Navarro said his team has “torn up the playbook” in the way it has been integrating alternatives into their client portfolios.
“We want income from multiple layers. We’ve looked at the 40% that would have been fixed income and also looked at private credit and private real estate,” he said. “Private real estate is up 7% for the year, private credit up a quarter of a percent. Seen against the negative numbers of other investments, that’s great diversification playing out in real time.”
Municipal bonds also now are look better than they did before, Navarro said, though he cautioned that he’s still positioned on the short-duration end of the curve and building short-term ladders where they’re “getting 80% of the curve” in AAA bonds with one- to 10-year maturities. “We’re still getting paid, no need to go further than that.”
On the equities side, Navarro said he wants both income and growth in the portfolio because it’s impossible to time which will be more profitable at any given moment.
“If you were a growth manager you could have just bought the Qs and gone to the beach,” he said of the prior bull market. “We don’t necessarily want to buy high dividend, but those companies that are growing their dividends. The companies that are buying back stock, returning 5% to 10% on an annual basis, and investing in acquisitions and R&D. It’s not just an income play, but a long-term strategy.”
Trade High Dividends For Growing Dividends
To this point, Maddi Dessner, who heads global asset class services at Capital Group, said her team has seen a significant uptick in financial advisors looking for advice on portfolio construction so they can identify weaknesses they may not be aware of.
For example, Capital Group's investment team, she said, has successfully managed dividend-oriented equities for some time, and they are able to assess the health and future expectations of a company not just in delivering income but also in growing that income. These kinds of insights, she says, can help advisors avoid buying the company that currently has the highest dividend as opposed to the one that has the best ability to grow that dividend.
“We’re looking not just at payout, but also details like the ability to withstand the leverage on their balance sheet,” she said. “And we do this not just for companies, but also for mutual funds and ETFs, which can give advisors a sense of whether there’s truly sustainable income in their strategy.”
The group is equally able to look at a company’s individual revenue streams to identify the exposure to underlying economies one gets by buying that company’s stock. This X-ray of a portfolio goes beyond where the company files its paperwork she said.
“An advisor believes they have a fairly well diversified portfolio across different geographies, but when we look at the geographies by revenue, we can see it’s actually overweight in developed markets, especially in the U.S. So, for example, a phone manufacturer may sit in South Korea, but all their phones are bought in the U.S.,” she said. “If you want to truly diversify, you need to make sure you’re diversifying across other economies.”
On the fixed-income side, Dessner said her group thinks that advisors should be very intentional about the role they want fixed income to play in a portfolio.
“Duration and credit quality is where an advisor typically will begin and end,” she said. “It brings down risk, delivers income and can provide other benefits. Do you want it to be a diversifier? Produce income? Protect against inflation? Are you looking for capital preservation with reduced risk?”
In the first half of this year, Dessner said more than 1,500 advisors sought her group’s expertise, putting her client flow on the same level as 2020, when the effects of the global pandemic and social unrest upended business as usual. This year, she said, it’s the geopolitical eruptions and the movements of the Fed that are creating the uncertainty.
“Advisors are engaging with us now as they did in 2020 with that serious question of ‘What do I do now?’” she said.