Edit ModuleShow Tags

A barbell investment approach


The Morgan Stanley Global Investment Committee (GIC) has increased the strategic allocation to equities at the expense of fixed income, while keeping cash and alternative allocations roughly the same.

  • The GIC recommends a shift toward international equities. The US has led the global recovery, but now other equity markets appear to offer similar or more upside.
  • Within alternatives, they recommend a move from hedged strategies to commodities.
  • The US equity market has led the developed and much of the undeveloped markets since the lows of the crisis. There are many reasons for this, but the most important driver is that the earnings recovery has been stronger in the US than in other regions.

Rethinking the Future

  • The GIC has recently updated their annual return forecasts for all of the major equity and fixed income markets. From these forecasts, they surmised that cash might be a better place to be than bonds, assuming some degree of interest-rate normalization over the next seven years.
  • To be clear, cash will likely have negative real returns, too, but with much less risk than bonds.
  • Another important implication of their analysis is that abnormally low returns in bonds do not necessarily mean that returns in equities are likely to be higher than normal. In fact, they think returns are likely to be lower than normal across the entire capital structure over the seven-year strategic horizon.
  • The end result is that on a strategic basis, they have decided to increase our allocation to equities at the expense of fixed income, keeping cash and alternative allocations roughly the same.
  • If rates normalize fully or more quickly than we assume, many fixed income investments could produce negative nominal returns, something many investors are not prepared to accept.
  • Within fixed income, they are now emphasizing shorter-duration securities (one to five years) than previously.
  • They are also shifting our strategic equity allocations toward international markets.

Tactically speaking

  • The GIC thinks it is too early to be fully invested on a tactical basis. A "high risk" signal was recently triggered and when that happens, it typically makes sense to wait for a more favorable signal, which usually comes after a market pullback or consolidation. Most of our tactical equity underweight is in the US, reflecting our desire to shift toward international markets.
  • For now, inflation-linked securities have been eliminated from the tactical portfolio given their record high valuations.


  • The GIC did not meaningfully change our strategic or tactical allocations to alternatives.
  • Specifically, they have a 20 percent weighting in both frameworks, still a much higher percentage than what most clients currently hold.
  • The GIC stresses it is important for investors to fully consider the historic diversification benefits of alternative investments within the framework of their proposed increased weighting toward equities.
  • Within alternatives, they recommend a partial shift to commodities from hedged strategies and managed futures.
Edit Module
Todd Hauer

Todd Hauer is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley Smith Barney in the Denver Tech Center. He can be reached at 720-488-2406 or toll free at 1-800-347-5099, or you can email him at Todd.Hauer@morganstanleysmithbarney.com.

Get more of our current issue | Subscribe to the magazine | Get our Free e-newsletter

Edit ModuleShow Tags

Archive »Related Articles

Don't abuse your employees with performance appraisals

Did you know that traditional performance appraisal is based on 100-year-old research by behavioral scientist on dogs, rats and pigeons? Stop and think for a moment: How do managers come up with the ratings for the performance review?

Law firms are getting creative with their real estate

Despite rising rents in many U.S. markets, the legal industry can still find opportunities to improve real estate efficiency, according to JLL’s latest annual Law Firm Perspective.

Buena Vista's South Main has the Wright stuff

Buena Vista’s South Main won the 2016 Wright Award for its collaborative spirit, strong vision and a commitment to craft. The winner was one of a dozen peer-nominated contestants from 10 Colorado towns.
Edit ModuleShow Tags

Thanks for contributing to our community-- please keep your comments in good taste and appropriate for our business professional readers.

Add your comment: