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Richard K. Ciccione joined NEPC in 2017 as a senior consultant and has 19 years of experience in institutional investment consulting and financial services. He is a senior member of our endowment and foundation consulting practice and serves on the impact investing committee and the discovery platform committee. In 2022, Rick relocated from Chicago to Colorado to spearhead NEPC’s presence and growth in the Mountain West and Southwest.

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CIO: What changes are you making to your asset allocation advice, given the current state of monetary policy, geopolitics and the impact of inflation and rising interest rates?

Ciccione: Our endowment and foundation clients construct strategic asset allocations that are revisited annually but changed infrequently. However, the latitude they include in their investment policy statement allows them to tactically take advantage of some near-term opportunities. A few recent tactical changes that many clients have made include introducing (or maintaining) a dedicated allocation to large-cap value stocks, shifting safe-haven fixed income from Treasurys to TIPS, and cementing some gains by rebalancing public equities back toward MSCI ACWI weights. With the tremendous run of the Magnificent 7 stocks, large cap growth has performed exceptionally well and skewed the S&P 500 from a core position to a growth-biased holding. Therefore, to reduce the style bias in a portfolio, we are advising clients to take about a quarter of their S&P 500 exposure and invest in large-cap value. TIPS also present an opportunity to generate modest outperformance versus Treasurys going forward, with elevated inflation in a higher for longer environment. Finally, going back to a lesson learned in Investing 101: sell high, buy low. Based on this simple premise, we’re advising clients to rebalance public equities back toward MSCI ACWI weights after strong performance from U.S. equities.

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

Ciccione: While my path to investment consulting hasn’t been a linear one, the primary lesson I learned early in life, which has been reinforced repeatedly during my career, is act with humility and treat people with respect. My parents instilled that in me at a very young age, and it was easy to follow the example they were living daily. I was working at Lehman Brothers as the ship hit the iceberg, and my severance was tied up in bankruptcy court. To make ends meet, I humbly filed for unemployment, cleaned up construction sites and plowed snow overnight.

As it translates to investment consulting, we need to have the humility to acknowledge we’ll get asset allocation recommendations wrong periodically, and at times, investment managers with whom we invest will underperform. This year, any diversification away from the S&P 500 (and the Magnificent 7) presented a headwind to performance. However, being transparent with clients and presenting the rationale for decisions we make helps to garner trust. The only thing we can control, at the end of the day, is how we service our clients. If we aren’t servicing them well, then they have every right to look for someone who will.

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CIO: What asset classes (specific securities or sectors) look good to you now? Why?

Ciccione: We are constructive on lower middle market value buyout strategies in this market environment. Many buyout strategies were able to generate attractive returns through financial engineering during a low-interest-rate environment. With the current elevated rate environment likely to persist for a while, based on Fed Chairman Jerome Powell’s most recent communications, the days of being able to financially engineer attractive returns are behind us. Therefore, we believe lower middle market buyout firms that are focused on low-entry multiples and act as operators give investors the best chance to generate the attractive performance that is needed to generate the total returns our endowment and foundation clients desire.

Additionally, I believe emerging markets equities are poised for a more attractive decade going forward than the sector has experienced recently. My thinking is threefold; First, valuations in emerging markets are attractive on an absolute basis, as well as relative to developed markets equity valuations. Second, the U.S. dollar is trading near historic highs versus many emerging market currencies, so any return to more normalized valuations will serve as a tailwind. Finally, almost everyone else is bearish on emerging market equities, which makes it a perfect time to buy, right?