FlexShares Income with Moderate Growth Model

Across all five FlexShares Strategic Models, we reduced real assets and reallocated to global equities. We believe that return expectations for real assets have fallen, especially for natural resources, which in our thinking may face headwinds from continued focus on climate risk. Given our slow growth expectations, we believe that there will be continued pressure on the supply and demand balance notably in the energy sector. That said, our analysis suggests that the asset class may actually be inexpensive relative to broader equities and could still provide protection against unexpected inflation, which we believe remains a risk. We also increased the allocation to High Yield bonds* in every model in order to take advantage of what we believe are potentially attractive risk/return profile of the general asset class, including potential yield, potential for expected total return and a potential lower risk relative to global equities. Our thinking is that high yield bonds may face some challenges from the slow economic growth environment, but may remain attractive to income-seeking investors given the very low level of interest rates in general, which we expect for the longer term. Our analysis suggests that lower levels of interest rates may also help high yield bond issuers to more easily service their debt.

Risk assets were unchanged from the prior year at 36%. Asset Allocation Changes: High Yield (+1%), TIPS (+1%), Natural Resources (-1%), Investment Grade Fixed Income (-1%).

We also made an adjustment to the FlexShares Exchange Traded Funds (ETFs) we use to implement the asset allocation of the FlexShares Strategic Models. FlexShares Strategic Models seek targeted factor exposures--key drivers of long-term risk and return such as quality, value, momentum, low volatility and dividend yield—within the US equity allocation of each model. As of August 2020, we added the FlexShares US Quality Low Volatility Index Fund (QLV) and removed the FlexShares US Quality Large Cap Index Fund (QLC), as we believe the adjustment offers a more diversified factor approach.