We recently wrote that we believe the cyclical reflation1 has more room to run. In short, economic reopening should continue to support above-trend growth in the U.S. and many other economies. Peaking economic growth need not cede to a sustained downward trend just yet.

But the “easy” part of the cycle may now be over. Indeed, persistently low bond yields and record-high valuations mean that the risk-reward tradeoff for investors is deteriorating. To add portfolio value, investors must seek sources of durable revenue growth.

Where can investors find those opportunities, and how can they enact them in a portfolio? Below we share our five highest-conviction ideas for the second half of the year.

1. Fixed income: global unconstrained bonds

Bond markets carry an asymmetric return profile; investors’ upside is limited to principal repayment and coupon income, but their downside is the potential for corporate default. Bond markets can also be highly inefficient, with multiple security types and over-the-counter markets creating frictions.

While we expect bond yields to move modestly higher over the course of the year, roughly 20% of global bond volume is still yielding less than zero.2 With a challenging backdrop for investing, we believe diversifying across broader fixed-income sectors is required to build a positive real return profile.

We believe an unconstrained approach can help manage these risks through careful credit analysis, diversified sources of alpha(liquidity, market structure), and sector and geographical rotations to leverage macroeconomic trends.

How to invest? A case can be made for unconstrained bonds to compose most, if not all, of an investors core fixed income exposure. For a diversified 60/40 investor looking for a bit more risk within their fixed-income sleeve, we advocate for a 30% exposure to unconstrained, with additional exposure to leveraged loans and high yield. 

2. Fixed income: leveraged loans

Leveraged loans, or floating rate bonds, benefit from both the potential for tightening monetary policy in the future, as well as strengthening corporate fundamentals brought on by a booming economy.

With core bonds yielding slightly over 1% and investment-grade corporates at less than 2%, generating meaningful income is a challenge. In contrast, floating-rate loans have yielded 4.9%, considerably more than investment-grade bonds. And while comparable to other higher yielding asset classes, they have virtually no interest rate risk.

How to invest? A diversified 60/40 style investor should consider a 5% allocation to leveraged loans within their fixed-income sleeve. However, those with conviction in rising interest rates could consider a larger allocation funded from core bonds.

3. Equity: small caps

Since 1926, small-cap companies have provided investors with a stronger chance of delivering inflation-beating returns—particularly during inflationary periods like the 1940s and 1970s. There are many potential reasons for this. Perhaps inflation presents a business risk; small caps may be more willing and able to pass higher inflation onto consumers in the form of higher prices.

How to invest? Historically, an investment in small caps comes with more risk. Carefully assess the appropriate size of allocation, and consider using an active manager.4 Small-cap companies represent less than 10% of the Russell 3000 Index.5 Bigger or smaller allocations relative to total equity exposure may be appropriate based on individual investor’s circumstances.

4. Equity: infrastructure

Infrastructure is likely to be a contributor to the inflationary surge (via government spending and rising input costs), as well as a beneficiary thereof. As a result, we believe infrastructure could hold its value well in an inflationary environment. In addition to holding attractive current valuations, infrastructure is a tangible asset with contractually driven, inflation-linked revenue growth. Plus, in our view, policy support, technological needs, and decarbonization will likely spur additional infrastructure opportunities.

How to invest? Infrastructure, despite its regional and capital diversification, consists of a relatively narrow range of industry and sector exposures. Therefore, most investors should consider a maximum allocation of 9.5% within any equity sleeve.6

5. Multi asset income

While we expect cyclical expansion to continue this year, it won’t continue forever. And while much remains uncertain, the highest likelihood scenario is that the U.S. economy returns to a moderate pace of growth with low interest rates. Yes, inflation and rates may increase modestly relative to pre-pandemic levels, but structural factors appear poised to maintain their gravitational hold on global rates. Significant cash chasing fewer high-returning opportunities globally also exerts downward pressure on U.S. yields.

As a result, investors are looking to balance the “hot,” volatile near-term with a likely lower return long-term. Increasingly, they’re doing it by focusing on multi-asset income in their portfolios. The typical 60/40 portfolio still provides diversification7 benefits, but investors can adapt this model for a “new economy” core portfolio. 

Some of the strongest investment ideas around multi-asset income – yield-focused equity, global diversification, careful credit selection – are reinforced by 2021’s cyclical improvement. Investors can also consider rotating into 2021 themes, such as infrastructure and value.

How to invest? A diversified product holding income-focused securities in both equity and fixed income could make up a core portfolio for investors with the appropriate risk tolerance and time horizon. Investors should consider global allocation and careful credit selection as important components to leverage themes discussed above.

1. Reflation is an act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle.

2. Source: Bloomberg LP, 6/30/21.

3. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.

4. Active investing (also called active management) is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions. Active management typically charges higher fees.

5. The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S stock market.

6. Source: “Allocating to infrastructure,” New York Life Investments, June 2021. 

7. Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.


All investments are subject to risk including loss of principal.

The opinions expressed are those of the Multi-Asset Solutions team, an investment team within New York Life Investment Management LLC and not necessarily those of other investment boutiques affiliated with New York Life Investments.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any particular issuer/security.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

Any forward-looking statements are based on a number of assumptions concerning future events and although we believe the sources used are reliable, the information contained in these materials has not been independently verified and its accuracy is not guaranteed. In addition, there is no guarantee that market expectations will be achieved.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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