about short even though you're taking a yield haircut. To own more duration which feels backwards, there's still reason to do it in this environments from a defensive perspective there's a lot of math that drives the break even concept. But for for really around numbers take the intermediate US Ag and say your duration is five years and your yield is five. So what that means is that if rates went up 1% from here from high threes in the 10 year to high fours, a 1% increase in rates. Times your five year duration is a 5% loss on prices of your AG. You have 5% yield that offsets that. That's why your break even is around 1% on the Ag. That's 88 bits at the time we did this math. So an intermediate duration you can absorb an increase in rates. So it's more defensive, there's more yield cushion built into intermediate than there was for years. So going from short to intermediate, you're not giving up all of your interest rate protection. That's not the biggest compelling case to go intermediate. We're not as concerned about rates going up. It's more about in the slowdown environment, if rates plummet and go down, that's where duration is your friend. And if rates went down 1% with a yield of five and a duration of five, that's a 10% total return. So that's why you want both cylinders firing in your core fixed income portfolio, short duration for ballast Bedrock, that line item that yields you 5% and doesn't move for better or worse and an intermediate which can run double digit returns if rates really rally from here. So I think we've all learned our lessons that there's no crystal ball in rates. You can't predict the rates markets. So you can have both of these pieces going in your portfolio and it's not that you're gonna be right every time, but at least in your client conversations you're not gonna be wrong. Adam, two quick questions here. Is there a role for international bonds including emerging market debt? Question number one, question #1, short answer is yes. For international bonds, international developed unequivocally need to be currency hedged. If you're going global and sovereigns and you're unhedged, the currency risk as you know Rusty can be five times your bond risk in the portfolio. So a sudden you own a currency fund, not a bond fund for your core outside the core. Yeah, emerging market debt, think across hard currency call it hedged and then local currency, emerging market debt that's where you can be unhedged and that's outside the core. We don't consider that balanced portfolio, so we can be unhedged there. Emerging market debts a bigger asset class than high yield and it's it's woefully under allocated in client portfolio. So we consider that part of the the non core credit portfolio. Yeah. And one last question on fixed income, what about inflation link bonds is just TIPS. Tips are conversations have been dying off a little bit around tips in our client consultations. I personally think tips are are difficult for individual investors because you're still buying duration day-to-day. They're just as interest rate sensitive as typical bonds, if not more sensitive. And then the actual moves you're getting it to be Keeping a pretty close eye on the move of nominals versus real rates. And now that's affecting your returns. And so TIPS are a thing that we've continually seen over the market cycles is that when inflation hits the headlines, people want to buy TIPS, but then they they don't last. You need to own TIPS for the long run to really have that inflation adjustment pay off. And it is a hard line item to explain to end clients at times and it's a hard one to keep in portfolios structurally. So unless you're very close to inflation markets and you've got a really strong view on breakevens, you want to tactically use TIPS. Outside of that I would keep it a little simpler with traditional core fixed income. Great, thanks. Thank you. OK, so then into credit, the quick take here on credit, this would be the offensive portion of the fixed income portfolio. Credit spreads are are relatively tight. We can't see any of the numbers on this page, but for round numbers you know talk about high yield spreads having a longterm average around 3:50. Currently around 450 bips over treasuries in a 2015 kind of energy driven sell off and high yield. Those spreads went up to 700 bips in a typical recession, not a COVID or global financial crisis is a typical bad, not horrible recession. That spread can go up to 800 bips. So if 350 to 800 is the normal to recession range, we're only at about 4:50. I mean just structurally there's not a lot of supply and there's a lot of demand for high yield keeping spreads relatively low. But there can be a lot of selling if if the economy weakens dramatically. So it's a really difficult case to make to be all in on a passive benchmark constrained high yield exposure. That being said, if you're talking about 450 dips over treasuries, you're talking high singledigit returns, if not doubledigit returns. So you don't want to miss the high yields and high yield and even if you're buying and now and you're getting a 9% starting yield and. Spreads do drift up from current spreads all the way down to those average peak spreads around 800. You're still actually almost breaking even on high yield and that kind of terrible case scenario because you have a 9% starting yield to offset and have that yield cushion so. That's not horrible, but that's still 0% returns. So our view is as far as offense and fixed income right now this is where the multi sector approaches or strategic income type funds can come in that can be flexible across high yield, investment grade credit, securitized markets and bring in those high single digit double digit yields for you. But be able to be nimble for you and and help you with the timing because odds are spreads will will widen from here before they come back in. A question for a high yield in terms of Janice Henderson preferences for the asset class, I would imagine one question is, do you play with a passive or active exposure? And on the active side, do you prefer a higher quality exposure or something that has kind of a higher beta, higher yield, lower quality exposure, any sort of preferences so in this environment it's more about. It's active and it's dynamic active. So it's active and that doesn't a benchmark constrained active high yield fund but more of that multi sector approach because it's not just how yield corporates, it's the securitized space as well and there's good risk adjusted yields relative to the environment. But you know if you talk to our fixed income team and you start seeing spreads get to that 607 hundred level especially. That's where it's gonna be moving more even in these multisector kind of approaches. So let's start really layering on that high yield risk. And for the audience here, the typical investor Janice Henderson is an active shop. But sure, if if it's buying a passive and just laying on the beta when spreads get to that level, then understood. But right now it's not the environment for that. Thank you, Okay. So that gets us through fixed income. I think what I'll do now is we can jump right ahead into the global allocation model portfolios that we offer and then get into some conversation with Rusty here on the the offense and defense portfolio recipe. So on these global allocation model portfolios, so high level these are our three core strategic total return portfolios implemented with Janice Henderson active mutual funds. And so given my comments earlier, we don't have the the positioning or performance breakdown in this presentation, but I think some positioning examples are gonna be pretty intuitive. So with inequities we're talking about that cautious underweight, the small cap and mid cap. But watching that really really closely and you start seeing those economic indicators turn you, you wanna be in small cap and mid cap. As soon as you can, once the economy really starts turning to maximize that rebound. Meanwhile, it's the US technology sector. Even U.S. healthcare is more classically defensive sectors. The caveat being my earlier comment, not as much overweight US technology given that it's actually rallied and been more defensive than than most could have hoped so far this year. And then outside of the equity sleeve on fixed income where we just left off underweight. Traditional long only static high yield exposures, any kind of high income high yield exposures and we through a full flexible multi sector approach and then it's balancing short and intermediate duration. We have the inverted curve paying you more for short than you have had for most of history but at the same time actually looking to intermediate for full on defensive posture. Because it can run like we said double or even triple the returns of short duration if if rates really plummet from here, if there's a really big slow down. Last note I think on these global allocation model portfolios is is just stay tuned by by popular demand. We are updating the structure of these model portfolios. The the the biggest ask from clients and the biggest demand from clients is it's not about the performance of these strategies, it's just about in general fees. Like I mentioned that these are implemented with Janice Henderson funds. Our funds themselves are are very competitive, but in a model portfolio level just the general generic client demand for lower fees, we're answering that demand. We're going to stay predominantly active, but we're looking at some of the bigger weights and individual sleeves and assessing where it's worth an extra line item in order to blend the active approach with some passive beta purely motivated by lowering fees just to. Be responsive to what clients want. So stay tuned for that and I'll leave the comments model portfolio is there rusty and I think I'll hand it back to you. Well, actually Adam, I'm really sorry, you must read this next page, OK. I'm just kidding. Kind of talk about some of the portfolio recipes that my team has created here. So again these are. The defense and offense portfolio recipes for four different risk levels and what we were trying to build here of course is using Janice Henderson as really the core allocation, but we're also trying to do of course at Orion portfolio solutions we believe in a multi mandate approach. We also wanted to incorporate different asset classes that we believe are important to have, including real assets and alternatives. And of course we created four different portfolios for four different risk benchmarks as well. So we're kind of scratching a lot of different itches on this on these recipes right here. Now we'll open up for more questions. I have another question for you, Adam, right off the bat and something that really I didn't put enough of a spotlight in the beginning because it's a really valuable resource. Again, it's in the lower left hand corner here. And that is a Janice Henderson PCs trends and opportunities handout, which I think is is really kind of neat. Could you talk about a couple different things on this, talk about sort of how it all comes together. So you you, you look at a lot of different advisor portfolios. Can I talk about kind of that data that goes into that? How often is this updated? And then how can advisors work with you and your team regarding some of this information? Thanks. I appreciate that question Rusty. So if any audience wants to download that outlook that's one of my favorite things that we do. So what we wanted to build out with that outlook of sorts is not to be your typical outlook filled with just pure historical data analysis or just trying to pontificate or predict you know prices of indexes at the end of the year. What what that really is, it's based on all those everyday conversations. We're constantly talking as a team and tuning in to what are clients asking us about, what are we talking about every single day. So that clients don't need to go through the hour long consultation with us if they don't want to. A lot of clients love that. But I understand if you don't wanna go through all the data analysis with us, we could boil it down to what are the most important takeaways You heard about a lot of it here as far as going up in quality in the US comes up every day navigating small and midcap is a section in that outlook. And then looking at you know the approach to credit for example and managing relatively tight spreads but relatively high yields. So that that's sort of a a summary of what the greatest hits are across these hundreds of consultations that we're doing quarter over quarter. So that's as of February. Most of the views there are holding up pretty well actually and most of it was was really across these slides in some form or another and then there'll be an update in mid June as well to look out for. So another question is, so investor sentiment has, as we know, been extremely negative for the past year. If you look at the American Association, individual investors for example, there's only been two weeks in the last year that's been net positive only three times as beginning of last year, which I personally find really extraordinary. We it's been, there's never been a time where there's been such persistent negative sentiment going back to the beginning of this weekly survey, it's in the late 80s. What are some of the best arguments you have for investors to stay invested and you know have a more optimistic outlook moving forward? The investors sentiment itself look at it historically and we put a blog post out about this later last year, but it's a great contrain indicator when investor sentiment is this poor. Usually on average historically we're talking about double digit perspective returns and not just 10% but north of 20% is what we saw. In in the blog that we published. So that alone seeing the bearishness and the negative sentiment should give some investors some hope as far as where things are headed the next 12 and 24 months. And then the other thing is that I think the lessons that we've all learned with just recent memory being the strongest, whether it's COVID or even year to date this year, is that there's no timingness and there's there's no predicting how soon the market can start looking through all the bad news. And it usually happens sooner than you'd think. One of the things that we've looked at before is it's just the pain of market timing. And so we looked at the last 20 years and over the last 20 years thinking about 250 trading days a year, roughly about 5000 different days. If you would have stayed and just invested the whole time across those 5000 trading days is never touched your portfolio. You made about 6 times your starting amount of what you had invested and if you missed just the 20 best trading days over those 5000. You were left with just half of those gains and then thirty worst. Now you're just breaking even. And it that the pain and the penalty for missing the best market days is really dramatic. And the other piece of it too is you look at global financial crisis and you look at COVID as great examples. It follows that those best days can only really happen after the worst days. Only the markets down 8% in one day. Can it be up 9% the next day? And that's just where we're so emotionally tuned to do what's opposite of our best financial interest because you only want to sell when things are down 8%. It's only going to be up 9% after it's been down 8% and you want to sell. So our instincts are really opposite of what's in our best interest financially and that's why we're always primed to have that regret. And and making those terrible decisions. So I I think there's a lot there emotionally and we have to almost not trust yourself and not trust that negative sentiment and even view the sentiment of the masses. Is that good Contra indicator and maybe an actual bullish signal, Excellent. Well, this has been great. Is there anything else that we should be talking about? Any questions that weren't asked that you think are irrelevant or any closing comments? No other questions, Rusty. Yeah, just by way of closing first thanks everybody for listening. Thank you Rusty for the air time with the audience very valuable to us at Janice Henderson. We appreciate it. I appreciate all the great questions and helping break up my my boring monologue as I was going through this and we're, I'll just leave it with with we're here to help whether it's through the investment solutions we have like the global allocation model portfolios. Or it's the individual portfolio consultations on portfolios you manage or looking at the model portfolios that you're using kind of in concert together like Rusty laid out on the portfolio recipe. We can help with those kind of objective analytics and consultations through our portfolio construction and strategy team. So I really appreciate all this and look forward to maybe a chance to do it again later. Awesome. Well, thanks, Adam. And again when it comes to questions, again just one more time for this page, here's our contact information. Please reach out to us if they have any more questions. In terms of our next portfolio recipe, it will be the core guided portfolio recipe and that will be on Tuesday, June 27th and you can register for that now. So again, thank you for your time and Trust and Orion portfolio solutions and we will see you next month. Thank you. _1714164306827