Themes and observations from U.S. Portfolio Insights
Based on the J.P. Morgan Portfolio Insights team’s reviews of client portfolios and our strategists’ 2020 outlooks, we review the common portfolio trends and imbalances we are seeing.
Advisors are constructing portfolios against the backdrop of a mixed macroeconomic picture: consumer strength and the lowest U.S. unemployment rate in half a century amid signs of softening in other data, including U.S. GDP, PMI and corporate earnings.
Intentionally or not, many advisors’ portfolios have become more tilted or concentrated. Our Portfolio Insights team has seen an overweighting of growth style equities, underweighting international equities and, in bonds, insufficient duration and a potentially worrisome shift toward lower credit quality.
We lay out a more balanced approach that plays both offense and defense to help advisors navigate the potential uncertainty ahead and achieve improved diversification.
THOUGHTFUL RISK MANAGEMENT BY BALANCING OFFENSIVE WITH DEFENSIVE
Marking the 12th year of the U.S. economic expansion, 2019 was a year of strong gains for equity and bond markets around the world. While we continue to see strength in the consumer, and the lowest U.S. unemployment rate in half a century, the data—including GDP, PMI and corporate earnings—are beginning to show signs of softening. Looking to 2020 in light of these macro factors, how should portfolios be tilted or concentrated? They shouldn’t be, we believe. Rather, portfolios should take (or move back toward) a balanced approach, playing both offense and defense to navigate the potential uncertainty ahead.
We have seen countervailing trends in our analysis of client portfolios (see box, “How We Get Our Data”): Advisors are shifting toward a more defensive stance in some ways, de-risking their portfolios by moving money from equities to fixed income. Yet in other ways they are playing offense— for example, by increasing their exposure to emerging market (EM) equities. We recommend finding a balance between these levers, one that acknowledges current higher valuations, the aging cycle and also our expectations that the markets still likely have further to go in 2020.
Based on what the J.P. Morgan Portfolio Insights team is seeing in client portfolios, and J.P. Morgan strategists’ 2020 outlooks, we detail here the imbalances we’ve seen and consider how advisors can become more risk conscious within each asset class, balancing offense and defense.
Growth style overweight
As advisors have sought stronger returns in a world where earnings are coming down, many have edged toward overweighting growth style equities. We are seeing a heavy growth lean in our portfolio analytics: allocations to growth that are nearly 2.5 times higher than to the value style (EXHIBIT 1). With economic data less than strong, advisors we’ve worked with have (some- times by design) leaned toward taking a little more exposure in one growth sector in particular—technology—and in some of the more cyclical sectors that have delivered better performance in recent years.
Portfolios analyzed allocated more than twice as much to growth than to value (47.5% vs. 19.7%), creating a lack of balance and diversification
EXHIBIT 1: ALLOCATIONS BY STYLE IN PORTFOLIOS ANALYZED USING J.P. MORGAN PORTFOLIO INSIGHTS ANALYTICS
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