JENNA DAGENHART:  Hello, I’m Jenna Dagenhart, and I’m here with John Greves from Schwab Asset Management and Som Priestley from T. Rowe Price. 

Well, John and Som, thanks very much for being with us today. At the time of this filming, we’re about to close the curtain on 2024. So let’s start with your high-level views for the year ahead. What trends are each of your firms anticipating in their capital market expectations for 2025? John, why don’t you kick us off here? 

JOHN GREVES:  Well, the past couple years we’ve seen an environment with strong equity and fixed income returns, really due to investor enthusiasm for resilient economy, the prospect for Federal Reserve interest rate cuts, and artificial intelligence. As we enter 2025, our capital markets expectations are anticipating a little bit more moderate environment for both equities and fixed income. Equities are starting with higher valuations than we’ve seen in recent years, and fixed income we’ve seen yields fall over the past six months, and so that is going to be just a little bit lower return for fixed income on a go-forward basis. Generally, we have a pretty positive view of the economy entering 2025, and that should lead to broadening of equity market performance. But we recognize that uncertainty is high, especially with policy, and we could see geopolitical risks continue to be impactful. 

JENNA:  Som, how about T. Rowe? What are your views for the year ahead? 

SOM PRIESTLEY:  Sure. So we enter 2025 with a complex market backdrop. On the one hand, there’s a lot of enthusiasm about incoming President Trump and the potential benefits to areas like M&A activity and regulation. And if those expectations are met, we agree that we could/should see a broadening and earnings which could/should benefit areas like small-cap and value. On the other hand, we once again believe that the key risk in the market environment has shifted from recession risk to inflation risk, which is a more difficult dynamic to manage around. So asset allocation, both strategic and tactical, will be critical in what could be a rapidly evolving market backdrop in 2025. 

JENNA:  Now, given those capital market expectations, could you each talk a little bit about how you’re currently approaching strategic asset allocation in your multi-asset strategies? Som, we’ll start with you this time. 

SOM:  Sure. So we typically take a long-term view when it comes to strategic asset allocation. We want to build portfolios that are durable, which means that they’re not overly reliant on a specific market environment to be successful. So we use a range of techniques in that endeavor, but the end result is a diversified portfolio. Looking to the year ahead, in our portfolios, you’ll see exposure to small-cap and value, and also some areas like inflation-sensitive equities, alternatives, and plus sectors in fixed income like floating rate that might provide incremental return or diversification properties. 

JENNA:  How about you, John?

JOHN:  Well, our strategic asset allocation emphasizes both efficient portfolio construction and behavioral finance research. And we agree that it’s important to stay broadly diversified to achieve portfolio objectives. We tend to have allocations to small-cap, real estate, and international equities, and we evolve those across the risk spectrum to really try to narrow in on the investment objectives that we’re looking for. So overall, entering 2025, we do view small-cap, international, and real estate as starting with a little lower valuations that could produce a little bit better returns for us in 2025 going forward. 

JENNA:  And advisors are increasingly turning to both active and passive strategies in client portfolios. Som, what role do these strategies play in a portfolio and what value do you see in combining them? 

SOM:  Sure. So we see value in both active and passive strategies as investors weigh the benefits of the potential for excess return against other factors like tracking error or fees. So I’ll cover some of the benefits of active before turning things over to John. From an active perspective, we believe investors should keep in mind both the return benefit but also the risk management benefits of an active approach. On the return side, that incremental gain above the benchmark, even a small amount can compound to have a real meaningful outcome for end investors, like more years of savings for retirement. On the risk management side, an active approach might keep you more diversified, which could be an important feature in what has been an increasingly narrowing market. 

JENNA:  And John, how do you think about constructing portfolios to optimally blend active and passive? 

JOHN:  Well, we agree that both active and passive strategies play an important role in portfolios. Active can complement passive well, especially in an environment where we’re seeing a little bit more concentration in index construction. That said, we believe that passive strategies really do make up the core elements of portfolios, and we typically allocate between 50- and 70% to passive strategies, really given their cost efficiency and low tracking error. The remainder is allocated to strategic beta and active strategies. Strategic beta, such as fundamental indexes, can really anchor portfolios a little bit more to the fundamentals, both the economy and to individual companies, and active strategies can be a little bit more dynamic in terms of their stock selection or security selection within fixed income. So overall, we do like the combination of passive strategies as a core, along with both strategic beta and active as complements.

JENNA:  In closing, what key takeaways should advisors keep in mind regarding client portfolio positioning for 2025? 

SOM:  So we believe the degree of difficulty could be high in 2025. That said, we also see the value that we’ve seen in equities and risk assets continuing potentially into the start of next year. So we’re currently overweight equities and short duration. That said, inflation is a key risk and there are a number of risks that might keep inflation higher for longer. Should we see a reacceleration in inflation and the market start not only pricing out Fed cuts, but pricing in Fed hikes that could represent an important tipping point for both equities and fixed income. Therefore, we’re balancing that overweight to equities with exposure to inflation-sensitive assets and alternatives. 2025, again, could be a rapidly evolving backdrop, and active management will be important to managing our portfolios through what could be choppy waters. 

JOHN:  We do recognize that we are starting with higher valuations and going to be an environment where geopolitical risks remain. We recognize also that clients could be in an environment where they’re highly focused on their returns of specific asset classes that have been higher over this past year. And so we really emphasize the importance of staying broadly diversified to meeting long-term investment objectives. And that broad diversification is going to be your friend over the long-term, given that markets can shift. And so we really emphasize that in 2025, if you keep your strategic asset allocation, you’re much better off in terms of achieving your long-term objectives. 

JENNA:  Well, thank you, John, and thank you, Som. I really appreciate you sharing your expectations for 2025. And to our viewers, thank you for watching. Before signing off, please take a moment to review the following disclosures.

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk, including loss of principal.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

The comments, views, and opinions expressed in the presentation are those of the speaker. The content presented here is intended for informational purposes only. The information is not intended to provide tax, legal, or investment advice; please check with your accountant or investment advisor for how it applies to your specific situation.

Some of the statements in this document may be forward looking and contain certain risks and uncertainties. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.