Portfolio Construction
Investment portfolio insights
Trends in portfolio construction
Stay up to date on the latest portfolio trends with our Portfolio Construction team’s insights, fueled by nearly 12,000 portfolio reviews annually.
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We continue to stick to our base case where the US economy exhibits muted near term recession risk as the global economy expands. Major economies demonstrated persistent expansion amid improved global financial conditions and firmer manufacturing activity, even as the global environment became more varied. The move toward global monetary easing inched forward, although persistent core inflation in the U.S. continued to keep the Federal Reserve on hold. However, data from recent months shows the labor market slowing back into balance and continued disinflation. This has given the Fed confidence, and as a result, the markets are pricing in two rate cuts later this year. As we enter a new environment where rate cuts are imminent, portfolio construction and long-term asset allocation are of utmost importance. Advisor portfolios have drifted in recent times given the surge in US equity allocations, bond market challenges and persistently high cash which will eventually come off the sidelines. The last mile of disinflation toward the Fed’s target may be difficult without greater economic slowing. As the markets reprice risk from the lower probability of near-term recession to a soft landing, it is important to maintain a well-diversified portfolio as upside surprises may be more difficult amid low market volatility and higher valuations.
A common composition of an advisor-created portfolio
Source: FI portfolio solutions (2,546 Portfolio Reviews and Portfolio Quick Checks conducted between 4/1/24 and 6/30/24) and Morningstar.
To monitor key trends in advisors’ strategic allocations and rebalances, we have reviewed over 3,000 professionally managed investment portfolios in Q2 of 2024 through our proprietary portfolio construction capabilities. Our analysis uncovers key themes playing out within each asset class that we believe will continue to be top of mind in 2024.
Driven by advantages like better tax efficiency, cost, and intraday liquidity, we are seeing an increase in ETF usage. Looking at portfolio reviews, 68% of incoming portfolios utilize both mutual funds and ETFs while 74% of target portfolios have both vehicles. Index funds continue to be the most popular product amongst advisors, especially when it comes to domestic equities. In 2022, 13% of advisors had some allocation to active ETFs but in 2024, that proportion has increased to 29%. The average allocation to active ETFs amongst users is around 17%. This is largely seen in the Fixed Income asset class, with strategic beta products preferred in domestic and international equities.
We observed the average portfolio has:
All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), as of 6/30/24.
In conclusion
Monetary policy is focused on both mandates of inflation and labor, which will drive the market in the coming months. It makes the Fed more comfortable, which makes investors more comfortable. Please reach out to our portfolio construction guidance team to help you build portfolios for this new market environment.
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Find out more about alternatives and how allocating to these investments may help strengthen your clients' portfolios.
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Diversification does not ensure a profit or guarantee against a loss.
Past performance is no guarantee of future results.
ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.
*The Magnificent 7 (Mag 7) includes the following stocks: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG and GOOGL), Amazon (AMZN), NVIDIA, (NVDA), Tesla (TSLA), Meta Platforms (META).
Stock markets, especially non-U.S. markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The securities of smaller, less well-known companies can be more volatile than those of larger companies.
Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments.
Additionally, bonds and short-term investments entail greater inflation risk—or the risk that the return of an investment will not keep up with increases in the prices of goods and services—than stocks. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.
Alternative investments are investment products other than the traditional investments of stocks, bonds, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.