With the Federal Reserve having raised its benchmark interest-rate target to 3.75% to 4% in September and the 10-year Treasury yield near 5.3%, higher borrowing costs are reshaping the investment landscape. For investors, this shift brings both opportunity and risk. Cash and bonds now offer more income, but rising yields can pressure longer-duration bonds and many stocks. Barron's asked a panel of investment advisors: What portfolio changes are you making or contemplating as interest rates rise?

Christian Salomone, chief investment officer, Ballast Rock Private Wealth

We've already been running slightly less duration [a measure of interest-rate risk that takes into account when bonds mature] in our model portfolios than what most generic model portfolios call for, so we're already well positioned for this. However, we are further reducing some of our long-term duration and replacing it with intermediate Treasury inflation-protected securities to protect us from what we view as higher-for-longer inflation. We also like the belly [middle part] of the yield curve, where there's an opportunity to put some of our cash reserves to work and get a little bit of pickup to yields on cash. That gives us some dry powder should long-term yields rise even higher. We're not looking to aggressively add duration. However, if we did see, say, 10-year yields up to 5.5%, and certainly 5.75% or 6%, we'd probably think about adding a little bit of duration.

On the equity side, concentration risk, especially in the broad U.S. indexes, continues to increase, so we've been methodically trying to reduce some of that risk, especially among stocks in the Magnificent Eight, or whatever they're calling it these days. We're reducing a little bit of our U.S. exposure and replacing it with European exposure. We feel we get better diversification by sector there. In the international indexes, especially the European ones, it's a little bit more financials and industrials, which should benefit from a rising-rate environment. There's a bit of energy in there, as well: We think the energy sector's issues are going to continue for the medium term, so we should see energy prices remain elevated.

Sheena Pauley, senior portfolio manager, MAI Capital Management

We're not too spooked by rising interest rates, and I view what's happening as getting back to a more normalized rate environment. Higher interest rates aren't necessarily a bad thing if you have a total return portfolio that's had a lot of gains on the equity side. It's a good time to take some money off the table, reinvest some of it in fixed income, and let the fixed-income investments help with that total return. A lot of clients are overweight right now in equities because markets have done so well. A lot of clients have exposure to the artificial-intelligence trade, and our conversations lately have been about how much longer this bull market can go on. I've been advising them to trim back, to get the portfolio back in alignment. Rebalancing the portfolio is an easier conversation now than before because fixed income has become a lot more attractive.

We know that bear markets happen every few years, so I have been trying to get clients to take action now and prepare. We do a lot of laddered bond portfolios -- I like using individual bonds. Our portfolio durations are shorter than the Bloomberg Aggregate Bond Index by about a year or so, and we do mostly investment-grade, high-quality type bonds, which is where yields have been very attractive. Clients who have been with us for a while understand and are appreciative of the fact that we're trying to get them into a more conservative position in their portfolio.

Stephen Kolano, chief investment officer, Integrated Partners

We've been underweight small-cap equity despite the run in the first half of the year, and actually we've become more underweight. Small-caps tend to run with more leverage than large-caps, and [small-cap companies'] debt tends to be shorter in duration and maturity, so it needs to be rolled over every four or five years. So, there's definitely a rate sensitivity in small-caps. There's still debt on small-cap balance sheets that has yet to be rolled over from even pre-2022. Combine that with really aggressive earnings-growth expectations for small-caps, especially in the second half of this year. For those two reasons, we're staying underweight small-caps.

We've also been taking profits in a lot of the momentum- and AI-related trades and moving into more-value-oriented large-cap equities. When you look at the capital spending by a lot of these AI companies, the return on invested capital is much further out. So, it ends up being a long-duration play within the equity world on the momentum side. Capital expenditure has to be funded not only by equity issuance but also by debt issuance. So, not only is it a longer-duration play but those future earnings are out further, as well. There's also a bigger uncertainty as to what those earnings are going to look like, given that they're funding capex now with potentially 6%, 7%, or 8% debt. You're going to need a much higher return on investment capital to make it accretive to your earnings.

Andy Wang, managing partner, Runnymede Capital Management

I do think the opportunity set is changing, because higher-quality bonds offer more meaningful income, which is especially relevant for clients approaching retirement. We're also reviewing whether clients' portfolios still need the same amount of equity risk to support their goals. The prospect that they can get a higher yield is there, and if we see subsequent rate hikes this year and next, you'd be able to get higher, near-risk-free returns.

On the stock side, we are paying attention to companies' cash generation, debt levels, and refinancing needs, because rising rates don't affect every company equally. We've always wanted to own companies with little to no debt. Over the past decade, that has been more and more difficult. In the zero-interest-rate environment, it didn't make sense for companies to not use debt. So, companies tend to have more debt than they did a decade or two ago. But in a rising-rate environment, leverage isn't a good thing. Companies will have to refinance that debt, which could have a negative impact on their earnings if cost of capital is becoming more expensive.

I do think insurers could benefit over time from higher yields as they reinvest their holdings. Although we need to understand their investment portfolios and their liabilities across sectors, they're worth examining because they can earn more on cash without facing the same refinancing burden as other companies. Healthcare is another area that may offer relatively resilient demand if higher borrowing costs slow the economy.

Write to editors@barrons.com