The world is substantially different now than it was a year ago. We've progressed from a time when COVID variants and vaccination rates were the chief concerns to now, when COVID is almost an afterthought due to widespread reopening and waning severity and number of cases. Instead, the Ukraine-Russia conflict, supply chain disruptions, and the first serious inflations in more than a decade have created a precarious geopolitical climate. The portfolio risks advisors are concerned about have dramatically changed in the last 12 months. The United States has been through all four stages of the business cycle in under two years, and we find ourselves in the mid to late phase now. While there are still strong leading indicators and a tight labor market, there remains a tug of war between the Fed fighting high inflation and the GDP withstanding that.

To monitor key trends in advisors' strategic allocations, we reviewed over 3,500 professionally managed investment portfolios through our proprietary portfolio construction capabilities in Q1 2022. Our analysis uncovered key themes playing out within each asset class, that we believe will continue to be top of mind in 2022 and potentially beyond.

Q1 2022 portfolio analysis included:

51%

moderate/moderate-aggressive portfolios

15%

aggressive portfolios

34%

conservative/moderate-conservative portfolios

We observed the average portfolio has:

13

holdings

6

different asset managers

54

bps of underlying blended fees

5

Domestic

2

Sector

2

International

4

Fixed Income

1

Other (Alternatives & Commodities)

  • Domestic Equity
    The average equity sleeve in a portfolio was 58%. 75% of the equity sleeve is allocated to U.S. equities. Within U.S. equity, the average portfolio has 88% allocation to large and mid caps and 12% allocation to U.S. small caps. U.S. stock prices experienced a correction but bounced back to post less severe losses.

    Insights:

    Q1 2022 saw an increase of 3% into small caps at the cost of allocation to large caps, which accounts for 64% of the equity sleeve compared to 72% in Q1 2021.
    Value and Defensives led in Q1. These categories offer a haven due to cheaper valuation and less economic sensitivity. However, advisors are only allocated 24% to value, which has been constant over the past year and 22% to defensive, which is the lowest it has been since 2021.
    Commodity prices jumped significantly and cemented their place as the best performing category in the past one-year period. Only 10% of advisors have exposure to commodities but it is at 4.8%, the highest level it has been in the past two years.
    Alternatives allocation has been consistently decreasing since 2016. Only 13% of the advisors encountered in Q1 2022 had some exposure to liquid alternatives. Of those advisors, the average allocation was 8%. Some liquid alt categories have a lower correlation to equity and should be considered as an alternative to fixed income as a hedge to equity, especially during this period of high inflation.
    Navigating 2022 will require an emphasis on diversified and disciplined investment strategies as we enter a high inflation regime, with exposure to inflation resistant assets.
  • International Equity
    25% of the equity sleeve is allocated to non-U.S. equities. This amount is steadily decreasing from a high of 28% in Q1 2021.

    Insights:

    We are seeing declining allocation to emerging markets predominantly driven by concern around China's regulatory tightening and slowing growth. Supply chain disruptions caused by China's zero-COVID policy are further adding to the risks in emerging-market equities.
    The trajectory of the Ukraine-Russia conflict is a key source of risk with the EU being most exposed to the fallout. However, economic reopening should be a boost in Europe.
    Cyclically adjusted P/E (CAPE) ratios for non-U.S. equities remained below U.S. valuations. Valuation metrics indicate a relatively favorable long-term backdrop for non-U.S. stocks and currencies. During Q1, the U.S. dollar rose against most major developed-market currencies, which add to underperformance of non-U.S. equities in dollar terms.
  • Fixed Income
    The average fixed income sleeve in a portfolio was 37%. The average portfolio allocation to high yield within that reached 29%—a steady increase from 26% in Q1 2021.

    Insights:

    Inflationary pressures and the Fed tightening monetary policy has led to rate hikes for the first time in 2015. Investment Grade allocation dropped to 71% compared to 76% in 2020.
    We are also seeing a duration of 4.6, the lowest it has been in the past year as a result of advisors trying to avoid the impact of interest rate increases.
    The percent of advisors having exposure to inflation protected bonds is 16% compared to 9% in Q1 2021. These products provide better diversification than Treasury bonds.
    While every fixed income sector had a negative return in Q1, bank loans/floating rate products came the closest to finishing the quarter with a flat return (0.1%). This could be an attractive option for advisors seeking fixed income alternatives.

After a strong 2021 for absolute and relative returns, performance in 2022 has been challenged as both stocks and bonds have struggled against the backdrop of 40-year-high inflation.

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Contact your Fidelity representative today to discuss how to successfully navigate the markets in 2022.

Fidelity Portfolio Construction Solutions Team

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Meet the team

Paul Ma
Paul Ma
Vice President, Lead Portfolio Strategist
Whit Collier
Whit Collier
Portfolio Strategist
Kelly Gushue
Kelly Gushue
Director, Portfolio Solutions Consultant
Nils Bierkamp
Nils Bierkamp
Portfolio Strategist
Craig Blackwell
Craig Blackwell
Portfolio Strategist
Taylor Hankins
Taylor Hankins
Portfolio Strategist
Alex Harrington
Alex Harrington
Portfolio Strategist

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