Stocks, Bonds—Hah! Wilshire Lays Out a Broader Asset Allocation

Those longstanding pillars of institutional investors’ portfolios, public equities and investment-grade fixed-income, didn’t do so hot in 2022—an unusual dual dive for a pairing that had enjoyed bull markets for decades. That’s why Wilshire Advisors is advocating that pension plans and other nonprofit investors re-do their allocations beyond the once-trusty stocks and bonds they have perennially favored.

The big change that has rocked the investing terrain is the dramatic increase in interest rates that began last year, which a Wilshire study likened to the 1980 eruption of Mount St. Helens in Washington, a catastrophe that followed more than a century of volcanic dormancy.

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The 2022 rate hikes, which are continuing this year, are similar events that shook the world. Wilshire projects that, as a result, traditional stocks and bonds will not stage a comeback. Mainstream bonds “are no longer the protector they were,” says Robert Appling, a Wilshire managing director and co-author of the study, in an interview. “Public equities, which have dominated” portfolios, should be rebalanced into other areas “such as private capital,” he adds.

U.S. public pensions, as of 2021, continue to have a relatively strong presence in stocks, with 47.1%, and bonds, in second place, at 21.5%. Alternatives, such as private equity and real estate, have been increasing their share, but the traditional asset classes continue to rule.

The Wilshire report calls for “increasing exposure to marketable alternatives with low correlations and beta to risk assets that are unrestrained across asset classes.” In a metaphorical shift, the consulting firm turned to soccer to illustrate its recommendations.

The study calls for giving “the talented rookie a shot at striker.” Public equities “tripped on the pitch” in 2022, and their still-high valuations and dwindling earnings in 2023 don’t bode well for the future, it says. Venture capital and buyout funds stand the best chance of riding societal trends and taking advantage of opportunities in health care, tech and industrials, it argues.

Generating income is best done nowadays via high-yield bonds (averaging 9.6% yields versus 5.1% for investment-grade paper) and short-duration credit, which the firm labels its “midfield” players. For goalie? Try global macro-oriented hedge funds, the study advises. As the report puts it, “diversifying marketable alternatives with low correlations and beta to risk assets that are unconstrained across asset class and direction (long/short)” should serve investors well.

Rebalancing among some allocators, along the lines Wilshire suggests, has started to happen. The nation’s largest public pension fund, the California Public Employees’ Retirement System, last summer announced it was shifting its asset allocation to move its stock ownership to 42% from 50% of its holdings.

Certainly, not everyone has such a dour view of traditional assets as does Wilshire. Consultancy Cambridge Associates, for instance, expects stocks and bonds to rebound to their old prominence in 2023.

So When Will Stocks and Bonds Un-Link?

CalPERS’ New Asset Allocation Kicks In July 1

Tags: Bonds, Buyout Funds, California Public Employees’ Retirement System, Economics & Markets, Hedge Funds, Mount St. Helens, Private Capital, public pensions, Stocks, Venture Capital, Wilshire Advisors

Fund Evaluation Group LLC, also known as FEG Investment Advisors, an employee-owned investment advisory with $71 billion assets under advisement, announced that Becky Wood, its president and CEO, will retire at the end of 2023 after five years at the helm of the organization and more than three decades of service to the firm.

Current CIO Alan Lenahan will take over as CEO, while Bill Goslee, the current head of institutional services, will take over as president, both in 2024. Additionally, Nolan Bean was promoted from head of institutional investments to co-CIO, effective immediately, joining Greg Dowling.

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Upon her retirement from Cincinnati-based FEG, Wood will continue her affiliation with the organization by being elevated to chairwoman of the firm’s board.

Her replacement, Alan Lenahan, who previously served as CIO of the firm for the past seven years, will assume the role of CEO at the turn of the new year. In addition to this promotion, FEG elevated Bill Goslee, former the head of institutional services for the past 15 years to president, effective, January 1, 2024. While promoting Nolan Bean from managing principal, head of institutional investments, to co-CIO effective immediately, alongside current Co-CIO Greg Dowling.

Lenahan has been at FEG for 21 years, the last seven as CIO, and holds both a CFA charter and a CAIA charter, with previous stints at Western & Southern Life and Arthur Andersen.

Goslee has been with FEG for 15 years and brings 38 years of financial services experience to the president role, with tenures at Arthur Andersen, Goldman Sachs Asset Management and Nationwide Financial.

“Alan and Bill have been instrumental in the development and execution of FEG’s investment and business strategy for more than a decade,” Wood said in a statement. “We are confident that through their focus on investment performance and client engagement, FEG will deliver an exceptional investment experience to our deserving clients. As tenured members of the FEG Leadership Team, Alan and Bill have highly complementary skill sets and a long history of close collaboration. They also have a deep understanding of the distinct needs of our institutional clients, their long-term investment objectives, and unique missions. I look forward to working closely with Alan, Bill and our entire Leadership Team throughout this transition, and I am pleased to have the opportunity to continue to uphold FEG’s mission, vision and values as a member of the Board moving forward.”