2023 Knowledge Brokers

Brady O'Connell

Brady O’Connell, a chartered financial analyst and chartered alternative investment analyst, has more than 25 years of experience consulting to a variety of investors, including corporate and public defined benefit plans, defined contribution plans, endowments and foundations. He is a member of Callan’s Client Policy Review, Alternatives Review, and Institute Advisory committees, and is a shareholder of the firm.

O’Connell has more than 25 years of investment consulting experience. Prior to joining Callan, in 2015, he was a partner in Aon, where he worked with a broad range of institutional investors, oversaw investment manager research and managed teams of consulting professionals.

CIO: What changes are you making to your asset allocation advice given the current state of monetary policy in a post-COVID, deglobalizing world and considering the impact of inflation and rising interest rates?

O’Connell: Extreme changes in the macroeconomic environment in 2022 led to big changes in our long-term capital market expectations. In fact, we saw the biggest increase in return expectations in more than 20 years, the bulk coming in fixed-income asset classes. Before this year, the low interest-rate environment meant modest return expectations for these asset classes, and many institutional investors pushed their bond allocations downward as the cost of modest returns was too high.

While our return assumptions changed significantly, their impact on client portfolios so far has been more modest. Institutional investors that make sound long-term asset allocation decisions rarely need to make significant changes in reaction to short-term market conditions, and our advice to clients this year has been to make changes at the margin. Pressure to reduce fixed income in favor of equities and illiquid investments has abated substantially. I suspect allocations to core bonds will see modest increases going forward. I believe investors will continue to allocate to alternatives where liquidity allows it and that we will see funding for new allocations to alternative asset classes coming from other public market asset classes such as global equities.

CIO: What (actionable thing) have you learned over the course of your career that has proven itself this year?

O’Connell: Investing is incredibly complex and dynamic, but following simple steps can go a long way to succeeding over time, regardless of the crisis or unique market conditions. Investors that followed their long-term asset allocation targets and rebalanced along the way are better off for having done so.

Macroeconomic events are extraordinarily difficult to anticipate from an investment standpoint. One of the simplest things an investor can do is establish a long-term investment policy and stick to it even when conditions are difficult. I use the term “simple,” but I want to contrast that with the term “easy,” because sometimes what is simple is far from easy.

Consider markets in October 2022. Market conditions included the Fed proceeding on its path of raising interest rates, equities plunging globally, stubborn inflation, recession concerns, and war and other geopolitical turmoil. With all that uncertainty, it would not only have been easy but also justifiable to reduce risk. Equities went on to stage a strong, and widely unanticipated, recovery. Investors that were tempted to de-risk in an uncertain market were punished by foregone investment gains, which for a long-term investor can be just as damaging as losses.

CIO: What investments (specific securities or sectors) look good to you now? And why?

O’Connell: It seems that, over the past decade, diversification and valuation in equity markets really haven’t mattered all that much. Winning investments have been concentrated in a narrow set of very large U.S. companies focused on a handful of industries. A strategy that includes diversified exposure to equities across capitalizations, styles and geographies has lagged.

However, I believe the price you pay for an asset has an impact on your future returns, so I continue to believe that valuations are important. The theory behind the benefits of diversification continues to make sense to me. Applying these factors to equity markets, I expect small-cap U.S. stocks to make up ground against large-cap; non-U.S. equities to rebound relative to U.S. equities; and value to experience a more sustained comeback relative to U.S. growth stocks.

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