For the defined contribution (DC) plan sponsors, the key is not to panic, says Paul Zemsky, chief investment officer, multi-asset strategies and solutions at Voya, but stick to the long-term plan. Zemsky advises not getting drawn into short-term views and events.
“We’re big believers in target-date funds (TDFs),” Zemsky says, because the vehicle helps provide the right amount of risk in the asset-allocation mix. While volatility can be a challenge, he tells PLANADVISER he does not expect to see much change in glide path investments, though he adds that he expects to see more lower-volatility equities in glide path structures, “a strategy that makes sense and should definitely be looked at.”
Zemsky says people should use caution when they stretch for yield. “It can be a little risky,” he says. “I would advise that DC participants who are directing their own investments be careful. I would check to see if the investment manager is doing that type of asset allocation already, instead of trying to do it themselves.”
If there is a big picture for 2015, Zemsky says, he definitely favors products with embedded advice, such as target-date asset-allocation and more professional management, instead of leaving individual investors to try and do it all themselves.
The firm is continuing to hold greater equity than fixed-income exposure versus its peers or benchmarks, Zemsky says, and continues to prefer U.S. equities over non-U.S. equities as more attractive fundamentals offset more aggressive valuations for U.S. stocks.
Anticipating a European Central Bank monetary shift, Voya is modulating its underweight position in EAFE. The firm has eliminated an underweight position in emerging market equities in the belief that stronger global economic activity in the second half of 2014 would benefit emerging economies, and in recognition of attractive valuations.
What does the economy look like? Voya believes growth that is above trend is likely through 2015, based on drops in figures for U.S. unemployment and steadfast GDP growth. Globally, growth will be driven by the U.S., the largest economy, and China, the strongest large expected grower, Zemsky says. Business investment remains a source of upside risk to the U.S. outlook. Nominal Eurozone growth is expected to be so tepid that its size is less meaningful, he adds.
“We’re in uncharted territory,” says Christine Hurtsellers, chief investment officer, fixed income at Voya, between duration risks and the question everyone’s been asking: When is the Fed going to tighten? Voya’s modus operandi is to proceed with caution, she says.
The investment manager continues its strategy of overweighting U.S. fixed-income risk sectors versus global credit and emerging markets. Voya expects the Federal Reserve to raise rates later and more quickly than market consensus, and it will likely be a series of gradual rate hikes—perhaps eight to 10 basis points—in the latter part of 2015. More talk of the “income divide” or “income inequality” also plays a part in keeping rates low, Hurtsellers says.
A look at historical industry correlation patterns shows a different pattern this cycle, Voya feels, with correlations remaining stubbornly elevated and a range that has continued to narrow. One reason could be heavy involvement in financial markets by the Central Bank. Hurtsellers points out that correlations become uncorrelated as the economy improves.
According to Hurtsellers, the firm expected additional spread tightening through January, but now views 2015 as a market with increasing spread volatility. In response, she says, the focus is on security selection in less-liquid sectors, with tactical beta positioning in Agency MBS (mortgage-backed securities).
The decline in U.S. unemployment has consistently outpaced the Federal Open Market Committee’s forecasts, Hurtsellers says, but wage pressures have not increased alongside it. The key difference is that the level of unemployment is closer to the last two cycles’ worst levels than to their best levels; however, Voya notes, wage growth often trails other indicators.