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

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 economy surprised on the upside in 2023, in stark contrast to the dire prediction of recession by many economists. The S&P 500 returned over 26% in 2023, mainly driven by the rebound of the technology sector. The U.S. as well as most of the global economy avoided a recession, in the face of cooling inflation and a belief in a soft-landing scenario. The Fed signaled that the trends were sufficient to project a shift to monetary policy easing in 2024, setting up market for a positive backdrop for 2024. The question continues to be how much of this is priced in.

A Common Composition of an Advisor-Created Portfolio

Source: FI portfolio solutions (9,456 Portfolio Reviews and Portfolio Quick Checks conducted between 1/1/23 and 12/31/23) and Morningstar.

To monitor key trends in advisors’ strategic allocations and rebalances as they react to a tough environment, we reviewed nearly 12,000 professionally managed investment portfolios in 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 2024.

Average ETF Usage in Advisor Portfolios

We are seeing the highest level of ETF usage in 2 years driven by advantages like better tax efficiency, cost, and intraday liquidity. In 2022, 52% of advisors had some ETF allocation and that has risen to 56% in 2023. The average portfolio in 2023 includes 27% in ETFs—a 6% and 9% increase from 2022 and 2021, respectively. As ETFs gain steam, the binary lines are blurred. While index funds continue to be the most popular product amongst advisors, there is increased interest in active ETFs. In 2022, 13% of advisors had some allocation to active ETFs but in 2022, that proportion has increased to 21% in 2023. The average allocation to active ETFs amongst users is around 10%—signaling not only a growing interest in the product, but also in the variety of wrappers available.

We observed the average portfolio has:

14
holdings
6
different asset managers
53
bps of underlying blended fees

Domestic Equity
Domestic Equity

Growth Allocations in Equity Sleeve

In 2023, the average equity sleeve in a portfolio was 66%, which represents a 2% increase from 2022 levels (64%). 78% of the equity sleeve is allocated to U.S. equities versus 22% in international. U.S. allocation has remained high in 2023, compared to 73% in 2021 as advisors pay more attention to the prevailing socio-political climate and inflation 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. The change worth paying attention to is the increase in Growth Equity allocation:

Insights:

  • The broad-based Q4 market rally, led by double-digit gains across most equity categories, capped a strong year for asset returns. For the full year, U.S. large cap growth stocks topped the leaderboard.
  • Growth allocations continue to grow, with advisors allocating 38% to it in Q4. This number had been decreasing throughout 2022 and into 2023, reaching a low of 33% in Q1.
  • A dramatic rebound for the stocks of the seven-largest U.S. companies by market capitalization—concentrated in the technology and communications sectors—drove the U.S. equity market’s gain. One year after their shares lost more than 40% due to the compression of valuation multiples, stocks of the largest seven companies gained more than 100% in 2023. Advisors participated in this by increasing growth allocations throughout the year.
Alternatives
Alternatives

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

Insights:

  • 16% of incoming portfolios had allocation to Alternatives. The average weight of alternatives in a portfolio is 5%.
  • 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 the better diversification that investors seek.
International Equity
International Equity

In 2023, 22% of the equity sleeve is allocated to non-U.S. equities, which represents a decrease from 27% in 2021. Advisors have 81% of their international sleeve in developed markets and 19% in emerging markets, consistent to the breakdown over the last two years. Global crosswinds included evidence of solid service activity but restrictive monetary policies in many developed economies. The global monetary tightening cycle appears to be over, but the pace and magnitude of easing remains uncertain. China remained an outlier, as it continued to ease policy in hopes of reaccelerating from its growth slump.

Insights:

  • 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.
  • The drop in commodity prices during 2023, highlighted by a decline in oil and energy prices, contributed to significant disinflation in emerging markets (EM). As inflation fell below or closer to target rates, some EM central banks began to cut interest rates. This could prove to be a good opportunity for advisors to take a look at their EM allocations going into 2024.
Fixed Income
Fixed Income

The average fixed income sleeve in 2023 was 32%. While fixed income allocations fluctuated between 30–37% in 2022, advisors have remained consistent quarter over quarter in 2023 in the face of uncertainty in the economic conditions ahead. A two-year high of 79% is allocated to investment grade. Advisors are still favoring lower risk products to hedge against uncertainty in the economy amidst an election year.

Insights:

  • After languishing during most of 2023, fixed income rebounded during Q4 as yields fell, and riskier credit categories finished as the year’s best performers.
  • It is difficult to time rate moves so it is important to align fixed income duration to portfolio objectives. Both a soft landing and recession are good scenarios to own bonds in, as the diversification provides protection in the event of slower than expected growth.
  • Advisors should consider moving from money market to bonds to lock in higher rates for a longer term as curve steepening happens very fast.

All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), as of 12/31/23.


In conclusion

Inflation coming down is the main driver of market recovery. It makes the Fed more comfortable, which makes investors more comfortable. Contact Fidelity's portfolio construction guidance team to help you build strategic portfolios for this current 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.

QUARTERLY SERIES
Q1 2024 investment themes outlook with Dr. Claus te Wildt

Tune in to hear from our team on the outlook for inflation and the economy in 2024.

FEATURED
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
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.