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2022 was a difficult year across all asset classes with equities and fixed income both down. Inflationary pressures are coming down and we believe inflation may have peaked. Given the Feds short-term rate hikes, the yield curve also inverted in Q4 signaling the likelihood that a recession may be on the horizon for the U.S. this year. Europe and China entered the recessionary phase ahead of the U.S., with Europe faring better than expected due to a milder winter, and China setting to reopen by doing away with its zero COVID policy, making non-U.S. equities particularly interesting.
To monitor key trends in advisors' strategic allocations and rebalances, we used the findings from reviewing over 10,000 professionally managed investment portfolios in 2022. 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:
14
holdings
6
different asset managers
56
bps of underlying blended fees
Average Asset Allocation of a Professionally Managed Portfolios in 2022
Source: Fidelity Investments, data from proprietary portfolio construction tools used from 1/1/22 through 12/31/22.
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Domestic Equity
In Q4, the average equity sleeve in a portfolio was 65%. 80% of the equity sleeve is allocated to U.S. equities which is the highest it has been in 2022. Within U.S. equity, the average portfolio has 67% allocation to large caps, 23% to mid caps and 10% to small caps.
Insights:
Almost all asset categories posted positive gains in Q4 but negative returns for 2022. Advisors continue to maintain a domestic bias but it is important to note that there is a risk of earnings downgrades and U.S. equities are still expensive compared to other regions. There is also the question of how much bad news the U.S. bear market has priced in.Growth allocations continue to decrease from 39% in Q1 to 34% in Q4. This went into Core (42%) while Value allocation remained consistent (24%). Value held up the best amongst U.S. equity styles with a -8% return in 2022 while growth performed the worst with a -29% return. Growth strategies historically face pressures from higher inflation and tighter financial conditions leading to advisors moving away from their long-term growth bias.Q4 saw advisors continuing to turn to more defensive sectors like utilities, consumer staples, and health care based on market dynamics, allocating 26% of their equity sleeve to them compared to 22% in Q1. Advisor allocations to energy also increased throughout the year, which finished in positive territory benefiting from the more inflationary environment.Average Allocation to Growth within the Equity Sleeve in 2022
Source: Fidelity Investments, data from proprietary portfolio construction tools used from 1/1/22 through 12/31/22.
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Alternatives
The 2022 backdrop of high inflation has led to rising interest rates, positive stock-bond correlations, and the lack of diversification between stocks and bonds leading to advisors looking to alternatives as an option.
Insights:
The Portfolio Construction Guidance team noted that in 2022, 29% of incoming portfolios had some exposure to alternatives but due to the increased appetite for alternative products amongst advisors, 40% of outgoing suggested portfolios have a position in alts.The average allocation per portfolio is around 8%. Most of these are categorized as market neutral, multistrategy, or options trading strategies.Commodities also finished the year with positive returns. However, the Portfolio Construction Guidance team noted that only 23% of incoming portfolios had explicit exposure to commodities with an average allocation of 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, alternatives are areas where investors can find better diversification.Alternative investments are investment products other than the traditional investments of stocks, bond, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, re al 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.
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International Equity
20% of the equity sleeve is allocated to non-U.S. equities which is the lowest level of the year. This amount is steadily decreasing from a high of 28% in Q1 2021. Advisors have 82% of their international sleeve in developed markets and only 18% in emerging markets.
Insights:
While we understand advisors decreasing international equity allocation after years of underperformance, we are seeing pretty large undervaluation's of non-U.S. equities versus their historical average, such that this may not be the right time to underweight the category.Non-U.S. stocks led the gains in Q4 amid a weaker dollar. The U.S. dollar fell back in Q4 after hitting a multi-decade high against other currencies in Q3.China's abrupt relaxation of COVID restrictions creates a high probability of cyclical upturn in services and consumption activity in 2023. Additional policy changes should also support an uptick after a prolonged slump.Average Allocation to International within the Equity Sleeve in 2022
Source: Fidelity Investments, data from proprietary portfolio construction tools used from 1/1/22 through 12/31/22.
- Fixed Income
Fixed income sleeves are also experiencing increased volatility, giving advisors no real place to hide. In 2022, both large cap stocks and investment-grade bonds posted double digit losses for the first time since 1926 making it the most challenging year for portfolio diversification in recent memory. The average fixed income sleeve in Q4 was 30%, a slight increase compared to the previous 2 quarters. The average portfolio allocation to high yield as a percent of fixed income is 27%, an increase of 3% compared to Q3.Insights:
All fixed income categories ended down for the year with more interest rate sensitive sectors like long duration government bonds suffering the biggest losses. Both treasury yields and credit spreads rose during 2022 across all major bond categories.The silver lining to rising rates is that after several years of extremely low bond yields, fixed income assets now offer relatively better income with more attractive valuations.While advisors chased quality earlier in the year, allocation to investment grade dropped to 73% in Q4. We are also seeing a slight decrease in duration from 6.1 in Q3 to 5.3 in Q4.As rate volatility stabilizes, it might be worth considering moving back into longer duration and higher quality credit even though yields are down from their peaks. High-yield spreads are tight and could be vulnerable to weaker equities.Average Allocation to Investment Grade Bonds in 2022
Source: Fidelity Investments, data from proprietary portfolio construction tools used from 1/1/22 through 12/31/22.
2022 has been challenging as both stocks and bonds have struggled against the backdrop of the highest inflation in 40 years. We may have entered a higher inflation regime where additional asset classes beyond stocks and bonds are needed to build a more diversified portfolio. Fidelity can help you navigate these challenges to help you position your clients' portfolios for years to come.
Diversification does not ensure a profit or guarantee against a loss.
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.
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Contact your Fidelity representative today to discuss how to successfully navigate the markets in 2023.
Fidelity Portfolio Construction Solutions Team
Analysis at a glance
53K+
Portfolio assessments
25K+
Advisors from 1,000 firms had their portfolios reviewed
7.9K+
Advisors engaged with Fidelity's portfolio construction tools in 2022
Data is from tool inception in July 2012 through December 2021, unless otherwise noted.
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Meet the team
Paul Ma, CFA
Lead Portfolio Strategist
Vino Ravichandran
Quantitative Analyst
Craig Blackwell, CFA
Portfolio Strategist
Taylor Hankins, CFA
Portfolio Strategist
Alex Harrington, CFA
Portfolio Strategist
Nate Chang, CFA
Portfolio Strategist
Gavin Robinson
Portfolio Strategist
Kelly Gushue
FMAX Investment Consultant
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