asset allocation committee summary

For Financial Professional Use Only – January 2021

Asset AllocationCommittee

January 19, 2021

Summary

Presenters

TPFG.comFor Financial Professional Use Only – January 2021

The Pacific Financial Group hosted a live, virtual Asset Allocation Committee meeting on Tuesday, January 19, 2021 featuring a group of our partners and strategists. Each shared their viewpoints and outlook on the market and economy. The following is a summary of each strategist’s comments.


Strategic: An institutional Modern Portfolio Theory process focusing on

correlations between designated asset classes with models based on historical

risk levels with scheduled rebalancing.

Tactical: Active portfolio allocations using indicators such as momentum,

trend following, and valuation with focus on shorter-term opportunities.

Ongoing re-allocations versus scheduled rebalancing.

Active: Selection of individual issues (i.e., equities/fixed income, ETFs) to

create a portfolio that will reflect manager analysis and seeks alpha.

Passive: Based on an underlying index, focusing on reduced tracking error

and returns consistent with the chosen benchmark. Often lower costs than

active management. Focus on beta.

Allocations

Underlying Investments


PFG JP Morgan Tactical Aggressive Strategy

PFG JP Morgan Tactical Moderate Strategy

A recurring trend for the last several years has been a drop in the expected return for equities and fixed

income. For example, JPMorgan’s long-term capital market assumptions for 2008 implied a 60/40 equity to

fixed income portfolio would return about 7.5%. For 2021, the projection is down to 4.2%, as both equities

and bonds look highly valued. JPMorgan has a number of levers to adjust to the current market

environment, including strategic asset allocation, manager selection, and tactical investing.

Financial markets were resilient over the past year, and JPM has an optimistic outlook, with some

continuing uncertainty. Upside risks include additional fiscal stimulus and the vaccine rollout. Inflation

remains subdued, and JPM expects central banks to let it run hotter rather than raise interest rates. A robust

earnings rebound is expected in 2021. In total, JPMorgan is overweight to both equities and credit. Within

equities, they favor a cyclical tilt supported by above-trend global growth and easy monetary and fiscal

policy across the globe. Recent adjustments include shifting from Small Core to Small Value, increasing

exposure to Industrials, Materials, and Financials. In fixed income, changes were made to underweight

duration.

The PFG JP Morgan strategies have a Tactical mandate that utilize Active underlying investments.

Summary:


PFG American Funds® Growth Strategy

PFG American Funds® Conservative Income Strategy

The growth style was a big contributor to the PFG American Funds Growth Strategy. Results were driven by stock selection in Consumer Discretionary and Information Technology. For 2020, equities that performed well include e-commerce, online marketplaces, online work, communications, and entertainment. These positions were within the New Perspective, New Economy, Growth Fund of America, and Small Cap Growth funds.

The PFG American Funds Conservative Income Strategy had positive results on both an absolute and relative basis. The Strategy is currently positioned for current income and capital preservation. The Bond Fund of America and Intermediate Bond Fund of America both did well to protect downside risk during the year.

More generally, companies were split during the year between those that benefited from and those that were hurt by the pandemic. Travel and Food industries were decimated, and while they may benefit from pent up demand, likely can’t be digitized going forward. Energy and Retail are secular decliners. Energy appears ripe for disruption with an early-stage, global shift to green energy that could last for years. Electric cars and green utilities could potentially become growth areas.

Pandemic “winners” include Technology and Healthcare. Tele-doctor visits and advances in home diagnostics represent the future of healthcare, with devices allowing doctors to monitor their patients remotely. Further progress is needed in cost efficiency, connectivity, and data management. Global economic growth is making a comeback, with low rates supporting asset prices. Digital leaders should stay ahead of their competition, with a fast, efficient online model providing a huge advantage to physical retail. Lastly, Capital Group supports strong core bond allocations as an important downside protectionposition. They are wary of inflows to corporate bonds, though municipals seem attractive.

The PFG American Funds strategies have a Strategic mandate that utilizing Active underlying investments.

Summary:


PFG BR Equity ESG Strategy

The BlackRock ESG model has done well so far, and they expect it continue going forward. Generally, the process

makes small tweaks to a standard index, using ESG as an additional risk screen. Each component is score on

Environmental, Social, and Governance measures. If it scores well, its weight is increased; conversely, if it scores

poorly, its weight is decreased. Note that the scale of these adjustments is relatively small, on the order of 50bps,

but over time have managed to produce excess returns of around 60bps.

Inflows to ESG ETFs appear to be persistent and growing. There is a generational shift in investment preference,

with European regulators leading the way in measuring corporate impact. The BlackRock ESG screen provides a

way to adjust for potentially affected companies. In addition, it becomes a source of active management, to attract

millennial capital, endowment capital, etc. BlackRock’s analysis indicates the active risk from ESG screens come

mostly from stock selection, not sector nor style; the screen is meaningful, and does not simply mimic old

sector/style definitions. ESG will potentially become a standard screening factor, as it is risk-efficient and only

adds a small amount of risk for the outperformance produced so far.

The PFG BlackRock strategy has a Tactical mandate that utilizes a blend of Passive underlying investments.

Summary:


PFG Fidelity Institutional AM® Equity Index Strategy

PFG Fidelity Institutional AM® Equity Sector Strategy

EI ES

Fidelity utilizes a highly quantitative model for the PFG Fidelity Inst. AM Equity Sector Strategy. The U.S. is

estimated to be between the early and midpoint of the business cycle. Consumers appear to be in good shape,

as a result of fiscal transfers and increased savings rate. There is currently $1.4 trillion in excess savings, and

these should be spent throughout 2021. On a more cautious note, manufacturing didn’t dip as much as

services, and has already rebounded strongly. It may start to trend down going forward. Services could also get

a short term slow down, depending on how the pandemic evolves. Small business activity has already started to

decline as a result of further lockdowns.

The Equity Sector model is measured against the Russell 3000, and current rotations are happening more

quickly than in previous periods. Fidelity expects the sectors that were hit hardest by the pandemic to recover

the most going forward. The model is currently overweight to industrials, Information Technology, Materials,

and Real Estate, while underweight to Consumer Staples, Financials, and Communications. Note that the

starting conditions for the midpoint of this business cycle look very different than past rotations, as equities

have elevated valuations. Technology’s behavior was different than past recessions, where it didn’t perform well.

They are still bullish on the sector, even with the current run up.

The PFG Fidelity Inst. AM Equity Index Strategy has a Strategic mandate that utilizes Passive underlying

investments. The PFG Fidelity Inst. AM Equity Sector Strategy has a Tactical mandate that utilizes a blend of

Active and Passive underlying investments.

Summary:


PFG Active Core Bond Strategy

Summary:

PIMCO is optimistic on a recovery for 2021. COVID-19 case growth has been large and increasing, but the end is in

sight due to a vaccine. Accommodative monetary and fiscal policy is expected to continue. PIMCO is forecasting a

strong rebound for the economy, though valuations will need to be considered. Recently, there has been a rally in

bond yields and credit spreads, and current interest rates imply much less return potential for the next 12-18 months.

Some duration exposure should be kept, and the focus should be on countries that offer a yield premium, including

the U.S. A secular decline in U.S. dollars is expected, with Euro and Yen looking more attractive.

Active management is particularly important during times of low rates. PIMCO integrates forward looking investment

views, a broad opportunity set, and analytics infrastructure to produce their model portfolios. The PFG Active Core

Bond Strategy is broadly diversified, balancing interest rate and credit risks, by pairing selective credit exposure with

core bond allocations.

The PFG PIMCO strategy has a Strategic mandate that utilizes Active underlying investments.


PFG Meeder Tactical Strategy

The fourth quarter of 2020 had astonishing behavior, including the Russell 2000’s best Q4 ever, and the S&P

500’s best November-December ever. Post-election return through the end of the year was the largest in S&P 500

history. Year 2020 also saw the largest calendar year recovery from a 30% intra-year decline. Meeder continues to

believe we are in a secular bull market, though very late in the “8th inning”. Historically, when 10-year real returns

approach 10%, the end of a secular bull market draws near, though it doesn’t occur immediately.

Meeder’s current short-term and long-term outlook is positive, as stock valuations relative to interest rates look

good and the yield curve continues to steepen. Their intermediate outlook is contrarian and negative, as

investment sentiment is extremely positive. They are neutral on Market Risk, as the VIX is still at 22, above the

long-term average of 16, implying it has the potential to decline. They are currently fully invested in equities.

The PFG Meeder strategy has a Tactical mandate that utilizes Active underlying investments.

Summary:


PFG BNY Mellon Diversifier Strategy

Summary:The PFG BNY Mellon Diversifier Strategy has a goal of principal stability, combined with some stable income

and stable growth. Historically, portfolios used fixed income for both stability and income. However, recent

valuations and interest rates have made equity and income components behave similarly, leading to a search for

yield. Higher correlations imply riskier credit. To adjust for this, the PFG strategy incorporates real estate and

floating rate positions. As interest rates rise, global natural resources and real estate should benefit. The

Strategy currently focuses on absolute return, moving away from core fixed income towards real assets.

The PFG BNY Mellon strategy has a Tactical mandate that utilizes Active underlying investments.


Jennifer EnstadChief Investment Officer

[email protected]

Gary MangusoChief Investment Strategy

& Product Officer

[email protected]

Portfolio Management Team

Eric NeufeldPortfolio Manager

[email protected]

Erwin Ma, CIMA®Financial Analyst

[email protected]

Important DisclosuresAdvisory services provided by The Pacific Financial Group, Inc. (“TPFG”), a Registered Investment Adviser. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. Investors should review all offering documents and disclosures and should consult their tax, legal or financial professional before investing.

TPFG makes no warranties as to the accuracy of the information or any representations made or implied. There are no affiliations between TPFG and any strategist. All information may be changed without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service and should not be relied on or deemed the provision of tax, legal, accounting or investment advice.

Capital Group® | American Funds® are registered marks of The Capital Group Companies, Inc. BlackRock® is a registered mark of BlackRock, Inc. MFS is a registered mark of MFS Investment Management. JPMorgan is a proprietary mark of JPMorgan Chase & Co. Fidelity Institutional AM® and the Fidelity Investments logo are registered service marks of FMR LLC. PIMCO is a proprietary mark of Pacific Investment Management Company LLC. BNY Mellon is a proprietary mark of The Bank of New York Mellon Corporation. Meeder is a proprietary mark of Meeder Investment Management. In each instance, the mark is used with permission. No representation is made by The Capital Group Companies, Inc., BlackRock Inc., MFS Investment Management, JPMorgan Chase & Co., FIAM LLC, Pacific Investment Management Company LLC, The Bank of New York Mellon Corporation, or Meeder Investment Management, or by anyone affiliated with such entities, regarding the advisability of investing in any investment product offered by Pacific Financial Group.

For Financial Professional Use Only – January 2021

Thank You!

CID.TPFG.1432

asset allocation committee summary

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