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 $299 billion in assets under management as of March 31, 2018.*

March 2018 Positions

  • All Asset Classes
  • Equities
  • Fixed Income
Current Position (as of March 2018)
Bonds
Neutral
Stocks

Equity valuations and bond yields are modestly more attractive, but downside risks have become more prevalent.

Global growth trends are supportive of equities, but margins could be weighed by higher rates, wages, and input costs. Bond yields have improved and bonds have historically provided greater downside protection than equities.

Equities

U.S.
Neutral
International

International equities are earlier in their economic cycles, and they offer attractive valuations and improving growth.

Relative to the U.S., valuations in international markets are modestly more attractive as improving economic growth, positive earnings trends, and strengthening global trade boost support. Valuations in the U.S. are extended but have declined from recent peak.

Developed
Neutral
Emerging

Emerging market (EM) equities are buoyed by attractive valuations and solid corporate earnings, but trade protectionism is a risk.

EM stocks are supported by global demand for exports. EM valuations are modestly attractive versus developed markets. Interest rates may rise as central banks respond to stronger growth, and rising inflation. Trade policies and stability of energy prices are concerns.

Global Equity
Neutral
Real Assets

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

Valuations for Real Estate Investment Trusts (REITs) are attractive. U.S. energy production is likely to increase given the higher energy prices and production cuts from other oil-producing nations. Other commodities remain structurally challenged by supply/demand imbalances.

Large-Cap
Neutral
Small-Cap

Beneficial tax policy and an increase in spending on capital projects could help U.S. small cap companies.

U.S. small-caps are less vulnerable to trade policy and offer attractive valuations versus U.S. large-caps, where gains have been heavily concentrated in a just a few technology stocks. Global large-cap valuations are reasonable with strong earnings growth momentum.

U.S. Value
Neutral
U.S. Growth

Valuations for growth stocks are less attractive after recent strength. Tax reform impacts could be a catalyst for value stocks.

Growth stocks are likely to continue to benefit in the current low growth environment, but valuations are less compelling after strong outperformance. Value stocks benefit from a sustained pickup in economic growth as well as higher rates.

Int'l. Value
Neutral
Int'l. Growth

International growth valuations are less attractive versus international value stocks, which benefit from improving cyclical trends.

Improving economies in Japan and Europe, notably so within financials, help support valuations for value stocks. Following strong performance, valuations for industrials and consumer staples sectors are above historical averages.

Fixed Income

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

High yield fundamentals remain broadly positive, and expectations for default are low. Upside is limited at current valuations.

Fundamentals remain positive for high yield bonds, with default rates falling and corporate earnings rising, despite the credit cycle being in a slate stage environment. There is likely a limited upside potential given current valuations.

U.S. Investment Grade
Neutral
Emerging Markets

Emerging Markets (EM) debt offers modestly attractive yields and improving fundamentals.

Valuations are somewhat extended and vulnerable to developed market central bank tightening, a stronger U.S. dollar, 2018 political calendar and slower Chinese growth. However, broad EM debt fundamentals remain attractive.

U.S. Investment Grade
Neutral
Nondollar

Low bond yields and extended duration profiles outside the U.S. dampen outlook continue to offer an unattractive risk/return.

European bonds are at risk from rising rates as European Central Bank tightens monetary policy. Yield and duration favor U.S. investment grade debt and the U. S. dollar should benefit from improving economic growth and tax reform.

*The combined asset allocation assets under management of the T. Rowe Price group of companies as of March 31, 2018. 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 March 2018 and may have changed since that time. Information and opinions, including forward looking statements, are derived from proprietary and non-proprietary sources deemed to be reliable but are not guaranteed as to accuracy.

There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them. The stocks of larger companies generally have lower risk and potential return than the stocks of smaller companies. Since small companies often have limited product lines, markets, or financial resources, investing in them involves more risk than investments primarily in large, established companies. The value approach carries the risk that a stock judged to be undervalued is actually appropriately priced. International investing involves unique risks, including currency fluctuation. Bond yields and prices will vary with interest rate changes. Investments in emerging markets are subject to abrupt and severe price declines, and should be regarded as speculative. High yield, lower-rated bonds generally involve greater risk to principal than investments in higher-rated securities.

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