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 $314 billion in assets under management as of September 30, 2018.*

September 2018 Positions

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

Equity valuations remain elevated, while tightening monetary policies may temper bond returns.

Equities are vulnerable to receding global liquidity, tightening financial conditions, an aging U.S. economic cycle, and elevated trade tensions. Bond yields have modestly improved amid rising inflation and may provide downside protection to equity market volatility.

Equities

U.S.
Neutral
International

Despite elevated global trade tensions, international equities offer attractive valuations relative to the U.S.

U.S. equity valuations are slightly elevated, with narrow market leadership. International equities are more attractive with above-potential economic growth and supportive corporate earnings, but trade wars, weakness in European financials, and populist sentiments are risks.

Developed
Neutral
Emerging

Emerging markets (EM) offer more attractive valuations, but U.S. dollar strength and increasing idiosyncratic risk are a concern.

With trade disputes spurring a recent sell-off, EM stock valuations are much more attractive and remain supported by healthy corporate earnings. A stronger U.S. dollar, trade war concerns, and elevated country-specific issues loom as potential risks.

Global Equity
Neutral
Real Assets

Energy supply/demand imbalance poses a long-term headwind, while real estate investment trusts (REITs) fundamentals are supportive.

Current energy prices may be unsustainable, while other commodities remain structurally challenged by global supply/demand imbalances. Fundamentals for REITs are broadly positive, with muted supply and healthy occupancy and rental income.

Large-Cap
Neutral
Small-Cap

U.S. small-cap valuations could benefit from fiscal-related spending and increased mergers and acquisitions.

U.S. small-caps are less vulnerable to global trade policies, and tailwinds from a weaker U.S. dollar have faded for U.S. large-caps. Despite a strong year-to-date rally, small-cap valuations remain more reasonable relative to large-caps.

U.S. Value
Neutral
U.S. Growth

Value stocks lack a catalyst to advance, and growth stock valuations are less compelling.

Growth stock valuations are elevated, and trade disputes could negatively affect some global supply chains. Fiscal stimulus provided near-term support for some cyclical value stocks, but a catalyst for durable expansion remains evasive despite attractive valuations.

Int'l. Value
Neutral
Int'l. Growth

Valuations for international value stocks remain attractive, but fundamentals are somewhat concerning.

Valuations for growth stocks outside the U.S. remain extended, particularly within the industrials and business services sector. Fundamentals for international value stocks have weakened, most notably within European financials.

Fixed Income

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

Upside for high yield bonds is limited at current valuations despite low near-term default expectations.

U.S. investment-grade bond yields are more attractive. Current valuations for high yield bonds appear elevated late in the credit cycle, despite high corporate leverage. While near-term default expectations remain low, there is likely a limited upside potential.

U.S. Investment Grade
Neutral
Emerging Markets

Emerging Markets (EM) debt offers modestly attractive yields after the sell-off triggered by the crisis in Turkey.

Broad EM debt fundamentals remain attractive. Many EM currencies have been unduly punished amid contagion fears, creating attractive opportunities in select areas. U.S. dollar strength and rising country-specific risks are problematic but unlikely to become systemic.

U.S. Investment Grade
Neutral
Ex U.S. Investment Grade

International bonds have a less attractive outlook given their sensitivity to interest rate changes.

Yields for U.S. investment-grade bonds are more attractive compared with the beginning of the year, as risks from economic growth and inflation have moderated. Hedged yields outside the U.S. are preferable for dollar-based investors, but durations remain extended.

*The combined asset allocation assets managed by T. Rowe Price Associates, Inc. and its investment advisory affiliates. This figure includes assets that are held outside of T. Rowe Price but where T. Rowe Price influences trade decisions.

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 September 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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