The Abacus Investment Committee (“IC”) reexamined the firm’s model portfolio fixed-income allocation in Q2 and has decided to reduce the TIPS (Treasury Inflation-Protected Securities) portion of fixed income from 20% to 10%. The remaining 10% will be allocated to DFEQX (DFA Short-Term Extended Quality Fund).
The IC perceived interest rate risk (the fact that the value of bonds will decrease as interest rates rise) as the most significant risk within bond markets today.
DIPSX (DFA Inflation-Protected Securities) will continue to serve as the investment vehicle for the 10% TIPS portion of our model portfolio. The Investment Committee views shorter-term bond holdings such as DFEQX as an inflation hedge as well. Nonetheless, the Investment Committee does not perceive inflation as an immediate risk within the portfolio due to prevailing high U.S. unemployment and feels that the revised bond allocation reflects this sentiment.
The overall view of bonds within the broader Abacus model portfolio has not changed given that the substantive risk portion of our model portfolio will continue to be limited to equities and real assets as opposed to fixed income. However, the Investment Committee believes it is important to seek appropriate risk/reward returns from fixed income in the more conservative portion of the portfolio given that cash is currently a guaranteed negative real return.
