Themes and observations from U.S. Portfolio Insights
- Our Portfolio Insights team, in reviews of thousands of client portfolios, saw U.S. equity allocations near peak levels even at a time when our tactical thinking has shifted to favor more international and emerging markets equities.
- In equity style, portfolios’ exposure to growth equities is double relative to value, and concentrations grew to a potentially worrying degree in individual big-name growth stocks.
- We also saw a slight rise in the use of alternatives, particularly option-based strategies. In fixed income, portfolios made an up-in-quality shift.
- Our forecasting scenarios build in continuing sources of volatility even after widespread COVID-19 vaccination, highlighting the importance of analyzing what investors own so they can properly position for the uncertainties and opportunities ahead.
In a time of change, investors are reassessing
It should come as no surprise that portfolios shifted in the last six months, in a year when economies and markets changed more profoundly than at any point in modern history (EXHIBIT 1). Our last edition found investors coping cautiously with seismic volatility as the global pandemic sparked one of the sharpest sell-offs on record in Q1, then taking measured risks as central bank and fiscal responses drove a massive market resurgence in Q2. The U.S. election concerns that dominated Q3 and Q4 further extended the wild ride.1
Since our last edition, in about 8,000 portfolio analyses we’ve run, we have found a few noteworthy trends: One is a worrying concentration in U.S. mega cap growth, particularly individual stocks. Another is a slightly warmer embrace of alternatives for additional downside protection, mostly options-based solutions. We also saw a commendable up-in-quality shift in fixed income.
Where should portfolios go from here? It would be myopic to assume widespread vaccine distribution will return investing to “normal.” Our forecasting scenarios build in continuing sources of volatility even after COVID-19, along with pockets of potential opportunity. The need remains as strong as ever to analyze what investors own, to reassess and reexamine how their allocations have held up, and to ensure proper positioning for the uncertainties and opportunities ahead.
Asset class trends (most utilized Morningstar categories)
EXHIBIT 1: HIGH, LOW AND AVERAGE ALLOCATIONS OBSERVED BY OUR TEAM (TRAILING 12 MOS.)
Equities: Concentration in domestic growth stocks intensified
Within traditional stock-bond portfolios, equities have reached their highest allocation in two years, at about 62% of portfolios (vs. the baseline 60/40 stock-bond allocation), making the average portfolio slightly more risk-heavy. U.S. equities accounted for about 78% of all equities held, near peak levels, as investors appeared to chase sources of past performance even as valuations hit, by some measures, historical highs on par with the late-1990s tech bubble.
The lean into the U.S. market is nothing new. But while we’ve seen the trend for years, there’s a difference now: We recently shifted our tactical thinking and suggest adding international and emerging market equities. Yet most portfolios we analyzed didn’t take that tack, or did it only very slightly.
Style-wise, the portfolios we analyzed were much more heavily exposed to growth than to value—above the already high levels of mid-2020. The embrace of growth sectors, such as tech, accelerated since July.
We also saw investors adding individual stocks (top five: Apple, Microsoft, Amazon, Johnson & Johnson and AT&T). More portfolios now hold individual stocks, while the average number of stocks owned has come down; that alone would intensify concentration (EXHIBIT 2). But there’s more at play. The largest growth mutual funds and ETFs have also been doubling down on growth, adding the same big, familiar names. Plus, a natural expansion of growth stocks occurred as these portfolio holdings rose in value. Taken together, the average portfolio’s current concentration in U.S. growth stocks is particularly noticeable. Especially when it comes to individual, larger and more concentrated single-stock holdings, we reiterate that diversification is paramount in markets this uncertain.
U.S. equities are near peak levels in portfolios, even as our tactical thinking has shifted to favor more international and emerging market equities
EXHIBIT 2: PORTFOLIOS REVIEWED IN H2 2020: AVERAGE WEIGHTING TO, AND NUMBER OF, STOCKS
Another noteworthy shift: Portfolios’ average allocation to emerging market equity (EME) hit a two-year high, suggesting that some investors understand the opportunity and value there. Compared with our forecasts and J.P. Morgan Asset Management’s Multi-Asset strategists’ views, however, they’re still well underweight; higher potential returns may warrant a significantly larger position than the average EME allocation our analytics team observed.
Alternatives: More presence in portfolios, yet performance differed drastically by manager
Alternatives allocations crept up to the highest we’ve seen in two years. But alternatives (as much as 2% of an average portfolio, up from 1% six months ago) are still far below a weighting we would deem effective.
Options-based strategies made up the vast majority of alternatives allocations we observed. A possible explanation: Investors, worried that fixed income may not be providing the ballast it has in the past, are therefore turning to a lower beta, lower volatility approach. We see the shift as part of alternatives becoming a more essential portfolio component—though, of course, any such decision needs to be right for the individual client.
The rise in the use of alternatives comes with a need for greater due diligence. Average performance for the options-based category was 7.32% in 2020, a respectable number. But where investors got their exposure made all the difference: The top performer rose about 28% while the bottom performer declined 5%—a massive dispersion among managers, and ironic for a category meant to dampen volatility. The performance dispersion is a reminder to do your homework before you allocate, especially in the alts category.
Fixed income: A commendable up-in-quality shift amid global uncertainties
In a period of rapid change, fixed income allocations held relatively steady but improved in quality. Our analyses saw allocations to core bonds (benchmarked to the Bloomberg Barclays U.S. Aggregate Bond Index) hit a two-year high.
Investors likely wanted to de-risk amid the pandemic and election uncertainty as they faced skyrocketing equity valuations. We saw slight underweighting of riskier high yield and international bonds involving currency exposure, as well as less short-duration, absolute return fixed income. Cash exposure was also up slightly, toward the higher end of historical levels. This general de-risking is a traditional approach but doesn’t solve the two primary concerns about fixed income in the current environment: Can it continue to be the potent source of diversification it was in the past? And, how does an investor generate income in a real yield world?
Those concerns have likely driven equity, alternatives and cash allocations up slightly at the expense of fixed income. While we are pragmatic about the headwinds to fixed income, we continue to advocate for its utility in a traditional stock-bond portfolio. For investors whose primary objective is preserving capital and dampening the potential blow of a stock market downturn, we encourage the focus on higher quality bonds.
We also advocate seeking out fixed income managers whose thinking has evolved and who have become more creative about using different fixed income sectors, at times, such as asset-backed securities. Alts have also become a viable idea for downside protection in light of the challenges confronting bonds in a world awash in liquidity. Above all, we encourage investors not to let fixed income act too much like equity in a reach for income or returns.
Positioning for the bumps and opportunities ahead has perhaps never been more important, and part of that duty involves knowing what you own. Our portfolio analyses are one way to get a clear-eyed view and to discover ways to become more creative fiduciaries for clients.
Discover what's in your portfolio
Portfolio insights analytics
A personalized service designed to help investors build stronger portfolios.
Dedicated team with credentials including MBA, CFA® and CIMA® designations
Thousands of investor portfolios reviewed annually
Portfolio consultations with thousands of investors
How we get our Data
The Portfolio Insights Analytics team analyzes thousands of portfolios and conducts thousands of one-on-one consultative calls with investors annually. Our team of over 20 specialists is focused exclusively on helping investors with asset allocation decisions, investment selection and portfolio implementation. Through its interactions, the team gleans valuable insights and meets every quarter to review and assess these themes and trends, and their potential portfolio implications.
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.
Copyright 2020 JPMorgan Chase & Co. All rights reserved