Touchstone Asset Allocation Guidance

We believe we can add value by adjusting portfolio weights in response to changing market conditions and in anticipation of changing fundamentals. History demonstrates that risk assets move through repeated boom and bust cycles. While the economic cycle influences these cycles, they do not necessarily overlap with the risk asset cycle.

By Touchstone Asset Allocation Committee May 2, 2024

Economy & Markets

Executive Summary

Sticky inflation has complicated the outlook for our economy and markets. It is likely that the Fed will need to hold rates at this level for longer than previously expected.
While our economy remains resilient it is not immune to monetary tightness. We continue to see signs of strain among pockets of consumers and businesses and expect they will increase with time.
To adjust to a longer period of higher interest rates we made a number of changes to our tactical positioning. See below for details.

Download Touchstone Asset Allocation Guidance (PDF)

Fixed Income

Weight: Neutral
Interest rates remain at levels not seen since before the Great Financial Crisis. While inflation has become sticky, interest rates remain above the rate of inflation. The combination of these two factors are likely to translate into higher returns on an absolute and inflation adjusted basis.

U.S. Taxable Investment Grade
Weight: Neutral
While we continue to find current interest rates to be attractive, we have begun to reallocate exposure to assets with higher perceived return potential such as non-investment grade and equities.

Duration
Weight: Slight Overweight
Higher than expected inflation readings have caused interest rates to move up across the curve. We are considering adding to duration should rates move even higher.

U.S. Taxable Non-Investment Grade
Weight: Neutral
HY bonds have performed well in the face of higher interest rates due to economic resilience, lower maturity wall, and higher index quality characteristics. We would be overweight if spreads were wider.

Equities

Weight: Neutral
We increased equity exposure with a bias toward U.S. stocks due to our expectation for a soft-landing and, eventually, more market friendly monetary policy.

U.S. Large Cap
Weight: Neutral
Earnings for large caps continue to surprise to the upside and estimates for 2024 have begun to rise. It is still early in the year and valuations are historically high, but we can't ignore the improving backdrop.

Growth
Weight: Slight Underweight
Growth stock outperformance in 2023 was driven by a small group of stocks. Narrow leadership is typically not a healthy sign. While AI has created some excitement, for many of the companies it has yet to translate into earnings growth.

Value
Weight: Slight Overweight
We have been waiting for an opportunity to increase our Value exposure in anticipation of a Fed pivot. After very strong Growth style returns in 2023, we believe the opportunity for Value outperformance improves in 2024 given attractive relative valuations. An extended Fed rate pause does introduce a near-term headwind.

U.S. Mid Cap
Weight: Modest Overweight
Mid-cap valuations are significantly below average on a historical basis versus their own history and relative to large caps. Mid-caps underperformed large caps despite stronger earnings growth over the past two years.

U.S. Small Cap
Weight: Neutral
Given the likelihood of a more extended Fed rate pause, we decided to remove our overweight to this more economically sensitive asset class. We see this as a near-term risk.

International Developed
Weight: Slight Underweight
We see an opportunity developing for international developed stocks mainly due to the timing difference between US and European central banks. Later this year Europe's economy could begin to improve while the US is slowing.

International Emerging
Weight: Neutral
The emerging market picture remains mixed, both from an economic standpoint as well as valuations. Given an extended Fed rate pause we are less confident in the return prospects for many developing markets in the near-term.

Strategic: Strategic asset allocation is a baseline allocation between asset classes established with a longer term focus and congruent with an investor’s investment goals and objectives. The allocation is meant to optimize the asset mix through methodical diversification in an attempt to maximize return and lessen risk.

Tactical: Tactical asset allocation is differentiated from strategic asset allocation by having a much shorter time horizon and the goal of adding alpha beyond what would be allowed through static strategic weights. Markets tend to be more volatile over shorter time horizons, while longer time frames tend to smooth out that volatility. That enhanced volatility in the short term creates the opportunity for either return enhancement and/or risk reduction by adding to or reducing weights of different asset classes.

About the Author

Touchstone Asset Allocation Committee

The Touchstone Asset Allocation Committee (TAAC) consisting of Richard “Crit” Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Brian Cheyne, CFA, CIMA - Senior Investment Strategy Specialist, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which is delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.

Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.

Index Definitions
S&P 600^® Index is an unmanaged index considered representative of U.S. small-capitalization stocks.
S&P 500^® Index is a group of 500 widely held stocks and is commonly regarded to be representative of the large capitalization stock universe.
Bloomberg U.S. Aggregate Bond Index is an unmanaged index comprised of U.S. investment grade, fixed rate bond market securities, included in government agency, corporate and mortgage-backed securities between one and ten years.
Alpha is the portion of a fund’s total return that is unique to that fund and is independent of movements in the benchmark

In accordance with Rule 22c-2 under the 1940 Act, Touchstone Funds has no arrangements to permit any investor to trade frequently in shares of the Funds, nor will they enter into any such arrangement in the future.
Fed is abbreviated for the U.S. Federal Reserve Board.
AI is abbreviated for artificial intelligence.

The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors.

The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on there sources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
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