January 02, 2023

Our model estimates a 38% likelihood of bonds outperforming U.S. equities. Considering the estimate, we decreased the portfolio’s fixed income exposure to 29.01% versus a 40% benchmark allocation. The likelihood of the short and long end of the curve outperforming cash are both below 50%. In contrast the likelihood of the middle of the curve outperforming cash exceeding 50%. Hence expect the middle of the curve to outperform cash while the ends of the curve are expected to underperform cash. Therefore, within the fixed income our allocation process reduces exposure to the ends of the yield curve. Domestically, the small cap stocks are expected to outperform the large cap stocks which in turn are expected to outperform the mid cap stocks. Given the estimated probabilities an increased exposure to small-cap and large-cap stocks is warranted this quarter. The decreased allocation to fixed income, and the near neutral allocation between the domestic and international components of the portfolio yields a increases in exposure to the domestic stocks in the portfolio. The strategy increases the allocation to domestic stocks to 35.74%and the international stocks to 35.25% relative to their 30% benchmark allocation. Given the significant differential performance between the value and growth stocks we have also estimated the likelihood that value stocks will outperform the growth stocks. During the coming quarter we look for the value stocks to outperform. Accordingly based on the probability estimates, our model increases exposure to the value stocks at the expense of growth stocks. The exposure to value of stocks increased to 20.04% relative to a 15% benchmark allocation. Overall, the equity allocation to domestic and international equities increases to 70.99% from a benchmark allocation of 60%. The Year-to-date performance during 2022 the benchmark gained 16.92%, while the LJE Asset Allocation utilizing the ETFs declined 16.71%. Therefore, the asset allocation added 17 basis points during 2022. The choice of vehicles to fill the different asset allocation also matters. During the fourth quarter, we replaced the EIF and IEI ETFs with the TIPS as well as splitting the allocation to large cap stocks between the IVV and SP ETFs. The vehicle selection added another 44 basis points. Hence for the year the LJE allocation outperformed its benchmark by 65 basis points.

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