Originally Published December 19, 2016
Portfolios tend to be heavily weighted to the things that recently worked, right, because they grow in proportion of your assets. And we all look backwards a little bit when we think about what's going to do well in the future, and really ensure that you have some of the assets that are likely to do well in a more inflationary or reflationary period.
We've operated as investors for a long period of time in an environment of declining interest rates. And particularly in the last several years, lots of capital has flowed into bond funds because that's been a very rewarding place to be in terms of returns. But it also is less risky, so you've got the best of both worlds, so to speak, in allocating your money to fixed income. And I think while the risk side of it - in that there's more capital protection in bond allocations - that will hold, but the return side isn't going to hold in the same way.
What's going to work is things that are more - will benefit more from stronger economic growth and will benefit more from higher interest rates. And so that, you know, broadly speaking, is risk assets like smaller-cap stocks, bank companies, particularly in the US where capital ratios are pretty healthy. But interest rates have been very narrow and the curve has been very flat, so they haven't made a whole lot of money.
And also you've got this environment today, again, once again in the US, starting there with a push towards less regulation. Certainly is going to, again, benefit some industries more than others. So those who have been subject to the tightest regulatory scrutiny in the last five or six years - so banks stand out in that - likely to get some relief going forward. And so I think you're seeing the beginnings of people reevaluating their portfolios with some of those changes in mind.