January 27, 2022

Over the holidays, I watched a documentary called ‘The Rescue’ that recounts the incredible 2018 rescue effort of a young soccer team trapped deep in a cave system in Thailand. It’s an inspiring story about the heroic divers who swam for hours in complete darkness in narrow underwater caves and murky waters, unsure about what they would find. While the divers had very specific skill sets, the lessons from this story are surprisingly universal and powerful. As we approach the two-year anniversary of COVID, we have all probably experienced emotions of moving forward with limited visibility, ongoing uncertainty, and feeling the proverbial need to come up for air every now and then. The divers talked a lot about problem solving, and about the need to be technical but also practical. They achieved ultimate success by being disciplined about assessing risks, sticking with their plan, and remaining calm under pressure. These same skills can be applied to any number of situations, and they offer good reminders of how to cultivate success and satisfaction in our everyday lives. From a portfolio management perspective, we are constantly assessing risks and examining different possible outcomes. For investors, one of the top risks this year is the highly debated shift towards tighter monetary policy and higher interest rates. For investors trying to navigate markets this year, a key question has become: How do I create a financial and investment plan that I can stick with during a rising rate environment?  

First, we get a little technical, but mostly practical. When the Federal Reserve raises the Fed Funds Rate—which is currently zero but forecasted to be around 1% by the end of this year—other interest rates typically follow suit and move higher as well. This includes mortgage rates, credit card rates, margin rates, etc. One practical thing that investors should do, if applicable, is refinance and possibly pay down or even eliminate debt that is subject to higher interest rates. Savvy corporate CEOs are currently doing this. During the first week of 2022, U.S. corporations rushed to lock in low interest rates before a possible March rate hike by refinancing and issuing almost $96 billion in bonds, the most since 2003. Locking in low rates is a sensible way for investors to approach a rising rate cycle.

In terms of portfolio positioning, we favor an overweight to growth assets since the Fed is raising rates in response to a strong economy, higher inflation, and lower unemployment. With U.S. GDP forecasted to be above trend this year, we believe equity markets will generally be able to handle modestly higher rates. For investors with imminent cash needs, one idea is to possibly create a liquidity account. Keeping earmarked funds liquid can help bring peace of mind during volatile markets, and as rates rise, cash equivalents will begin paying higher yields as well.

Another theme from the documentary is to be realistic about your options and develop creative solutions. For bond investors, the reality is that government bond yields are presently at very low levels, and it will be challenging to generate a positive return from government bonds in a rising rate environment. Thus, within fixed income, we favor an underweight to Treasuries and an overweight to credit such as high yield, emerging market bonds, and shorter duration asset-backed securities. When we think about creative solutions to traditional fixed income today, we favor alternative assets and absolute return funds. The absolute return funds we utilize today are actively managed flexible fixed income funds that do not track traditional bond benchmarks. These funds have low correlations with traditional stocks and bonds and the potential to outperform in rising rate environments.

As we progress into this new year, we remain focused on helping clients navigate the ever-changing investment landscape. Just as the Thai rescue documentary I watched ends with a positive outcome, we are reminded that rewarding things are possible when we collaborate, think holistically, and remain focused on our objectives. We push onward and upward, and we look forward to working with our clients in the years to come.