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 $304 billion in assets under management as of June 30, 2018.*

June 2018 Positions

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

Equity valuations remain elevated, while the upward trend in bond rates may be tempered by demand for yield.

Rising concerns about trade protectionism and trade policy volatility could pose a risk to equities and bond performance. Broad global trends remain supportive of equities, but valuations are elevated. Upward trend in rates may be tempered by demand for yield.

Equities

U.S.
Neutral
International

International equities, with greater exposure to global growth, offer attractive valuations relative to the U.S.

Valuations in the U.S. are slightly elevated, and strong corporate earnings growth is likely already at peak level. Stable economic growth and positive corporate earnings growth are supportive of international equities, but trade uncertainty poses a risk.

Developed
Neutral
Emerging

Emerging markets (EM) offer attractive valuations relative to developed markets, but U.S. dollar strength could be a concern.

EM stocks are supported by global demand for exports and positive corporate earnings. Higher interest rates, hawkish trade policies, country-specific issues, and a stronger U.S. dollar are potential risks, but valuations remain attractive versus developed markets.

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, but some structural headwinds remain. The current level of energy prices may be unsustainable, and other commodities remain structurally challenged by supply/demand imbalances.

Large-Cap
Neutral
Small-Cap

U.S. small-caps valuations are reasonable, and are less vulnerable to trade policy and could benefit from tax-related spending.

Tailwinds from a weaker dollar are fading and trade policy remains a threat to U.S. large-caps. U.S. small-caps are less vulnerable to trade policy and could benefit from a pickup in mergers and acquisitions. Domestic growth trends are moderating for global small-caps.

U.S. Value
Neutral
U.S. Growth

Growth stock valuations are elevated, while value stocks may benefit from a tax-reform aided cyclical upswing.

Certain growth stocks are likely to benefit in the current low growth environment, but supply chains for technology stocks could pose a risk. Tax reform, rising interest rates, and higher oil prices could be supportive of cyclicals, financials, and energy stocks.

Int'l. Value
Neutral
Int'l. Growth

Valuations for international growth stocks are above historical averages while valuations for value stocks remain attractive.

Fundamentals for international value stocks have weakened, most notably within European financials. Following strong performance, growth stock valuations, particularly for industrials, remain extended.

Fixed Income

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

High yield fundamentals are broadly positive with near-term expectations for defaults low. Upside is limited at current valuations.

U.S. investment grade yields continue to be attractive. Fundamentals remain positive for high yield bonds, with default rates falling and corporate earnings rising. However, 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.

Broad EM debt fundamentals remain attractive. However, EM bonds remain vulnerable to developed market central bank tightening, a stronger U.S. dollar, trade volatility, and political risks in several emerging nations.

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

Hedged yields outside the U.S. are more attractive for dollar-based investors, but durations remain extended.

Yields in the U.S. are more attractive following a sell-off on concerns about higher energy and rising inflation. U.S. yields remain the most attractive among developed markets as monetary policy moves advance at a measured pace.

*The combined asset allocation assets under management of the T. Rowe Price group of companies as of June 30, 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 June 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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