Portfolio Allocation Trends - Q3 2023

A review of nearly 300 advisor portfolios shows that taking equity risk and staying short on fixed income duration drove top year-to-date portfolio returns.

Portfolio consultants Sean Kaukas and Kevin McCullough review the allocation trends identified in financial advisors’ model portfolios during the third quarter of 2023. Key findings include:
  • The top-performing portfolios had higher overall equity exposure, with a tilt to US large-cap growth stocks.
  • On the fixed income side, the top performers had a shorter duration profile.
  • The average return for the top quartile portfolios was 8% year to date, while the average return for the bottom quartile was about half that, at a little over 4%.
  • There has been a rotation back into traditional asset classes, with advisors reducing their allocations to cash, commodities, and alternatives and increasing exposure to equities and fixed income.
  • As of the third quarter, 20% of advisor portfolios had a bias toward growth stocks while nearly 60% favored value stocks – so advisors have largely missed out on the growth rebound this year.
  • In bond allocations, advisors have been warming up to extending duration, despite the fact that rates have yet to stabilize.
  • Duration has lengthened over the past few months to about 4.5 years, on average, but this is still lower than 2020, when the average was just over 5 years.
  • While alternative allocations spiked to all-time highs in 2022 when traditional asset classes were struggling, the story has changed this year and alternative allocations have downshifted closer to their long-term average.
  • Notably, the Morningstar category known as “derivative income” has seen a significant uptick this year as advisors have favored lower-volatility equity strategies that can also generate attractive yields.
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This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Growth stocks may be more sensitive to market conditions than other equities, as their prices strongly reflect future expectations.

Alternative investments involve unique risks that may be different than those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.

Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time.

Duration risk measures a bond's price sensitivity to interest rate changes. Bond funds and individual bonds with a longer duration (a measure of the expected life of a security) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations.