Principal Financial Advisors, Inc – Market Volatility Update

Global markets reacted in earnest to the coronavirus fears over the past several weeks.  Equity markets fell, US Treasury yields hit new lows, volatility spiked, and credit spreads widened.  As uncertainty and fears persist, global central banks acted quickly and meaningfully to alleviate the immediate stresses in our financial markets.  The US Federal Reserve took unprecedented steps by lowering short-term interest rates, moving to the zero-lower bound in two moves, and injecting needed liquidity into the fixed income markets.
During these times of uncertainty, we want to remind our investors of our long-term investment focus. Our investment horizon takes into consideration asset class historical returns and risk profiles and builds an asset allocation line-up that exhibits strong return potential and diversification benefits.  Disruptions, like the one we are currently in, can create unsettling results but can also create opportunities to generate value over a longer horizon.
The asset allocation line-up is reviewed formally on a quarterly basis, however, that doesn’t necessarily result in changes due to our long-term focus.  Over the past 15 months, PFA has made several adjustments to the asset allocation line-up.  These include:
  1. Removal of the Global Multi-Strategy Separate Account – this was an opportunistic weight within our fixed income asset class over the past several years. Historically, this investment option has performed well in rising interest rate environments. The cycle of interest rate increases stopped in December 2018, and thus we removed the exposure before the Fed pivot in early January 2019. This removal proved beneficial as interest rates fell throughout 2019 and have reached even lower levels in March 2020.
  2. Decreased high yield exposure –we still believe that high yield bonds provide additional return opportunities over a full market cycle, but given the long period of excess returns against the Bloomberg Barclays Aggerate Bond Index, tight credit spreads, and a perceived late stage of the economic cycle, we reduced our dedicated high yield allocation in early January 2019. This reduction in high yield exposure benefitted as high yield underperformed higher quality and longer duration bonds in 2019 as high yield credit spreads have widened by 500 basis points since year-end 2019.
  3. Increased passive core fixed income exposure – the allocations from the removal of the Global Multi-Strategy Separate Account and reduction in high yield were directed to the Bond Market Index Separate Account. This separate account seeks to mimic the risk/return profile of the Bloomberg Barclays Aggregate Bond Index, which currently reflects a 40% allocation to US Treasuries. Increasing our passive core fixed income allocation to 40% of the total fixed income asset class provided downside protection, especially during this recent flight-to-quality, relative to our exposure in the Core Fixed Income Separate Account and High Income Separate Account.
  4. Replaced Core Plus Bond Separate Account – with the Core Fixed Income Separate Account in the third quarter of 2019. The Core Fixed Income Separate Account tends to have a higher credit quality than the Core Plus Bond Separate Account and doesn’t heavily utilize high yield. This change will help PFA manage the overall exposure to high yield bonds within our client portfolios.
  5. Addition of Diversified International Separate Account – given the underperformance of the Overseas Separate Account, the growing probability of continued central bank accommodation, falling interest rates (further impacting financials) and recognizing that growth stocks often outperform value stocks at the end of an economic cycle, we reduced the allocation to the Overseas Separate Account. The assets were allocated to the Diversified International Separate Account in September 2019. This allocation benefitted client portfolios as the growth tilt of the Diversified International Separate Account has been rewarded by the market.
Looking forward, we continue to monitor the financial markets and our investment options very closely. Volatility can make it difficult to distinguish a long-term signal from noise in the short-term and at this point long-term risk and return profiles have not significantly changed.  We will continue to monitor and rebalance client portfolios, as appropriate, to ensure the overall asset allocation remains consistent with target allocations.
If you have any questions about your company’s retirement plan or what is occurring in the markets please contact your advisory associate at Principal Financial Advisors, Inc.

Sincerely,

Randy Welch
President
Principal Financial Advisors, Inc.

Before directing retirement funds to a separate account, investors should carefully consider the investment objectives, risks, charges and expenses of the separate account as well as their individual risk tolerance, time horizon and goals. For additional information contact us at 800-547-7754 or by visiting principal.com.

 

Investing involves risk, including possible loss of principal.

 

Fixed-income investment options (inclusive of U.S. Treasury Inflation-Protected Securities) are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of the bond investment options nor their yields are guaranteed by the U.S. government or any other government entity.

 

High yield investment options are subject to greater credit risk associated with high yield bonds.

 

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

 

International and global investment options are subject to additional risk due to fluctuating exchange rates, foreign accounting and financial policies, and other economic and political environments.

 

Principal Financial Advisors, Inc. is a registered investment adviser and member of Principal Global Investors.   Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.  Asset allocation strategies are developed using Separate Accounts available through a group annuity contract of Principal Life Insurance Company.

 

Asset allocation and diversification do not ensure a profit or protect against a loss.

 

Separate Accounts are available through a group annuity contract with Principal Life Insurance Company. Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group, Des Moines, IA 50392. See the group annuity contract for the full name of the Separate Account. Certain investment options may not be available in all states or U.S. commonwealths. Principal Life Insurance Company reserves the right to defer payments or transfers from Principal Life Separate Accounts as permitted by the group annuity contracts providing access to the Separate Accounts or as required by applicable law. Such deferment will be based on factors that may include situations such as: unstable or disorderly financial markets; investment conditions which do not allow for orderly investment transactions; or investment, liquidity, and other risks inherent in real estate (such as those associated with general and local economic conditions). If you elect to allocate funds to a Separate Account, you may not be able to immediately withdraw them.

 

April 2020 – 1142465-042022

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