February 2025 Memo
Stocks had a sharp rebound in January while bonds rose more modestly. It's interesting to note that in the past six months (roughly since The Federal Reserve started easing interest rate policy), stocks and bonds have both dropped together in two of those months. Looking back 24 months, we observe that stocks have fallen nine months…and guess what? Bonds also fell every one of those months. Diversification is accomplished by owning assets with prices that are influenced by different factors and thus their prices move separately – when one zigs, another zags. With bonds and stocks mostly moving in the same direction the past couple years, the traditional bond/stock portfolio is not providing sufficient diversification benefits. Hence, for years, we have strived to build portfolios that diversify beyond traditional bond and stock models. That strategy has proved beneficial during this period of high stock-bond correlations.

We know the topic on everyone's mind is tariffs and politics. We don't have any special insight (or a crystal ball). What we do have is a thorough understanding of the portfolios we manage and the ever-changing market we operate within. The reality is that when valuations on "riskier" assets are high, as they are today (specifically stocks and high-yield bonds), prices are more susceptible to shocks of all types (not just tariffs). Our response is to increase the quality and diversification of portfolios.

In early January we wrote, "One doesn't need to divine the future to expect elevated volatility in both stock and bond markets. Managing volatility/risk is a core objective of our strategies, as such, we believe we are well positioned to navigate the expected turbulence.". A month of Donald Trump's Presidency, has affirmed our understanding of the current investment environment and portfolio strategy.

Portfolio Strategy

Debt


Liquid Fixed Income

Spreads on corporate bonds are approaching record tight levels (i.e. valuations are high). This is most apparent and/or concerning at the lowest-rated segment, high-yield bonds. Hence, bond portfolios have gravitated toward higher-quality and more liquidity.
Yields from higher-quality, more liquid corporate bonds are compelling versus cash.
We remain cautious on long-term government bonds because we do not believe yields compensate investors for the risk of inflation and government deficits.

Private Credit
Our opportunity set continues to improve in this space, in both breadth and quality. We will maintain our healthy exposure given the relatively predictable, attractive potential returns.

Equity


Public Equity (stocks)

Given high valuations, high concentration and the expectation of higher volatility resulting from political uncertainty, we remain cautious and happy with an underweight exposure.
Despite high concentration in the 10 largest companies, the S&P500 remains the most compelling opportunity for core stock exposure. We believe it is quite simply, they highest quality portfolio of companies. Through the S&P500 investors receive diversification across sectors and global revenue exposure. It also captures a healthy blend of current earnings and growth (i.e. future earnings).

Private Equity
Our experience investing in private equity over the past decade enables us to take advantage of the revolution we are currently observing in private asset investing. For decades private asset exposure was mostly limited to large institutions. This market is evolving at a rapid pace to enable individual investors to participate.
We believe exposure to private equity allows investors to hold less publicly traded stocks, which could lower portfolio volatility and gain exposure to a more diverse set of business. Given current public market dynamics described above, we believe this is an excellent time to allocate to private equity.

Real Assets


Real Estate

Some sectors have maintained strength (industrial, rental housing, travel/leisure), while others are seeing valuations bottom (office, retail). Diversified real estate is beginning to look attractive for more conservative investors.

Infrastructure
Infrastructure assets have predominantly only been available to large institutional investors. These are attractive as they tend to be long-life, relatively stable assets with prized characteristics like inflation protection. Like the rest of the private asset universe, the best asset managers are now tailoring their infrastructure strategies to individual investors. We are busy conducting due diligence on expected offerings.

Commodities
Consistent with our objective to hold a more diversified portfolio of assets during periods of heightened volatility, an allocation to commodities can improve portfolio return dynamics and help mitigate risk.

Long-term tail winds for commodities such as geo-political strife, energy transition, infrastructure demands including manufacturing reshoring and trade wars all contribute to our belief a modest exposure is reasonable.


The information contained herein has been provided by Constellation Wealth Management and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.

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