Find out how your portfolios stack up
Expert Perspective
|February 21, 2024
Find out how your portfolios stack up
How do your portfolios stack up against your peers'? Learn what’s trending in the biannual report from Vanguard’s Portfolio Analytics and Consulting (PA&C) team. You can review the highlights of the year-end 2023 report here or download the full analysis.
Advisors underweight growth stocks
Advisors’ allocations toward growth remain steady, but benchmark-relative active risk has increased for many advisor portfolios given changes in index composition. The persistent outperformance of mega-cap growth names in headline indexes has only pushed their weightings higher, further magnifying typical advisor underweights that our team has analyzed for years.
Our data shows a roughly 7% underweight in the median growth allocation at 32% of the overall equity sleeve compared to 39% for a global equity benchmark.
Figure 1: Equity style
Three out of four advisors now meaningfully underweight growth
Note: 985 equity sleeves observed in 2022, with an average of 11 tickers per sleeve; 1,220 equity sleeves observed in 2023, with an average of 12 tickers per sleeve.
Sources: Vanguard and Morningstar, Inc., as of December 31, 2023. Equity charts include all observed portfolios in each time period. Equity benchmark: FTSE Global All Cap TR USD.
In 2023, three out of four advisor portfolios were meaningfully underweight growth—at a point in time where growth was handily outperforming broad indexes (source: FactSet, as of December 31, 2023). As you can see below, small underweights to the top names in broad indexes can have an outsized impact on active risk and returns in your clients’ portfolios.
Figure 2: Difference in cumulative returns if underweight the "Magnificent 8" stocks relative to the S&P 500
Notes: The above figure shows the difference in cumulative returns relative to the S&P 500 Index given 50%, 25%, and 10% underweights to the Magnificent 8 stocks from January 1, 2014, through December 21, 2023. The Magnificent 8 stocks include Amazon, Apple, Microsoft, Nvidia, Alphabet (Google), Meta (Facebook), Netflix, and Tesla.
Sources: Investment Advisory Research Center analysis using data from FactSet, Inc.
Read the full article: From downturn to upswing: Strong fourth-quarter returns in stocks and bonds (advisors.vanguard.com).
Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Advisors’ government bond underweight narrows
Fixed income continues to be an area of focus for most advisors who engage with our PA&C service. The historic spike in bond volatility experienced throughout 2022 and 2023 is top of mind for many advisors. It's no wonder why the median allocation to active bond funds exceeds 70% as advisors seek to outsource components of their fixed income management.
Given many active bond managers tend to underweight government bonds, advisors remain meaningfully overweight corporate bonds, which has persisted for quite some time. More recently, we have noticed a clear shift in our data that shows a 5% increase in the median government bond allocation, at 38% of the overall fixed income sleeve compared to 33% a year ago. In addition, we saw an increase in the usage of explicit government bond ETFs as higher risk-free rates attracted the attention of many advisors.
Although most advisors remain woefully underweight government bonds, we believe this is a solid step in the right direction. We caution against forgoing the diversification benefit that comes from pairing government bonds with credit sensitive securities, such as corporate bonds and equities.
Figure 3: Fixed income sectors
Advisors continue to overweight cash, but most are underweight government bonds
Note: 947 fixed income sleeves observed in 2022, with an average of 6 tickers per sleeve; 1,178 fixed income sleeves observed in 2023, with an average of 6 tickers per sleeve.
Sources: Vanguard and Morningstar, Inc., as of December 31, 2023. Fixed income charts include all observed portfolios in each time period. Fixed income benchmark: Bloomberg U.S. Aggregate Float Adjusted.
Now is the time to revisit duration
Duration positioning remains one of the more popular topics we discuss with advisors as a team. Vanguard encourages advisors to get back to strategic duration weights as a way of preserving portfolio yields and diversification benefits for multi-asset-class portfolios. While advisors at large remain underweight duration, we have observed an encouraging directional trend in advisors’ duration positioning as it inches higher and advisors reallocate capital into intermediate duration and core bond strategies.
Figure 4: Duration
Three out of four advisors continue to underweight duration
Note: 947 fixed income sleeves observed in 2022, with an average of 6 tickers per sleeve; 1,178 fixed income sleeves observed in 2023, with an average of 6 tickers per sleeve.
Sources: Vanguard and Morningstar, Inc., as of December 31, 2023. Fixed income charts include all observed portfolios in each time period. Fixed income benchmark: Bloomberg U.S. Aggregate Float-adjusted Index.
Importantly, Vanguard’s research underscores the challenge of adding value through tactical duration management. Timing the rates market can be difficult and can create unintended outcomes for your clients’ portfolios. As you can see below, simply missing a few select months could have made a big difference—for better or worse.
Figure 5: Roller coaster of a year ending with an incredible rally during the fourth quarter
Cumulative 2023 return for bonds by month
Notes: The figure shows the cumulative performance by month from January 1 through December 21, 2023.
Sources: Investment Advisory Research Center analysis using data from Morningstar, Inc. Bonds: Bloomberg U.S. Aggregate Bond Index. Read the full article: From downturn to upswing: Strong fourth-quarter returns in stocks and bonds (advisors.vanguard.com).
Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
See how your portfolios compare
Use this detailed report on the portfolio construction choices your fellow advisors made in 2023 to inform your decisions as you work to improve outcomes for your clients.
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Notes:
- For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
- All investing is subject to risk, including possible loss of principal.
- Past performance is no guarantee of future returns.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
- Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
- While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. While the market values of government securities are not guaranteed and may fluctuate, these securities are guaranteed as to the timely payment of principal and interest.
- Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
- CFA® is a registered trademark owned by CFA Institute.
- Certified Financial Planner Board of Standards Inc. owns the certification mark, CFP®, in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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