Designed for investors who want to focus on generating income while also preserving capital.
Across all five FlexShares Strategic Models, we reduced real assets and reallocated to global equities. We believe that return expectations for real assets have fallen, especially for natural resources, which in our thinking may face headwinds from continued focus on climate risk. Given our slow growth expectations, we believe that there will be continued pressure on the supply and demand balance notably in the energy sector. That said, our analysis suggests that the asset class may actually be inexpensive relative to broader equities and could still provide protection against unexpected inflation, which we believe remains a risk. We also increased the allocation to High Yield bonds* in every model in order to take advantage of what we believe are potentially attractive risk/return profile of the general asset class, including potential yield, potential for expected total return and a potential lower risk relative to global equities. Our thinking is that high yield bonds may face some challenges from the slow economic growth environment, but may remain attractive to income-seeking investors given the very low level of interest rates in general, which we expect for the longer term. Our analysis suggests that lower levels of interest rates may also help high yield bond issuers to more easily service their debt.
Risk assets decreased slightly from 16% in 2019 to 15% in 2020. Asset Allocation Changes: High Yield (+1%), TIPS (+1%), Global Equities (-2%).
We also made an adjustment to the FlexShares Exchange Traded Funds (ETFs) we use to implement the asset allocation of the FlexShares Strategic Models. FlexShares Strategic Models seek targeted factor exposures--key drivers of long-term risk and return such as quality, value, momentum, low volatility and dividend yield—within the US equity allocation of each model. As of August 2020, we added the FlexShares US Quality Low Volatility Index Fund (QLV) and removed the FlexShares US Quality Large Cap Index Fund (QLC), as we believe the adjustment offers a more diversified factor approach.
The hypothetical models are for informational purposes only. The models may not be suitable allocations for all investors. Your own investment experience will differ including the possibility of losing money. The hypothetical model is not intended to represent any specific type of investment.