In volatile times, remember your time horizon; follow facts not feelings; and, if needed, reposition gradually
By Max Gokhman, Assistant Vice President, Head of Asset Allocation, Pacific Life Fund Advisors,
and Craig Imamura, Senior Analyst, Pacific Global Asset Management
Remember Your Time Horizon
The degree of response to ongoing market volatility should largely depend on your time horizon. Many investors’ objectives stretch over years or even decades. Keeping long-term objectives in mind can allow you to view short-term spikes in volatility as just bumps on the road to your financial destination.
At PLFA, we manage the Portfolio Optimization Funds with a 10-year horizon. We keep our funds consistently diversified across global asset classes to maximize our opportunity set while mitigating risk from concentrated positions.
Through the recent turbulence, this balanced approach helped Pacific FundsSM Portfolio Optimization Moderate keep pace with global equities when they rallied earlier this year and fare better when they abruptly dropped, including on March 9, when equities fell more than any day since December 2008
Chart 1: Pacific Funds Portfolio Optimization Moderate kept pace with global stocks, but still protected against the downside.
Total Return (Dec. 31, 2019 – March 9, 2020)
Source: Bloomberg, as of March 10, 2020
Pacific Funds Portfolio Optmization Moderate
Returns for the Fund reflect reinvestment of dividends and distributions. Returns shown at net asset value (NAV) have all distributions reinvested. Returns shown at maximum offering price (MOP) for Class A shares reflect payment of the maximum sales charge of 5.50%. When a sales charge is illustrated, it is applied at the beginning of the period. Performance for other share classes may differ.
For performance data current to the most recent month-end, call Pacific Funds at (800) 722-2333 or go to PacificFunds.com/Performance. Performance data quoted represents past performance, which does not guarantee future results. Current performance may be lower or higher than the performance quoted. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than the original cost.
Net annual operating expenses for Class A are 1.26% and total (gross annual) expenses are 1.32%. Returns reflect reinvestment of dividends and distributions. The Fund’s annual operating expenses shown above are effective 8/1/19 through 7/31/20. Gross Expense Ratio reflects the total annual operating expenses paid by the Fund. Net Expense Ratio reflects waivers, reductions, reimbursements, and the limitation of certain “Other Expenses.” Expense caps and/or fee waivers are reevaluated annually. There is no guarantee that the investment adviser will continue to cap expenses after the expiration date. Please see the current prospectus for detailed information.
Follow the Facts
In February, we witnessed the quickest 10% drop in U.S. stocks since the Great Recession, a plunge that shook the confidence of many investors. The resulting cacophony of headlines, tweets, and posts only served to heighten emotions, the enemy of prudent investors who make decisions based on objective data.
This stoic, follow-the-facts strategy dictated PLFA’s approach to the impacts of the Coronavirus. For instance, PLFA had already been monitoring the build-up of inventories by U.S. businesses (Chart 2) due to trade-war concerns. We believe this excess inventory will allow manufacturers to keep selling even as imports from China are restricted or slowed.
PLFA also noted the growing coordination between central bankers and legislators for a joint fiscal and monetary response to maintain a healthy economy over the medium term. In addition, we carefully took note of medical experts such as Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, who led the U.S. government’s response to outbreaks such as Zika, Ebola, and HIV. His Feb. 28 assessment that “overall clinical consequences of Covid-19 may ultimately be more akin to those of a severe seasonal influenza.”1 All this played a part in our decision to take carefully measured steps amid the sell-off to add more equities to our portfolios.
Chart 2: U.S. manufacturers began building up inventories from the onset of the trade war in 2018.
Source: Bloomberg, as of Dec 31, 2019
Investors who thoroughly analyze a potentially market-shifting event may conclude that a portfolio adjustment is warranted because the current risk or opportunity would have a meaningful impact over their time horizon. But trying to time the market is an ill-advised strategy, and implementing a significant rebalance with a single trade amid heightened volatility may amount to more harm than good. If your financial objective is years away, it’s prudent to be deliberate and measured—systematically moving toward your new allocations while assessing new evidence along the way.
1Fauci, M.D., Anthony S., et al. “Covid-19 - Navigating the Uncharted.” The New England Journal of Medicine, February 28, 2020
The MSCI All Country World Index (ACWI) captures large and mid-cap representation across 23 developed-market countries and 26 emerging-market countries.
The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market
About Pacific Funds
Pacific Funds offers U.S. equity, fixed income, and multi asset mutual funds designed for growth, income generation, and diversification. Our managers seek to deliver consistent results with downside protection strategies to help shareholders meet their long-term financial goals.
Important Notes and Disclosures
About Principal Risks: There is no guarantee the Fund will achieve its investment goal. Asset allocation and diversification do not guarantee future results, ensure a profit or protect against loss. Although diversification among asset classes can help reduce volatility over the long term, this assumes that asset classes do not move in tandem and that positive returns in one or more asset classes will help offset negative returns in other asset classes. There is a risk that you could achieve better returns by investing in an individual fund or multiple funds representing a single asset class rather than using asset allocation. A fund-of-funds does not guarantee gains, may incur losses and/or experience volatility, particularly during periods of broad market declines, and is subject to its own expenses along with the expenses of the underlying funds. It is typically exposed to the same risks as the underlying funds in which it invests in proportion to their allocations.
All share classes may not be available at all firms, and not all investors may be eligible for all share classes. Indexes are unmanaged and cannot be invested in directly. Further, they hold no cash and incur no expenses.
This commentary represents the views of the portfolio managers at Pacific Life Fund Advisors LLC as of 3/9/20 and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant. Sector names in this commentary are provided by the Fund’s portfolio managers and could be different if provided by a third party.
Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
You should consider a fund's investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the fund and are available from your financial advisor. The prospectus and/or summary prospectus should be read carefully before investing.
Pacific Life Fund Advisors LLC (PLFA), a wholly-owned subsidiary of Pacific Life, is the investment adviser to Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.
Third-party trademarks and service marks are the property of their respective owners.
Pacific Global Asset Management LLC is the asset management division of Pacific Life Insurance Company that sponsors Pacific Funds.