Structuring portfolios with a global mindset

Michael Godwin, of Fragasso Financial Advisors, understands better than most the challenge of mitigating risks in an environment where bond and stock prices have become positively correlated – as seen throughout 2022 and much of 2023.

“Broadly diversifying your portfolio in traditional asset classes hasn’t really helped in improving Sharpe ratios,” he says, pointing out the underperformance of international emerging markets and US small-cap stocks compared to US large-cap growth stocks. 

Discussing the economic outlook, Godwin acknowledges the prevalent belief among investors that a soft landing is likely for the US economy. However, he cautions about the difficulties in balancing demand reduction to curb inflation while maintaining economic growth.

“In terms of the economy, most investors believe that a soft landing is the most likely outcome for the US. But I think it can be hard to slow demand enough to bring down inflation while also keeping economic growth at or above its trend. We’re of the belief that you might get one interest rate cut this year. And I think the Fed’s going to do that just because they had signalled that they want to cut rates, not necessarily because they have to cut rates.”

Consequently, Fragasso Financial maintains a below-duration exposure in their fixed-income portfolios, adjusting only when economic data signals a longer duration is warranted. And, addressing the broader market dynamics, Godwin highlights the recent shifts in investor expectations.

“Coming into the year, the market was discounting six Fed rate cuts in 2024,” he says. “And now the odds are for just under two rate cuts. That’s what really boosted the markets in the last two months of 2023 and through the first quarter of this year – it was the thought that cheaper money was on the horizon. But if the main narrative for the markets shooting 25 percent over that time frame was lower interest rates, and that doesn’t materialize, then something will likely have to give.”

But for Godwin, it’s inflation that remains a pressing concern.

“We’ve long been of the opinion that inflation will remain stickier than the Fed had anticipated. This likely means that interest rates should remain higher for longer. When we start to see employment numbers get materially worse, that’s when we’ll look to extend our duration, as that would likely signal that the Fed will need to get more aggressive in cutting interest rates.”

Drawing on his experience in global macro strategies and managing multi-asset class portfolios, Godwin shares key insights from his career.

“One of the first things I’d say is don’t get in your own way,” he advises. “Our portfolios at Fragasso are structured in a global manner, and we make tilts based on our macroeconomic views. The tilts are important from a risk standpoint because we believe that you don’t want to make wholesale changes to a portfolio. Take things with a grain of salt in this industry and do your own research. There’s often a herd mentality on Wall Street, and not that the herd is always wrong, but it’s important to try to play devil’s advocate or to see the other side often.”

And, reflecting on economic cycles, Godwin emphasizes the value of historical perspective.

"Every economic cycle is different, but there are often a number of similarities to each," he notes. "I always like to say don't screw it up. As portfolio managers, we have an unbelievable responsibility to our clients. Our clients have worked for years to build a significant nest egg, and they've entrusted us to manage that for them. My number one goal is to not screw that up." 

Technological advancements have significantly impacted Fragasso Financial Advisors’ operations, enhancing client relationships and portfolio management. Godwin describes the democratization of finance, where investments once exclusive to endowments and foundations are now available to high-net-worth individuals.

"Investing in more non-traditional or esoteric asset classes, such as private credit, private real estate CLOs, and even private equity, has become much more feasible," he explains.  “Investors need to do an incredible amount of due diligence before partnering with an alternative asset manager, especially given the wide range of returns that can be seen from the top quartile managers to the bottom quartile managers.”

These new tools and ways of doing things have had a huge impact on the transformation of wealth management as an industry. A shift towards tech has allowed investors greater access to a variety of investment opportunities that were previously out of reach.

"Over the past five to ten years, technological enhancements have led to a democratization in finance,” adds Godwin. "The broad array of investments that we can now offer our clients helps them better seek their goals. That’s something that's been very impactful, not only for performance but also for solidifying our relationships with clients.”

But, despite the tech revolution, Fragasso Financial Advisors’ approach to client relationships will always go beyond the robotics.

"We've been focusing on building strong relationships with our clients for years. It's not just about portfolio management and wealth management; it's about building trust and understanding. Whether it's through mobile apps or video calls, being able to stay connected with our clients has been invaluable.”