Portfolio Construction

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Trends in Portfolio Construction: Q3 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.

The U.S. economy is proving to be more resilient than everyone expected, despite the uncertain global economic outlook. In Q2, continued global economic expansion amid generally disinflationary trends led recession odds to drop. However, in Q3, the resilient U.S. late cycle expansion has contributed to a stalling pattern in disinflationary trends. The job market continues to be very strong, but consumer activity is starting to fade along with a slight downturn in PMI—signs that the U.S. economy is cooling. Inflation remains in a downward trend despite a slight uptick in August. This late cycle environment is a mixed bag, with economic and corporate activity remaining solid but policy and inflation trends more uncertain. 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 the second quarter of 2023 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 2023 and potentially beyond.

We are seeing the highest level of ETF usage in two years. The average portfolio in Q3 includes 25% ETFs—a 5% and 8% increase from 2022 and 2021, respectively. As ETFs gain steam, the binary lines are blurred. While index funds are the most popular product in terms of usage, advisors are making larger allocations to strategic beta and active ETFs. The average allocation to active ETFs and strategic beta amongst users is 14% and 20% respectively, signaling a growing middle ground between active and passive as advisors explore a variety of wrappers for investment decisions.

We observed the average portfolio has:

different asset managers
bps of underlying blended fees

Domestic Equity
Domestic Equity

In Q2 of 2023, the average equity sleeve in a portfolio was 68%, which is a slight increase from 65% last quarter. 80% of the equity sleeve is allocated to U.S. equities versus 20% in international. U.S. allocation has gone up from 75% in Q2 as advisors pay more attention to the prevailing socio- political climate in the rest of the world. Within U.S. equity, the average portfolio has 67% allocation to large caps, 22% to mid caps and 11% to small caps—which is largely unchanged from previous quarters.


  • Growth allocation remains at 37% in Q3. Growth allocation, which had been decreasing every quarter, surged to 37% in Q2 after a low of 33% in Q1. It looks like advisors are still attempting to participate in the equity market rally led by U.S. technology companies, helped by an anticipated boom in artificial intelligence.
  • Rising bond yields interrupted the rally in riskier assets leading to losses across most major equity categories. The market’s gain in 2023 remains narrow, being concentrated in the 10 largest stocks in the technology and communications sectors.
  • The consensus outlook has stabilized, and investors expect a double-digit profit-growth rebound in 2024. Investors are basing their valuation metrics on 2024 earnings.

In 2022, in the higher inflation environment, the 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 led advisors to look at alternatives as an option.


  • We are seeing more interest in alternative investments in Q3 2023, with 15% of all incoming portfolios having some allocation to liquid alternatives. The average alts allocation per portfolio is around 8%. Most of these are categorized as market neutral, multistrategy, or options trading strategies.
  • If inflation persists higher, then bonds may not serve as a diversifier for equities as it normally does during low inflationary times. In that case, certain areas of alternatives can provide better diversification that investors seek.
International Equity
International Equity

In Q3, 20% of the equity sleeve is allocated to non-U.S. equities, which represents a decrease from 25% in Q2. Advisors have 82% of their international sleeve in developed markets and 18% in emerging markets, consistent to Q2. This allocation to developed markets is almost 3% higher than it was in Q1. With war, extreme uncertainty, heightened chance of recession in Europe/UK, and China’s volatile and inconsistent recovery, advisors are exhibiting a domestic bias.


  • 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 undervaluations of non-U.S. equities versus their historical average.
  • Higher interest rates in Europe caused shares to fall in Q3 but there was positive news that inflation has slowed to a two-year low in September, which could mean an end to interest rate rises.
  • Energy was the best performer this quarter, driven by higher prices after Russia and Saudi Arabia cut production.
Fixed Income
Fixed Income

Advisors are fully on board the fixed income train. The average fixed income sleeve in Q2 was 30%, which is a decrease from 33% in Q2—this is quite a change considering the quarter over quarter increases in fixed income allocations over the last year. This past quarter, 80% of the sleeve is allocated to investment grade, which is a two-year high. Duration in Q3 remains similar to last quarter at 5.8.


  • Many fixed income sectors drifted lower with the most interest rate-sensitive categories suffering the largest declines. Riskier sectors like leveraged loans continued to add to gains, but government bonds posted losses as yields rose.
  • In Q3, bond yields rose above long-term historical averages. After many years of very low bond yields and tight credit spreads, fixed income assets offer relatively better income opportunities with more attractive valuations.
  • While advisors are allocated to higher quality as they try to shift portfolios from investments seen as potentially risky during volatile markets, we see that high-yield sectors have been outperforming. However as rate volatility stabilizes, it might be worth moving back into longer duration and higher quality credit.
  • Both a soft landing and recession are good scenarios to own bonds in.

All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), as of 9/30/23.

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In conclusion

Fidelity's Portfolio Construction team believes inflation coming down is the main driver of market recovery. It makes the Fed more comfortable, which makes investors more comfortable. Please reach out to our Portfolio Construction Guidance team and services to help you build portfolios for this new market environment.

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