Benchmark Exposure Paid Off in 2019
2019 was a good year to be in the benchmarks. While absolute return strategies had positive returns for the year, they did not do as well as traditional equity and fixed income. Virtually all asset classes went up, and equity and fixed income markets had their best performances in ten years.
Echoing the strong returns of global markets, our annual survey of financial advisors’ portfolios shows that portfolios with a bias towards Large Cap Growth equity funds had the best performance in 2019. US financial advisors’ portfolios did particularly well, as they had the largest average allocation to equities at 53%, taking the top spot from the UK in 2018 (Figure 1).
Figure 1 – Average Allocation Across Financial Advisors’ Portfolios by Region at the End of 2019
We continued to see a huge disparity in the way that investors in different regions allocate to various asset classes to construct moderate risk model portfolios (Figure 2). Advisors in the UK and US have the highest allocations to equities, with portfolios weights in excess of 50%, whereas in France equity allocations are just over 30%. In contrast, Spain and Latin America allocate around 40% to fixed income, whereas in the UK and France it is closer to 20%. The differences partly stem from cultural differences between advisors, meaning that similar risk tolerances would result in completely different portfolios in different regions.
Interestingly, French advisors’ typical portfolios had the lowest proportion of equities in 2019, but were not the worst performer of our peer group thanks to diversification across real assets and alternatives (Figure 2).
Figure 2 – Which Region Performed Best in 2019? 12-month Performance vs. Risk in Financial Advisors’ Typical Portfolios by Region
There are also marked regional differences in ESG (environmental, social, governance) investing trends. Socially responsible investing is becoming mainstream in Europe, where “socially conscious” funds (Morningstar’s terminology for at least minimal ESG compliance) now represent 14% of the French financial advisors’ portfolios we’ve analysed. Similarly, the typical moderate model portfolio offered in Spain by large financial institutions contains 19% socially-conscious funds, and the proportion increases to more than 22% in the Netherlands.
The strong interest in ESG in Europe is likely a combination of higher demand from investors, favorable regulatory tailwinds, and the growing realization that ESG investing does not mean lower returns in many geographical areas (Figure 3). In contrast, slower ESG adoption by US and Latin American financial advisors may be a function of a smaller ESG offering, particularly in fixed income, and the historical relative underperformance of ESG equity funds compared to their more traditional peers.
Figure 3 - ESG vs. Traditional Equity Fund performance Jan 1, 2017 – Dec 31, 2019
If 2019 was the year to be in the benchmark, 2020 looks very different. As we saw in late February 2020, the environment can change quickly. Most portfolios were ill prepared for the market rout triggered by coronavirus fears and plummeting oil prices. Now that volatility has returned, and the 11-year bull market has ended, financial advisors will have new opportunities to review their models to better understand sources of return, diversification, and risk.
To learn more about how allocation decisions affected portfolio risk and return levels, read the full 2019 Global Portfolio Barometer.