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Concordius Strategy
Asset Allocation In A Rising Rate Environment
Given the recent spike in bond yields, we have been asked by clients whether
there are any particular allocation changes they should make to their portfolios
in order to be better positioned within a rising rate environment. We have examined a number of research reports and it appears that there is a consistency
of findings across the studies. In this note we articulate these findings and
attempt to provide a prudent course of action, given our conclusions.
May 19, 2015
“Investors should continue to
focus on value opportunities
and not be deterred by the
direction of interest rates”
Morgan Sizer
Alternative Research & Strategy
Investors Have Asked This Question Before
Numerous studies have been conducted which examine
the performance of equities in both rising and falling rate
environments. Reports by Morningstar and Russell Research capture the general findings of these studies:
 Though equities do underperform in rising rate environments, there is no consistently negative correlation between rates and equity returns (annualized
equity returns are still positive during periods of rising
 Over the 1970-2013 study period under review, during
rising rate cycles within that period, equities only underperformed by approximately 100bp annualized vs. falling rate environments within that same period (see table below).
Overseas equity markets tend to outperform US domestic equities during times of rising domestic rates
(the study does not examine foreign monetary policy).
The research also suggests that the rationale behind the
rate moves is a more important factor than the direction of interest rates. Rising rates due to an improving
economy are generally good for stocks, whereas rates
rising due to inflationary concerns are generally negative for stocks. Similarly, rate cuts due to falling inflation
expectations is good for stocks, but falling rates due to a
recessionary economic environment coincide with stock
market underperformance.
Courtesy Russell Research
Equity Sectors Which Typically Benefit
Sectors which typically benefit from a benign rising rate
environment (good economy vs. fears of rising inflation)
are cyclical sectors which include financials, insurance
companies, industrials and technology stocks.
Banking stocks benefit due to an increase in their net
interest margins, as well as lower non-performing loans,
as unemployment falls and house prices rise.
Insurance companies benefit as higher rates help them
fund their potential liabilities.
Technology and industrial names benefit from the increased output and investment in manufacturing and technological processes as economic activity increases.
At Concordius Capital Advisors we believe that current
foreign markets, and not be deterred by the direction of
conditions exhibit a benign inflation environment where
the Fed is expected to raise rates due to an improving
interest rates.
economy. Within this context, equity investors should
continue to seek out value opportunities within the
above-mentioned sectors, look to increase exposure to
Within clients’ fixed income allocations, we are advising
clients to consider adopting ladder strategies in order to
more efficiently harness the increased volatility within the
fixed income space.
Concordius Capital Advisors LLC is registered as an investment advisor with the SEC. The firm only transacts business in states where it is
properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of
the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
All investment strategies have the potential for profit or loss.
This document should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned, or as personalized investment advice.
A list of all specific recommendations made by the firm for the past year is available upon written request.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or
strategy will be suitable or profitable for an investor’s portfolio.
Past performance may not be indicative of future results
There are no assurances that a portfolio will match or outperform any particular benchmark.
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the
date of publication and are subject to change.
Contact Us
Concordius Capital Advisors, LLC
9500 Koger Boulevard, Suite 111
St. Petersburg, FL 33702
(813) 642-6444
[email protected]
Visit us on the web at www.concordiusadvisors.com