This year’s narrow equity market has been a great example of how a broad index is not always perfectly representative of the constituents that make up that index. Some sectors are likely overpriced while others represent significant value. Uncovering the opportunities and balancing the potential risk in markets like this requires a deep analysis beyond a broad index. - Market volatility often leads to opportunities as asset classes, sectors, and securities can become mispriced or overlooked. - Volatility in the CMBS market has created opportunities for active managers that can add value through sector and security selection. - With nearly 50% of the outstanding CMBS falling into the office and retail space, using an actively managed product for CMBS exposure can help mitigate risk. - The flexibility of active bets within the portfolio allows for tilts to stronger performing sectors and securities that offer value. We believe the addition of actively managed CMBS exposure can help diversify a fixed income allocation and provide an attractive yield with less interest rate risk.

While money market and Treasury Bill rates look attractive and deserve an allocation in a diversified portfolio, overweighting them too much and forgoing opportunities elsewhere may result in regret in the not-too-distant future. Diversified intermediate- and longer-duration high quality fixed income offer compelling income and potential capital appreciation opportunities. Additionally, dividend income from high quality equities is more attractive than it has been in some time so investors should also consider allocating to that area of the market.

Don't bet against history! It's important to recognize that recent broad based equity market gains have been driven by a limited number of companies. It's what we call a narrow market rally. As a result, the Russell 1000 Growth Index is trading at a 25% premium to its 10-year average, where those valuations now look stretched. Market history shows that valuations eventually matter and once mean reversion kicks in, those market laggards can quickly become leaders. Rather than betting against history, we have been increasingly allocating to fundamental strength in the value style as well as dividend payers that have lagged this year’s market rally. All it takes is a little bit of patience to reap what history suggests will be excellent investment opportunities ahead.