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In the first quarter of 2023, we reviewed over 2,000 professionally managed investment portfolios 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 includes 26% ETFs—a 5% and 8% increase from 2022 and 2021, respectively. As ETFs gain steam, the binary lines are blurred, with 38% of advisors relying on more than straight index products. They are predominantly strategic beta products (15%) and active ETFs (5%) versus straight index (6%), signaling a growing middle ground between active and passive as advisors explore a variety of wrappers for investment decisions.
Utilization of ETFs
We observed the average portfolio has:
15
holdings
7
different asset managers
56
bps of underlying blended fees
-
Domestic Equity
In Q1, the average equity sleeve in a portfolio was 64%. Seventy-nine percent of the equity sleeve is allocated to U.S. equities, which have come down slightly compared to the last quarter as advisors pay more attention to diversification. Within U.S. equity, the average portfolio has 66% allocation to large caps, 23% to mid caps, and 11% to small caps.
Insights:
Growth allocations continued to decrease with an allocation of 33% of the equity sleeve in Q1, the lowest it has been in 2 years. The decrease in growth appears to have moved into Core (43%) while Value allocations are at 25%.At the top of the growth stocks leader board, we saw information technology and communications services sectors, with most growth categories remaining negative on a one-year basis.The rally in information technology and communications services sectors powered U.S. growth stocks to the top of the leaderboard in Q1. However, most categories remained negative on a one-year basis.The banking stress experienced during Q1, highlighted by the failure of two regional banks, is likely to generate even greater caution and lead to further credit tightening.Earnings outlooks deteriorated during Q1, with investors expecting slower sales growth and negative earnings growth for the rest of the year with a recession looming. -
Alternatives
Since 2021, the backdrop has been similar to prior periods of high inflation and positive stock-bond correlations. This reduction in the diversification potential of stocks and bonds is leading to some advisors looking at alternatives as an option.
Insights:
We are seeing more interest in alternative investments, with 18% of all incoming portfolios having some allocation to 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, bonds may not serve as a diversifier for equities as they normally do during low inflationary times. In that case, alternatives may be where advisors can find greater diversification benefits. -
International Equity
Twenty-one percent of the equity sleeve is allocated to non-U.S. equities, which represents a slight uptick yet is still far off from a high of 28% in Q1 2021. Advisors have 80% of their international sleeve in developed markets and 20% in emerging markets. This allocation to emerging markets is almost 3% higher than it was last quarter.
Insights:
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. Non-U.S. developed country stocks were second only to U.S. growth stocks in terms of performance in Q1.The global cycle has become less synchronized, with China accelerating amid a post-COVID reopening and Europe stabilizing amid falling energy prices. With the United States in a late-cycle expansion phase and a likelihood of recession on the horizon, advisors are cautiously increasing international allocations after two years of holding them steady or decreasing.China's post-COVID reopening and policy stimulus support a continued recovery driven by strong consumer spending. China's economy grew by 4.5% in Q1 of 2023, the fastest rate of growth in a year and an improvement over the 2.9% in Q4 of last year. This is a big reason for the recent shift by advisors into the emerging markets space.- Fixed Income
Banking sector turmoil, dramatic fluctuations in investor views of the outlook for inflation, and monetary policy contributed to the volatility in the Treasury markets in Q1 2023. Treasury yields dropped and credit spreads widened across most fixed income categories during Q1, at least partly due to banking-sector turmoil. With fixed income valuations looking more attractive to start off the year, the average fixed income sleeve in Q1 was 32%, an increase over the previous quarter.Insights:
All fixed income categories finished in positive territory as yields dropped during Q1, with longer maturity bond categories posting the best gains. 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.Advisors are exhibiting a flight to quality as they try to shift portfolios from investments seen as potentially risky during volatile markets. The average portfolio allocation to investment grade as a percent of fixed income is 77%, the highest level it has been in two years. We are also seeing a slight increase in duration from 5.3 in Q4 2022 to 5.6 in Q1 2023.As rate volatility stabilizes, it might be worth moving back into longer duration and higher-quality credit.The financial markets have been challenging as both stocks and bonds have struggled against the backdrop of 40-year high inflation. 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 position your clients' portfolios for years and decades to come.
Diversification does not ensure a profit or guarantee against a loss.
Past performance is no guarantee of future results.
ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.
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.
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, real 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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Fidelity Portfolio Construction Solutions Team
Analysis at a glance
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Portfolio assessments
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Advisors from over 1,500 firms had their portfolios reviewed
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Advisors engaged with Fidelity's portfolio construction tools in 2022
Data is from tool inception in July 2012 through December 2022, unless otherwise noted.
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Meet the team
Paul Ma, CFA
Lead Portfolio Strategist
Vino Ravichandran
Quantitative Analyst
Taylor Hankins, CFA
Portfolio Strategist
Alex Harrington, CFA
Portfolio Strategist
Nate Chang, CFA
Portfolio Strategist
Gavin Robinson
Portfolio Strategist
Tori Kissell
Portfolio Strategist
Kyle Jones, CFA
Portfolio Strategist
Chris Gibbs, CFA
Portfolio Strategist
Jim Conybear
Portfolio Solutions Consultant
Manuela Arango Coty, CFA
Portfolio Solutions Consultant
Nick Sgroi
Portfolio Solutions Consultant
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