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 March, we continued to make tactical adjustments to reduce pro-cyclical exposure. We’ve returned our overall stock/bond allocation back to strategic weights and removed our domestic equity bias.
The Trump administration has taken an aggressive policy approach that they believe may involve near-term economic pain. We’re taking these risks seriously and have adjusted our positioning accordingly over the last two months.
While we’ve reduced most of our pro-cyclical exposure, we are not adopting a defensive stance. U.S. businesses and consumers remain financially strong, with low debt burdens. Although our domestic equity return expectations have declined, we do not foresee a bear market.

Download Touchstone Asset Allocation Guidance (PDF)

Fixed Income

Weight: Neutral
We’ve returned to strategic weights between stocks and fixed income, as bond yields near 10-year highs offer compelling income opportunities and competitive return prospects versus equities.

U.S. Taxable Investment Grade
Weight: Slight Overweight
We tactically added to investment-grade bonds, shifting to a slight overweight. They offer appealing risk-adjusted return potential given attractive yields and lower economic sensitivity.

Duration
Weight: Neutral
We’ve shifted to neutral duration as we believe interest rate risks have become more balanced. The prospect of slowing economic growth could put downside pressure on yields, while sticky inflation and potentially disruptive debt and budget negotiations could put upside pressure on yields.

U.S. Taxable Non-Investment Grade
Weight: Slight Underweight
We slightly reduced high-yield bond exposure to trim pro-cyclical risk. However, we kept the move modest, supported by loose credit conditions, higher index quality, and a manageable maturity wall.

Equities

Weight: Neutral
Our equity allocation is back to strategic weight, and we’ve removed our domestic equity bias while maintaining a preference for mid-caps.

U.S. Large Cap Blend
Weight: Neutral
We see heightened earnings risk for the S&P 500 due to tariffs, DOGE, and immigration policies. This has led us to lower return expectations, increasing the attractiveness of other asset categories.

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

Value
Weight: Neutral
We removed our slight Value overweight given more pro-cyclical exposure within the index and lack of valuation support.

U.S. Mid Cap
Weight: Overweight
We maintain a mid-cap overweight based on attractive valuations, lower international exposure, and less pro-cyclical risk versus small caps. Within mid caps, we favor higher quality companies with strong cash generation.

U.S. Small Cap
Weight: Slight Underweight
Given greater earnings risk, we reduced our small cap exposure to a slight underweight. Small business owner sentiment has turned down, particularly around capital spending and hiring.

International Developed
Weight: Slight Overweight
We increased our exposure to a slight overweight. In addition to lower U.S. return expectations, improving economic conditions in Europe, targeted fiscal stimulus, and attractive valuations support the shift. However, U.S. tariffs remain a significant risk.

International Emerging
Weight: Slight Underweight
We remain slightly underweight, given the potential drag from delayed Fed rate cuts and broader tariff threats on China and beyond.

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 400® Index is an index that measures the performance of 400 mid-sized companies in the United States.
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.
S&P 600® Index is an unmanaged index considered representative of U.S. small-capitalization stocks.
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.
Russell 1000 Index measures the performance of the 1000 largest companies in the Russell 3000 Index
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.
Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group