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CONTRIBUTORS

Stephen Dover, CFA

Chief Investment Strategist
Head of Franklin Templeton Institute

Tony Davidow, CIMA®

Senior Alternatives Investment Strategist
Franklin Templeton Institute

Preview

Most studies agree that the majority of returns come from asset allocation. Regime-based asset allocation (RBAA) is founded on the premise that asset classes perform different under various economic scenarios referred to as regimes.”
–Bruce Stewart, “Introduction of Regime-Based Asset Allocation,” Investments & Wealth Monitor, July-August 2020

In the last several years, we have experienced the longest equity bull market in history, a global pandemic, and the highest level of inflation since the 1980s. And since March 2022, the Federal Reserve (Fed) has raised interest rates 525 basis points (5.25%). Throughout this period, we have seen a natural rotation of leading and lagging asset classes as we’ve moved from one economic regime to the next.

This paper explores the historical performance of a select group of asset classes across various regimes. The goal is to try to arm advisors with knowledge for analyzing asset class performance across regimes. This paper examines the following:

  • What are the various types of asset allocation?
  • What are the various economic regimes?
  • Which asset classes have historically performed best across each regime?
  • What role do alternative investments play in a client portfolio?
  • Are there opportunities to allocate tactically across regimes?

In this paper, we explore the ability to identify changing economic regimes, and make subtle shifts given the economic environment.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.

Alternative strategies may be exposed to potentially significant fluctuations in value.

Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.

Active management does not ensure gains or protect against market declines.

Hypothetical scenarios provided are not based on the performance of actual portfolios and the interpretation of the results should take into consideration the limitations inherent in the results of the models, some of which are listed below. The hypothetical models are based on historical performance of the market sectors reflected in the models, current market conditions, the amount of risk to be assumed by the portfolios, as applicable, and certain subjective assumptions relating to the respective investment strategies. Such model scenarios assume investment through the entire timeframe referenced. Hypothetical information is presented to establish a benchmark to assist in assessing the anticipated risk and reward characteristics of an investment or a strategy and to facilitate comparisons with other investments. In general, the higher modeled return is for an investment or strategy, the greater the amount of risk that is associated with that investment. Any modeled data or other forecasts contained herein are based upon estimates and assumptions about circumstances and events that may not occur or may change over time. For instance, the hypothetical models may assume a certain rate of increase in the value of the investment over a particular time period. If any of the assumptions used do not prove to be true, actual results may be lower than modeled returns or outcomes. The modeled outcomes are subject to change at any time and are current only as of the date herein. Hypothetical outcomes are subjective and should not be construed as providing any assurance as to the results that may be realized.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

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