19 minute read
Dunham is pleased to offer you "Behind the Scenes of Your Dunham Portfolio"! Join us as we explore the thinking and analysis that went into the Dunham Investment Committee's changes for our Asset Allocation strategies covering the first quarter of 2023.
We see the events that began to unfold in 2022, continuing in 2023. We do not believe inflation will magically move to the Fed's target rate in 2023, and this failure to meet the Fed's target inflation rate may lead to what we believe will be more interest rate hikes in the first half of 2023. However, we think we will see peak interest rates in the first half of 2023 and inflation slow down by the end of 2023.
We believe that the Fed fund rate may rise to 5.25% - 5.5% from the current 4.25% - 4.5% [1]. But what is interesting about this is our belief that bond prices currently reflect most of this rate increase. As a result, our longer-term perspective is to begin making shifts to increase our duration exposure. Increasing duration exposure may lead to an investment opportunity, especially if we experience a slower economy in 2023 or 2024, causing the Federal Reserve to reverse course and begin to lower interest rates.
As a result, you will see what could be the beginning of an allocation shift into the more duration-sensitive Dunham Corporate/Government Bond Fund.
In addition, if the fed interest rate increases slow our economy, defaults on below-investment-grade bonds, also commonly known as junk bonds, may increase and may put downward pressure on our fixed-income strategies.
To relieve this downward pressure, the Investment Committee has begun shaving pieces off of the Dunham Floating Rate Bond Fund and the Dunham High Yield Bond Fund in favor of higher-rated corporate and government bonds found in the Dunham Corporate/Government Bond Fund. This shift increases duration exposure which, as we previously mentioned, should serve our fixed-income portfolios well for the long term, especially since investment-grade bonds are now receiving more meaningful yields than a year ago.
Turning our attention to the U.S. stock market, there was a split with the Dunham Investment Committee between those who believe we are currently in a recession and those who think we may be entering into a recession. However, the Committee agreed that the equity market may see excessive volatility in the first half of 2023 with downside pressure on equities.
Given this expectation, the investment committee increased the weighting to the Dunham Dynamic Macro Fund. We believe this fund brings a more dynamic and nimble investment strategy that can capitalize on both long and short positions within asset classes worldwide. You will see this allocation change in both the Dunham Core Equity and Core Alternative Strategies.
The equity allocation also moved to a slightly larger bias in the Dunham Large Cap Value, the Dunham Small Cap Growth Fund, and the Dunham Focused Large Cap Growth Fund as we reduced our exposure to the Dunham Small Cap Value Fund to possibly combat this expected downside pressure. While there was some discussion about increasing the value exposure a bit further, the Committee felt that the run-up in value stocks in 2022 created better long-term valuations in certain growth stocks.
On the international front, we believe that the developed markets have had some positive surprises, with inflation decreasing and a warm early winter avoiding an energy crisis in Europe.
Developed markets had a solid fourth quarter in 2022. We took some of the profits and rebalanced the foreign strategy to a 50-50 allocation between Dunham International Stock Fund and the Dunham Emerging Markets Stock Fund. We believe that emerging markets have attractive valuations, and longer-term could see a rally in the post-COVID markets ahead of us.
Here are the changes made to the various Dunham Asset Allocation strategies: as of Jan 1, 2023.
The list of Dunham Funds included each strategy and a history of their allocations weightings are available upon request, please contact Dunham & Associates Investment Counsel, Inc. by calling (800) 442-4358 or call you Financial Advisor.
[1]The current Federal Fund Rate ("Fed Fund Rate") can be found at https://www.federalreserve.gov/releases/h15/
Disclosure:
The views set forth in Behind the Scenes of Your Dunham Portfolio are current as of December 31, 2022, are subject to change based on market conditions and other factors, and should not be construed as investment advice.
The information in this video contains general market information only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. Nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. This video is for informational purposes only and does not constitute a solicitation or an offer to sell securities or advisory services nor is it an offer to purchase an interest in any Dunham Fund or Program. Sources of data are all public and may include but are not limited to Reuters, Bloomberg, Standard and Poors, U.S. Bureau of Labor Statistics, Federal Open Market Committee, Yahoo Finance and NASDAQ.
The Dunham Asset Allocation program is a turnkey wrap fee program comprised of the Dunham Funds. A wrap fee program is defined as a program offered by an investment adviser that wraps several services together for a fee based on the size of the client's account, asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification, asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Rebalancing may be a taxable event. Before taking any specific action, be sure to consult with your tax professional. The Dunham Asset Allocation program currently utilizes the Dunham Fund N Class Shares, each representing a different asset class, and only available to clients of fee-based advisory programs. The seven strategic allocations represent varying % allocations to the asset classes, with rebalancing to a quarter 's target allocations occurring on the first business day of each quarter, the reinvestment of dividends on the date of the payment is also assumed.
Past performance is not indicative of future results.
The information in this video is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice.
Dunham Asset Allocation Program: The Adviser is the sponsor of the Dunham Asset Allocation Program ("Program"), an advisory wrap program using the Dunham Funds, N share class.
As the program sponsor, Dunham charges the Investor a Program Fee covering limited discretionary investment management, brokerage and custodial services related to Dunham Funds, shareholder servicing and distribution, and client communications. Dunham will be paid a Program Fee option of 0.25% for the Asset Based Advisory Fee or 1/2 of the Performance Based Advisory Fee option. Investor understands that the Performance Based Fee may create an incentive for the financial advisor or Registered Investment Adviser ("RIA") and Dunham to increase the level of risk that the account may incur. The Investor further understands that the Performance Based Advisory and Program Fees may result in higher fees than an Asset-Based Advisory Fee and the RIA and Dunham, may receive increased compensation with the Performance-Based Advisory Fee.
The Program may be used by financial advisors to diversify client portfolios among the various asset classes represented by the Funds. The Adviser takes a portion of the revenues it receives from the Program and may reimburse certain non-affiliated financial advisors for their marketing and business development efforts. For the Performance Advisory Fee Option, reimbursements are from 0 to 25 basis points a year, depending on the dollar amount of client assets in the program. The Adviser also sponsors due diligence trips and conferences designed to enhance the financial advisor’s understanding of the offerings. Certain costs associated with attendance at these meetings may be paid by the Adviser. The Adviser also supports industry conferences and sponsors educational events attended by clients of the financial advisors as well as the financial advisors themselves.
The Investor pays no additional fees to Dunham or to the non-affliated financial advisor or their RIA. However, these payments may create a potential conflict of interest by influencing a non-affliated financial advisor to invest in the Custom Asset Allocation Program. The Advisory fees and potential conflicts of interest are described in greater detail in Part 2 of DAIC's Form ADV or WRAP Fee Brochure.
DAIC offers sub-advised mutual funds in the Custom Asset Allocation Program in which Sub-Advisers' compensation is tied to their success versus an established benchmark. The Sub-Adviser receives a fulcrum fee, which will vary based on the Sub-Adviser's performance against the benchmark. The Sub-Adviser is rewarded when performance exceeds the benchmark and penalized when performance is short of the benchmark. Some Sub-Advisers may get paid a minimum fee even if they don't meet the benchmark. The Adviser is paid a separate fee.
*The Dunham Monthly Distribution Fund, an investment in the Core Fixed Income Strategy, utilizes an absolute return style to achieve its investment objective and may invest a significant portion of its assets in equity securities. However, its volatility (risk) has historically exhibited a low correlation to both the broad equity and the broad fixed income markets.
**The Dunham Core Fixed Light Custom Core Allocation strategy has limited track record, with an inception date of 1/1/2021. It was added as a Custom Core Allocation strategy on 9/30/2022, which means that prior to that date, accounts allocated in this strategy did not benefit from the firm’s continuous monitoring and quarterly adjustments to reflect market conditions, performance, and other factors.
Core Fixed Income Strategy
The Dunham Core Fixed Income Strategy is constructed using Dunham funds that primarily invest in fixed income securities and fixed income alternatives. Investors in this Strategy generally prioritize capital preservation over maximizing total returns.
Core Fixed Light Strategy
The Dunham Core Fixed Light Strategy is constructed using Dunham funds that primarily invest in fixed income securities and fixed income alternatives.
Investor in this Strategy generally prioritize capital preservation over maximizing total returns by investing in asset classes that generally exhibit less volatility and less return than the typical core fixed income strategy.
Core Equity Strategy
The Core Equity Strategy is constructed using Dunham funds that primarily invest in equity securities and equity alternatives. Investors in these strategies generally prioritize maximizing total returns.
Core U.S. Equity Allocation
The Core U.S. Equity Allocation Strategy is constructed using Dunham funds that primarily invest in domestic equity securities. Investors in these strategies generally prioritize maximizing total returnsCore Foreign Equity Allocation
The Core Foreign Equity Allocation Strategy is constructed using Dunham funds that primarily invest in foreign equity securities. Investors in these strategies generally prioritize maximizing total returns.
Core Alternatives Allocation
The Core Alternatives Allocation Strategy is constructed using Dunham funds that primarily invest in alternative strategies. Investors in the Core Alternatives Allocation Strategy generally seek a balance of alternative strategies that has a goal of exhibiting a low to moderate correlation to both equity and fixed income markets across market cycles.
RISK CONSIDERATIONS:
An Investment in the strategies and the Dunham Funds involves risks, including the risks listed below:
Asset Allocation Risk – In allocating the Fund’s assets, the Sub-Adviser may favor markets or asset classes that perform poorly relative to other markets and asset classes.
Call or Redemption Risk – As interest rates decline, issuers of high-yield bonds may exercise redemption or call provisions. This may force the Fund to redeem higher yielding securities and replace them with lower yielding securities with a similar risk profile. This could result in a decreased return.
Changing Fixed Income Market Conditions Risk – During periods of sustained rising rates, fixed income risks will be amplified. If the U.S. Federal Reserve’s Federal Open Market Committee (“FOMC”) raises the federal funds interest rate target, interest rates across the U.S. financial system may rise.
CLO Risk – Negative economic trends nationally as well as in specific geographic areas of the United States could result in an increase in loan defaults and delinquencies. There is a material possibility that economic activity will be volatile or will slow significantly, and the CLO performance will likely be significantly and negatively impacted by such conditions. Such effects may include an inability for Obligors to obtain refinancing of their debt obligations. A decreased ability of Obligors to obtain refinancing may cause a deterioration in loan performance generally and for CLOs. It is not possible to determine whether or when such trends will improve or worsen in the future. CLOs may include underlying securities, which are investments in foreign countries. These factors could detract from CLO’s performance.
Commodity Risk: Investing in the commodities markets may subject the Fund to greater volatility than investments in traditional securities.
Corporate Loans Risk — Borrowers generally pay interest on corporate loans at rates that change in response to changes in market interest rates such as the London Interbank Offered Rate (“LIBOR”) or the prime rates of U.S. banks. The market for corporate loans may be subject to irregular trading activity and wide bid/ask spreads. In addition, transactions in corporate loans may settle on a delayed basis. As a result, the proceeds from the sale of corporate loans may not be readily available to make additional investments or to meet the Fund’s redemption obligations.
Credit Risk – Issuers of fixed-income securities may default on interest and principal payments due to the Fund. Generally, securities with lower debt ratings have speculative characteristics and have greater risk the issuer will default on its obligation.
Currency Risk – Adverse changes in currency exchange rates (relative to the U.S. dollar) may erode or reverse any potential gains from a Fund’s investments denominated in a foreign currency or may widen existing losses.
Derivatives Risk – Financial derivatives, such as forward contracts, may not produce the desired investment results because they are not perfect substitutes for the underlying securities, indices or currencies from which they are derived.
Distribution Policy Risk – The Fund’s distribution policy is not designed to generate, and is not expected to result in, distributions that equal a fixed percentage of the Fund’s current net asset value per share. Shareholders receiving periodic payments from the Fund may be under the impression that they are receiving net profits. However, all or a portion of a distribution may consist of a return of capital.
Emerging Markets Risks – In addition to the risks generally associated with investing in foreign securities, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues.
ETF Risk - The Fund invests in ETFs or other investment companies. As a result, your cost of investing in the Fund will be higher than the cost of investing directly in ETFs and may be higher than other mutual funds that invest directly in common stocks.
ETN Risk – The Fund may invest in ETNs, which are debt securities of an issuer whose returns are linked to a particular index. ETNs are subject to credit risk of the issuer.
Event Risk — Event risk is the risk that corporate issuers may undergo restructurings, such as mergers, leveraged buyouts, takeovers, or similar events financed by increased debt.
Financials Sector Risk — Companies in the financials sector of an economy are subject to extensive governmental regulation and intervention, which may adversely affect the scope of their activities, the prices they can charge, the amount of capital they must maintain and, potentially, their size.
Foreign Investing Risk – Investing in foreign companies or ETFs can increase the potential for losses in the Fund and may include, among others, currency devaluations, currency risks (fluctuations in currency exchange rates), country risks (political, diplomatic, regional conflicts, terrorism, war, social and economic instability and policies that have the effect of limiting or restricting foreign investment or the movement of assets), different trading practices, less government supervision, less publicly available information, limited trading markets and greater volatility.
Interest Rate Risk: Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security may fall when interest rates rise. Securities with longer maturities may be more sensitive to interest rate changes. Certain corporate bonds and mortgage-backed securities may be significantly affected by changes in interest rates. Some mortgage-backed securities may have a structure that makes their reaction to interest rates and other factors difficult to predict, making their value highly volatile. Because zero coupon securities do not make interest payments, they are considered more volatile than bonds making periodic payments. When interest rates rise, zero coupon securities fall more sharply than interest paying bonds. However, zero coupon securities rise more rapidly in value when interest rates drop.
Inverse ETF Risk - The value of an inverse ETF may not track or correlate to the value of the security or portfolio it is intended to hedge. Investing in inverse ETFs may result in increased volatility due to the funds’ possible use of short sales of securities and derivatives such as options and futures.
IPO Risk – IPOs are often subject to extreme price volatility and speculative trading. These stocks may have above- average price appreciation in connection with the initial public offering prior to inclusion in the Fund.
Large Cap Stock Risk – The value of securities of large cap issuers may change as large cap investing style goes in and out of favor depending on a variety of political, regulatory, market, or economic developments.
Leveraging Risk – The Fund’s use of leverage through futures, options, short positions, or inverse ETFs will magnify the Fund’s gains or losses.
LIBOR Risk. Certain of the Fund’s investments and payment obligations may be based on floating interest rates, such as the London Interbank Offered Rate (“LIBOR”). In 2017, the head of the United Kingdom’s Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement reference rate. As such, the potential effect of a transition away from LIBOR on the Fund or the financial instruments in which the Fund may invest cannot yet be determined.
Liquidity Risk – The markets for high-yield, convertible and certain lightly traded equity securities
(particularly small cap issues) are often not as liquid as markets for higher-rated securities or large cap equity securities. Less liquid secondary markets also may affect the Fund’s ability to sell securities at their fair value.
Long-Term Maturities/Durations Risk – Fixed income securities with longer maturities or durations may be subject to greater price fluctuations due to interest rate, tax law, and general market changes than securities with shorter maturities or durations.
Lower-Rated Securities Risk – Securities rated below investment-grade, sometimes called “high-yield” or
“junk” bonds, generally have more credit risk than higher-rated securities. Companies issuing high-yield fixed-income securities are not as strong financially as those issuing securities with higher credit ratings.
Management Risk – The Sub-Adviser’s judgments about the attractiveness and potential appreciation of a security, whether selected under a “value”, “growth” or other investment style, may prove to be inaccurate and may not produce the desired results.
Merger and Event-Driven Risk – This is the risk of investments in companies that are expected to be, or already are, the subject of a publicly announced merger, takeover, tender offer, leveraged buyout, spin-off, liquidation or other corporate reorganizations carry more risk than investments in companies that are perceived to be in stable organizational situations.
Money Market/Short-Term Securities Risk – To the extent the Fund holds cash or invests in money market or short- term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Mortgage-Backed and Asset-Backed Securities Risk – Mortgage-backed and asset-backed securities often involve risks that are different from or more acute than risks associated with other types of debt instruments.
Non-Diversification Risk – A Fund that is a non-diversified investment company means that more of the Fund’s assets may be invested in the securities of a single issuer than a diversified investment company.
Options Risk – Options can fall rapidly in response to developments in specific companies or industries and the Fund’s investments may be negatively impacted by unexpected market conditions.
Portfolio Turnover Risk – Increased portfolio turnover may result in higher brokerage commissions, dealer mark- ups and other transaction costs and may result in taxable capital gains.
Preferred Stock Risk – An issuer’s board of directors is generally not under any obligation to pay dividends (even if such dividends have accrued), and may suspend payment of dividends on preferred stock at any time. In the event an issuer of preferred stock experiences economic difficulties, the issuer’s preferred stock may lose substantial value due to the reduced likelihood that the issuer’s board of directors will declare dividends and the fact that the preferred stock may be subordinated to other securities of the same issuer.
Private Placement Risk – The liquidity of the market for specific privately issued securities may vary. Delay or difficulty in selling such securities may result in a loss to the Fund.
Real Estate Industry Concentration Risk – By concentrating in a single sector, the Fund carries much greater risk of adverse developments in that sector than a fund that invests in a wide variety of industries. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations.
Real Estate Investment Trust Risk (REIT) – Equity REITs may be affected by any changes in the value of the properties owned and other factors, and their prices tend to go up and down.
Risks Associated with the Discontinuation of the London Interbank Offered Rate (“LIBOR”) – It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021. The expected discontinuation of LIBOR may impact the functioning, liquidity, and value of investments that reference LIBOR.
Risks of Investing Asia –The value of the Fund’s assets may be adversely affected by political, economic, social and religious instability; inadequate investor protection; changes in laws or regulations of countries within the Asian region (including countries in which the Fund invests, as well as the broader region); international relations with other nations; natural disasters; corruption and military activity.
Securities Lending Risk – A risk of lending portfolio securities, as with other extensions of credit, is the possible loss of rights in the collateral should the borrower fail financially. The Fund might not be able to recover the securities or their value.
Senior Bank Loans Risk – Senior Loans are subject to the risk that a court could subordinate a Senior Loan, which typically holds the most senior position in the issuer’s capital structure, to presently existing or future indebtedness or take other action detrimental to the holders of Senior Loans. Senior Loans are subject to the risk that the value of the collateral, if any, securing a loan may decline, be insufficient to meet the obligations of the borrower, or be difficult to liquidate. In the event of a default, a Fund may have difficulty collecting on any collateral. In addition, any collateral may be found invalid or may be used to pay other outstanding obligations of the borrower.
Short Selling Risk: If the price of the security sold short increases between the time of the short sale and the time the Fund covers its short position, the Fund will incur a loss. Also, the Fund is required to deposit collateral in connection with such short sales and may have to pay a fee to borrow particular securities and will often be obligated to pay over any dividends and accrued interest on borrowed securities. These aspects of short selling increase the costs to the Fund and will reduce its rate of return. Additionally, the successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
Small and Medium Capitalization Risk – Companies with small and medium size market capitalization often have narrower markets, fewer products or services to offer and more limited managerial and financial resources than do larger, more established companies.
Software Industry Risk – Changing domestic and international demand, research and development costs, availability and price of components and product obsolescence can affect the profitability of software companies. Software company stocks may experience substantial fluctuations in market price.
Stock Market Risk – Stock markets can be volatile. In other words, the prices of stocks can fall rapidly in response to developments affecting a specific company or industry, or to changing economic, political or market conditions. The Fund’s investments may decline in value if the stock markets perform poorly. There is also a risk that the Fund’s investments will underperform either the securities markets generally or particular segments of the securities markets.
Structured Note Risk – The value of a structured note will be influenced by time to maturity, level of supply and demand for this type of note, interest rate and market volatility, changes in the issuer’s credit quality rating, and economic, legal, political, or events that affect the industry.
U.S. Government Securities Risk – The U.S. Government, its agencies, authorities and instrumentalities do not guarantee that the value of issued U.S. Government securities will increase, and in fact, the market values of such obligations may fluctuate. In addition, not all U.S. Government securities are backed by the full faith and credit of the United States; some are the obligation solely of the entity through which they are issued. There is no guarantee that the U.S. Government would provide financial support to its agencies and instrumentalities if not required to do so by law.
Expense ratios are gross of any fee waivers and reflect those in Dunham’s most recent Prospectus.
Natural Disaster/Epidemic Risk – Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis, and other severe weather- related phenomena generally, and widespread disease and illness, including pandemics and epidemics, have been and can be highly disruptive to economies and markets. They may adversely impact individual companies, sectors, industries, markets, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the Fund’s investments. For example, the novel coronavirus (COVID -19), which was first detected in 2019, has resulted in, among other things, stressors to healthcare service infrastructure, country border closings, business and school closings, and disruptions to supply chains and customer activity. Natural disaster/epidemic risk could have a significant adverse impact on the Fund’s portfolio investments.