Asset Allocation Committee Strategy

Asset Allocation Committee Strategy

Executive Summary

The T. Rowe Price Asset Allocation Committee evaluates the relative attractiveness of major asset classes over a 6- to 18-month time horizon. These positions are currently reflected across our suite of asset allocation portfolios accounting for approximately $269 billion in assets under management as of June 30, 2017.*

Q3 2017 Positions

  • All Asset Classes
  • Equities
  • Fixed Income
Current Position (as of July 2017)
Bonds
Neutral
Stocks

A low-yield environment and rising interest rates suggest modest returns for bonds, but equity valuations appear extended.

Economic growth remains subdued and uncertain as some global central banks move to rein in accommodative policies, which could put upward pressure on yields. The likelihood of pro-growth economic and fiscal policies fueling further upside in equities is in doubt. 

Equities

U.S.
Neutral
International

Overseas stocks benefit from signs of improved economic fundamentals, stronger corporate earnings, and diminished political risks. 

Many international developed markets are earlier in the economic cycle than the U.S., supported by monetary stimulus and reasonable valuations. Uncertain Brexit negotiations lie ahead, but the eurozone’s economy and earnings have improved, and political risks have eased. 

Developed
Neutral
Emerging

Some risks for emerging markets (EM) stocks have receded, but absolute valuations are expensive and commodity weakness remains a concern. 

Valuations and further weakness in energy and commodity prices could weigh on EMs. Risks from a stronger U.S. dollar, higher developed market interest rates, and the impact of protectionist trade policies on global trade and capital flows remain credible but have receded. 

Global Equity
Neutral
Real Assets

A long-term supply/demand imbalance still weighs on energy and commodity prices.

The potential for increased U.S. infrastructure spending is supportive, but its ultimate form, timing, and scope remain uncertain. Higher energy prices have been challenged by a sharp U.S. production response, reigniting concerns about global oversupply and pricing pressures.

Large-Cap
Neutral
Small-Cap

More attractive valuations and stronger free cash flow yields are more compelling for U.S. small-caps versus large-caps. 

Increased U.S. fiscal spending and lower corporate taxes could fuel small-cap outperformance given their greater sensitivity to the domestic economy and higher marginal tax rates. Economic growth and stimulative monetary policies may benefit international small-caps. 

U.S. Value
Neutral
U.S. Growth

Growth stocks still hold broadly favorable valuations, and expectations for economic growth remains modest.

The postelection rally in lower-quality value sectors faded, and growth sectors outperformed in the first half of 2017. Increased spending, tax cuts, and deregulation should support cyclical sectors like financials and energy, but required legislative approval remains uncertain.

Int'l. Value
Neutral
Int'l. Growth

Overseas value stocks enjoy favorable valuations versus more expensive growth sectors, although certain areas face headwinds.

Valuations for overseas value stocks remain broadly attractive as growth sectors such as consumer staples appear increasingly expensive. However, value sectors like financials and energy face headwinds from modest global growth and global commodities oversupply. 

Fixed Income

U.S. Investment Grade
Neutral
U.S. High Yield

High yield valuations are trending above historical averages after strong performance, despite weakness in energy prices. 

While high yield bonds continue to offer a yield advantage over investment-grade bonds, we reduced our overweight as we believe there is less opportunity for further appreciation. Additionally, high yield bonds remain vulnerable to a pullback in commodity prices. 

U.S. Investment Grade
Neutral
Emerging Markets

Emerging markets (EM) debt features attractive yields and improving fundamentals, but valuations are less compelling. 

A risk-on environment after the U.S. elections and improved economic fundamentals boosted EM bonds, but renewed weakness in commodity prices and concerns about rising protectionism, higher developed market interest rates, and a stronger U.S. dollar pose ongoing risks. 

U.S. Investment Grade
Neutral
Nondollar

Bond yields and extended duration profiles outside the U.S. continue to offer an unattractive risk/return profile. 

Yield and duration favor U.S. investment-grade debt. U.S. dollar strength has declined but may find support as the Federal Reserve tightens policy. Improving economic growth and expectations of initial monetary tightening in Europe could increase yields and boost the euro.  

*The combined asset allocation assets under management of the T. Rowe Price group of companies as of June 30, 2017. This figure includes assets that are held outside of T. Rowe Price but where T. Rowe Price influences trade decisions. The T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International Ltd, T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd, and T. Rowe Price (Canada), Inc.

This material represents the views of the T. Rowe Price Asset Allocation Committee only and may not reflect the opinion of all T. Rowe Price portfolio managers. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of July 2017 and may have changed since that time.

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