Markets have witnessed a rotation from growth to value stocks in the last year as investors have grappled with concerns about higher inflation, tighter monetary policy and increased potential for market volatility and geopolitical risk. How have portfolios changed in this complex environment? The Capital Group Portfolio Consulting and Analytics team reviewed 479 professionally managed portfolios from January 1 through March 31, 2022. Here’s what the team discovered:
*Average expense ratio for American Funds model portfolio is the average of F-2 share class gross expense ratios for American Funds Global Growth, Growth, Moderate Growth, Growth and Income, Moderate Growth and Income, Conservative Growth and Income, Retirement Income — Enhanced, Retirement Income — Moderate, Retirement Income — Conservative, Conservative Income and Preservation model portfolios as of March 31, 2022. Low dividend payers are defined as companies paying a dividend of less than 0.7%. Excess yield represents 12-month yield of the fixed income sleeve of the average advisor portfolio minus the 12-month yield of an ETF vehicle that tracks the Bloomberg Aggregate Index and is net of fees. TIPS are Treasury Inflation-Protected Securities.
Past results are not predictive of results in future periods.
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Source: Capital Group, F-2 share class gross expense ratios as of March 31, 2022. American Funds model portfolios are represented as follows: GG (American Funds® Global Growth Model Portfolio), G (American Funds® Growth Model Portfolio), MG (American Funds® Moderate Growth Model Portfolio, GI (American Funds® Growth and Income Model Portfolio), MGI (American Funds® Moderate Growth and Income Model Portfolio), CGI (American Funds® Conservative Growth and Income Model Portfolio), RIE (American Funds® Retirement Income Model Portfolio — Enhanced), RIM (American Funds® Retirement Income Model Portfolio — Moderate), RIC (American Funds® Retirement Income Model Portfolio — Conservative), CI (American Funds® Conservative Income Model Portfolio), PSP (American Funds® Preservation Model Portfolio).
Many advisors who outsource model portfolio construction use passive investments to help minimize portfolio fees. But this may not always be the case. In fact, our analysis showed that even though the average portfolio allocated 24% to passive funds, the fee for this average portfolio was 0.49% compared with 0.42% for the average fully actively-managed American Funds model portfolio.
Source: Factset, as of March 31, 2022. Dividend yield terciles/quartiles/quintiles are listed from highest to lowest dividend-payers for the S&P 500 (terciles), MSCI ACWI (quartiles) and MSCI ACWI ex US (quintiles).
Dividend payers can provide a measure of downside protection during difficult markets and income in the face of inflationary pressures. Yet many financial professionals continue to focus on low dividend payers, according to our analysis. We suggest focusing on dividend payers with the potential for sustainable dividend growth. Changing market dynamics and sector rotations can provide opportunities on a company-by-company basis, including firms in sectors that have not traditionally paid dividends.
Sources: Capital Group, Factset. Returns shown are cumulative 1-year returns. U.S. HY represents Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index; U.S. IG Corp represents Bloomberg U.S. Corporate Investment Grade Index; EMD represents JPMorgan EMBI Global Diversified Index; U.S. Agg represents Bloomberg U.S. Aggregate Index, TIPs represents Bloomberg U.S. Treasury Inflation-Protected Securities (TIPs) Index. 2022 year-to-date figures are as of March 31, 2022.
Bond markets have also witnessed rotations in recent months as investors absorbed the shift toward more hawkish monetary policy in the U.S. and expectations for sustained inflationary pressures. Financial professionals increased allocations to TIPs over the last year, according to our analysis of actual portfolios. Many investors have also embraced shorter-duration bonds given anticipated rate hikes. We encourage clients to make sure that fixed income allocations are providing an appropriate balance of income, equity diversification, capital preservation and inflation protection relative to client goals.
Meeting long-term goals through periods of market volatility, style and sector rotations.
Source: Capital Group, as of March 31, 2022.
“High current income is the primary objective for the American Funds Conservative Growth and Income Model Portfolio; long-term growth of capital is the secondary objective. The growth and income building blocks WMIF and AMF have a dual purpose of seeking to provide yield and appreciation from broad equity exposure. Equity-income funds such as CIB and IFA play a similar role, with some latitude to provide flexibility at the equity/fixed income asset class level. The use of AHIT aims to reinforce the higher income focus of the model. MSI offers an expanded opportunity set to provide flexibility to lean into and out of credit sectors. BFA complements the core plus funds and seeks to provide equity diversification.”
— Stanley Moy, Capital Group multi-asset investment product manager
The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.
The MSCI All Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter.
MSCI All Country World ex USA Index is a free float–adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, excluding the United States. The index consists of more than 40 developed and emerging market country indexes. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter.
Bloomberg U.S. Aggregate Index represents the U.S. investment–grade fixed–rate bond market.
Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index covers the universe of fixed–rate, non–investment–grade debt. The index limits the maximum exposure of any one issuer to 2%.
Bloomberg U.S. Corporate Investment Grade Index represents the universe of investment grade, publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements.
Bloomberg U.S. Treasury Inflation Protected Securities (TIPS) Index consists of investment-grade, fixed-rate, publicly placed, dollar-denominated and non-convertible inflation-protected securities issued by the U.S. Treasury that have at least one year remaining to maturity, and have at least $250 million par amount outstanding.
The J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities.