Portfolio Construction

Investment portfolio insights

Elevate how you build client portfolios with the latest insights on asset allocation and investing trends, all backed by our proprietary data and expert commentary.

Trends in Portfolio Construction: Q2 2023

Stay up-to-date on the latest portfolio trends with our Portfolio Construction team’s insights, which are fueled by nearly 12,000 portfolio reviews throughout the year.

It has been a tale of two starkly different quarters to round out the first half of 2023. In the first quarter, we saw signs of stress in the U.S. and European banking systems, escalating fears that a recession may be on the horizon. While in Q2, continued global economic expansion amid generally disinflationary trends has led recession odds to drop. The debt ceiling crisis was averted and better than expected earnings drove positive returns in the quarter, led by large cap growth stocks. CPI continues to fall, and the Fed paused in June as it waits to see the effects of monetary tightening. However, an inverted yield curve and tighter credit conditions mean that the late cycle outlook remains mixed. While there was some talk of a pause in rate hikes, a resilient U.S. economy has caused the Fed to continue to commit to a hawkish stance in future months. The rate of inflation is decelerating but greater economic slowing may be necessary to bring down core inflation sustainably. The Fed and other central banks are likely nearing the end of their hiking cycles. Globally, Europe has carefully avoided a recession, but China’s reopening momentum is faltering. The question continues to be how much of this is priced in amidst these challenging dynamics.

To monitor key trends in advisors' strategic allocations and rebalances as they react to a tough environment, we have reviewed over 2,100 professionally managed investment portfolios in Q2 of 2023 through our proprietary portfolio construction tools. Our analysis uncovers key themes playing out within each asset class that we believe will continue to be top of mind in 2023 and potentially beyond.

We observed the average portfolio has:

different asset managers
bps of underlying blended fees

Domestic Equity
Domestic Equity

In Q2, the average equity sleeve in a portfolio was 65%. Seventy-five percent of the equity sleeve is allocated to U.S. equities, which has come down from 79% in Q1 as advisors pay more attention to diversification. Within U.S. equity, the average portfolio has 67% allocation to large caps, 22% to mid caps and 11% to small caps.


  • Growth allocations, which had been decreasing every quarter, surged to 37% in Q2 after a low of 33% in Q1. U.S. technology companies led the way for the equity market rally, helped by an anticipated boom in artificial intelligence.
  • Despite the sharp gains by U.S. large cap stocks, the market rebound remained narrow. The top 10 largest U.S. stocks, concentrated in the technology and communications sectors, rose more than 40% in the first half of the year. This far outpaced the rest of the market, where the rebound was less pronounced.1
  • Earnings growth is currently contracting at low-single digit rates, but the consensus outlook has stabilized, and investors expect a double-digit profit-growth rebound in 2024. With the year half over, investors are basing their valuation metrics on 2024 earnings.

In the higher inflation environment, correlations of stock and investment-grade bonds turned positive, where the performance of stocks and bonds moved in the same direction. This lack of diversification between stocks and bonds may have led advisors to look to alternatives as an option.


  • We are seeing more interest in alternative investments in 2023, with 18% of all incoming portfolios having some allocation to liquid alternatives. One year ago, only 13% of incoming portfolios had an alts position. The average alts allocation per portfolio also went from around 8% last year to 9% this quarter. Most of these are categorized as market neutral, multistrategy, or options trading strategies.
  • If inflation persists higher, bonds may not serve as a diversifier for equities as they normally do during low inflationary times. In that case, certain areas of alternatives may provide better diversification that investors seek.
International Equity
International Equity

Twenty-five percent of the equity sleeve is allocated to non-U.S. equities, which represents a further uptick from 21% in Q1 and the highest level since Q1 2022. Advisors have 82% of their international sleeve in developed markets and 18% in emerging markets. This allocation to developed markets is almost 3% higher than it was last quarter, with corresponding 3% less in allocation to emerging markets. We believe investors are cautious on China’s stalled recovery. Despite perceived home country bias, international continues to be a top destination for diversification.


  • Developed-market equities outperformed emerging markets. Global earnings growth, which has been decelerating since 2021, showed signs of stabilizing. While we understand advisors decreasing international equity allocation after years of underperformance, we are seeing large undervaluation of non-U.S. equities versus their historical average while the U.S. climbed well above its longer-term average.
  • Non-U.S. cycles are becoming de-synchronized, with some countries experiencing better cyclical trends. The U.S. is in the late-cycle expansion phase, leading advisors to cautiously increase international allocations that have been stagnant over the past two years.
  • China’s weakening economic data from lower foreign direct investment to lower consumer sentiment is worrying. Japan by contrast has shown strong domestic demand in a loose monetary policy environment and the lower commodity prices really helped European economies. Advisors have shifted outlook to diversify away from China but remain invested in Asia and developed markets.
Fixed Income
Fixed Income

The average fixed income sleeve in Q2 was 33%, increasing consistently since Q2 of last year. Seventy-nine percent of the sleeve is allocated to investment grade, which is a two-year high and duration has also increased quarter over quarter to 5.8%.


  • As banking-sector turmoil abated during Q2, Treasury yields rose, and credit spreads fell across most fixed income categories. Most major bond sectors’ yields and spreads finished roughly near their averages over the past two decades. After many years of very low bond yields and tight credit spreads, fixed income assets may offer relatively better income opportunities with more attractive valuations.
  • Credit-sensitive fixed income categories, such as emerging-market debt and corporate high-yield bonds, posted positive returns, but rising interest rates dragged most bond categories lower.
  • Advisors are exhibiting a flight to quality as they try to shift portfolios from investments seen as potentially risky during volatile markets. As rate volatility stabilizes, it might be worth considering longer duration and higher-quality credit.

In conclusion

Inflation coming down is historically the main driver of market recovery. It tends to make the Fed more comfortable, which may make investors more comfortable. Please reach out to our portfolio construction guidance team to help you build portfolios for this new market environment.

Want to know more?

Check out how Fidelity can give you a scalable, personalized portfolio construction framework for managing portfolios more efficiently and effectively.

Thinking Outside the Portfolio podcast: Q3 2023 Investment Themes

Tune in to hear from Dr. Claus te Wildt on recent market activity, the Fed, and inflation.

An Advisor's Guide to Alternative Investments

Find out more about alternatives and how allocating to these investments may help strengthen your clients' portfolios.

Investment strategies to power your clients’ portfolios

Our tailored portfolio solutions—including model portfolios and separately managed accounts—can allow you to spend more time where it counts: building better client relationships.