The Anfield Investment Committee has completed stage three of our four-part annual forecasting process—setting our capital market expectations (CMEs) for 2022. As we have mentioned in the past, we construct portfolios built for a variety of time horizons—our fixed income portfolios are designed with a 1-3-year time horizon, our balanced portfolios are constructed with a 3-5+ year time horizon, and our most aggressive portfolios are constructed with a 7+ year time horizon.
Like last year, we will be providing best-to-worst rankings for how we see equity and fixed income assets performing while also providing return estimates for fixed income markets. As we’ve relayed in the past, we do not believe market participants (buy-side and sell-side and including our own team!) have a crystal ball that allows for precise forecasts of what equity markets will do over the next 12 months. For example, the S&P 500 returned 28.7% on a total return basis in 2021—a survey of various sell-side firms had an average 2021 price return of 7.8%. Add a generous 2.2% of annual S&P 500 dividends, and that’s a total return of 10%, just about one-third of the actual realized total return of the index. In short, twelve-month equity market “point” and even range forecasts are often wildly inaccurate! Further, when we construct portfolios, the relevant input is not that the S&P 500 will return 8% or 10%, but that the S&P 500 will be the best, or worst performing stock market—hence our use of a forced ranking system for forecasting.
Our rankings, which can be seen below, show a strong favorability towards U.S. markets (Large, Mid, and Small Cap) with US High Yield and Emerging Market debt looking to be the areas of strength in fixed income markets in 2022. As noted in our macro forecast update, we believe the US economy will continue to grow at an above-trend-but-moderating rate, as will inflation. From a strategy perspective, we are still bullish on risk assets like equities and credit and are bearish on interest rate risk (duration). We believe economic, corporate (earnings), and consumer fundamentals will remain solid, buoying equity and credit markets. We also believe interest rates will end the year higher, continuing 2021’s upward drift. As such, we prefer credit vs. duration in fixed income space.
Though we don’t provide forecasts or rankings for alternative assets such as real estate, commodities, etc., the conditions briefly outlined above are also bullish for many alternative asset classes. We thus remain very constructive on the opportunity set and believe their contribution to diversification—and in some cases yield—warrant an allocation within a diversified portfolio of equities and fixed income.
A note on our fixed income rankings below—these rankings are based on broad, widely-available indices and as such, they do NOT factor in the positive alpha that can be earned by active managers. Two examples are our rankings for Mortgages and US Investment Grade (IG) Bonds. The Bloomberg US MBS index consists solely of agency (Ginnie, Fannie, and Freddie) securities and doesn’t include non-agency MBS (such as those held in DPFNX). Similarly, the S&P 500 IG index has a duration of 8.3 years (according to S&P Global), and thus in a rising interest rate environment, we believe this index could underperform US Treasuries as measured by the Bloomberg US Treasuries index (which has a duration of 7.0 years according to Bloomberg) despite a ~90 bps yield pickup, especially if IG spreads are under pressure.
Anfield Capital Management, LLC is a registered investment adviser with the SEC. This report is for informational purposes only and does not constitute advice, an offer to sell, or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. The contents of this report should not be relied upon in making investment decisions. The information and statistical data contained herein have been obtained from sources that we believe to be reliable but in no way are warranted by us as to accuracy or completeness. The accompanying performance statistics are based upon historical performance and are not indicative of future performance. The types of investments discussed do not represent all the securities purchased, sold, or recommended for clients. You should not assume that investments in the securities or models identified and discussed were or will be profitable. Results of the models do not reflect the performance result of any one client. Not all clients have experienced this specific return level. Actual client returns may differ materially from the performance of the models due to actual fees incurred by clients, timing of cash flows, or client restrictions (e.g., restrictions on specific securities, industries, or types of securities). Clients who invested in the models after our initial trade date for any security may have experienced materially different performance and may have lost money.
While many of the thoughts expressed in this report are stated in a factual manner, the discussion reflects only Anfield Capital’s beliefs about the financial markets in which it invests portfolio assets following the models. The descriptions herein, are in summary form, are incomplete and do not include all the information necessary to evaluate an investment in any model. The models described represent current intentions. However, Anfield Capital may pursue any objectives, employ any techniques, or purchase any type of financial investment that it considers appropriate for the models and in the best interests of its clients.
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