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

Economy & Markets

Executive Summary

In February, we made tactical changes to reduce some pro-cyclical exposure. We reduced exposure to domestic small- and large-caps and increased exposure to mid-caps and investment grade fixed income.
We typically downplay government policy as a market driver, however, it is hard to ignore the barrage of executive orders (averaging two per day), shifting tariff announcements, and DOGE initiatives. Survey data indicate that consumer and business sentiment has quickly shifted from optimism to caution.
Europe has been a surprising bright spot, supported mainly by a decent earnings season and prospects for a path to peace in Ukraine. We remain slightly underweight due to the likelihood of a coming tariff announcement that would introduce 2025 earnings and currency risks.

Download Touchstone Asset Allocation Guidance (PDF)

Fixed Income

Weight: Neutral
Bond yields near 10-year highs create attractive income opportunities for 2025. Historically, bond returns during easing cycles have often been positive, including after the 1995 soft landing.

U.S. Taxable Investment Grade
Weight: Slight Underweight
We tactically added to investment grade bonds, though still have a slight underweight. The tactical addition brings our overall stock/bond allocation back to their strategic weights as we adjust to near-term policy risks.

Duration
Weight: Slight Underweight
Following the Fed’s first rate cut, we removed our slight duration overweight. The Republican sweep introduces interest rate risk, with policy proposals that could be economically stimulative or inflationary.

U.S. Taxable Non-Investment Grade
Weight: Slight Overweight
High-yield bonds have performed well despite higher rates, supported by economic resilience, a lower maturity wall, and higher index quality. While spreads remain historically tight, recession risks appear low, financial conditions are loose, and default activity remains muted.

Equities

Weight: Neutral

We removed our slight equity overweight though continue to favor U.S. stocks, particularly Value and mid-caps.

U.S. Large Cap Blend
Weight: Neutral
We removed our slight overweight in large-cap blend. Tariff risks have increased beyond our initial assumptions and expanded DOGE and deportation efforts could harm labor conditions and consumer spending.

Growth
Weight: Moderate Underweight
We remain underweight Growth equities due to high stock-specific risks among top constituents with elevated valuations.

Value
Weight: Slight Overweight
Our slight Value overweight aims to capture expected outperformance among the bottom 493 stocks in the S&P 500 index, which have a value bias. Lower valuations, continued economic resilience, and further rate cuts should broaden market performance.

U.S. Mid Cap
Weight: Overweight
Mid-cap stocks (S&P 400) posted strong fourth-quarter results. We estimate that, in aggregate, earnings have exceeded estimates by 7.5%.

U.S. Small Cap
Weight: Neutral
Small-caps have been volatile amid shifting policy signals and small business owner sentiment has turned down. Small-cap returns have gone negative year-to-date despite strong earnings.

International Developed
Weight: Slight Underweight
Developed international equities have performed well year-to-date. We believe it is mostly a relief rally given potential progress toward peace in Ukraine, better earnings, and no tariff announcement yet. However, we don’t believe Europe or Japan will be spared from tariffs and we are waiting for that shoe to drop.

International Emerging
Weight: Slight Underweight
We moved to an EM underweight post-election, due to three challenges: slower Fed rate cuts that may restrain EM central banks; broader tariff threats on China and beyond; and potential U.S. dollar strength.

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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