Portfolio Construction
Portfolio Construction Pulse: Investors reposition assets for a soft landing
Over the 12 months ended June 30, 2024, investors redeployed assets into more traditional, building-block style stock and bond allocations. Large-cap equity allocations increased in both the U.S. and internationally to take advantage of rising stock markets. Allocations to intermediate core bonds also increased, with disinflationary trends taking hold and global central banks beginning to cut rates. The stock market rally has become more concentrated, and there may be an opportunity to consider broadening equity exposure with active managers in areas with less challenging valuations, including U.S. value, small-cap stocks, and international value.
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Positioning Highlights
As of June 30, 2024
Asset Allocation: Investors repositioned for an ongoing equity rally and lower interest rates.
- Top level: Allocations to stocks and bonds increased in moderate-risk advisor models, and satellite exposures fell. Within equities, both U.S. and international largecap blend saw the largest allocation gains. Within fixed income, intermediate core bonds saw the biggest increase, duration increased, and credit quality improved.
- Sectors: Allocations to sector-focused equities, commodities, and short duration fixed income declined. Alternatives declined and appeared to be a funding source for increased equity exposure.
- Active vs. passive: Allocations to passive portfolios gained share versus active, which fell from 81% to 73% over the past two years. As market concentration has become a concern, shifting to broader, active mandates could be an opportunity.
MODEL STATISTICS (Average)
Data sourced from model portfolios submitted by financial professionals and reviewed by our portfolio construction specialists.
Average statistics based on moderate risk models submitted for the three-year period ended June 30, 2024.
*Beta is calculated relative to Morningstar Moderate Target Risk Index.
AVERAGE ALLOCATION: 12-Month Change
Source: T. Rowe Price Client Investment Platform (CIP) database.
MODEL ALLOCATIONS (Average)
Data sourced from model portfolios submitted by financial professionals and reviewed by our portfolio construction specialists.
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Average Allocations 2022–2024
1 T. Rowe Price utilizes “Other Equity” to invest in outcome-oriented equities to address inflation. Financial professionals typically utilize other equity for specific allocations to sector-oriented exposure.
2 For financial professionals, alternatives includes investment strategies in the following categories: Commodities, master limited partnerships, real estate, global real estate, multi-strategy, options trading, long-short equity, relative value arbitrage, event driven, systematic trend, macro trading, derivative income, and equity market neutral. Alternatives play a defined role in T. Rowe Price multi-asset portfolios, serving as an illiquid cash-plus alternative that is carved out of fixed income.
Source: T. Rowe Price Client Investment Platform (CIP) database.
Equities
INVESTORS REDEPLOYED TO PARTICIPATE IN THE MARKET RALLY3
- Equity allocations remained balanced overall, but there was a shift from large-cap value to large-cap blend, which saw the largest allocation gain in moderate-risk advisor models. A move into small-cap value suggests a modest contrarian shift.
- Advisors moved away from sector allocations, with real estate seeing the largest drop. This fit with an overall shift to more core assets and fewer satellite positions across asset classes.
| EQUITY4 | Financial Professional Model Portfolios | T. Rowe Price Multi-Asset Strategic Design | Difference |
|---|---|---|---|
| U.S. Large-Cap | 55.0% | 52.5% | 2.5% |
| U.S. Small-Cap5 | 19.6 | 13.5 | 6.1 |
| Dev. Ex-U.S. Large-Cap | 12.8 | 21.0 | -8.2 |
| Dev. Ex-U.S. Small-Cap | 0.5 | 4.0 | -3.5 |
| Emerging Markets Equity | 3.2 | 4.0 | -0.8 |
| World Stock | 4.6 | 0.0 | 4.6 |
| Regional Stock | 0.2 | 0.0 | 0.2 |
| Other Equity | 3.9 | 5.0 | -1.1 |
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Equity Allocations
3 Based on Morningstar categories.
4 As percentage of total equity.
5 Includes both small-cap and mid-cap equities.
6 As percentage of U.S. equity.
Source: T. Rowe Price Client Investment Platform (CIP) database.
Fixed Income
INVESTORS POSITION FOR LOWER RATES
- A return to intermediate core fixed income was an overriding theme. Allocations to short-term and diversifiers declined over the last 12 months, while core increased from 48.0% to 55.7%. As a result, duration rose from 4.52 years to 4.87 years. Short-term bonds and bank loans were the funding source for core fixed income.
| Fixed Income7,8 | Financial Professional Model Portfolios (3-Year Average) | T. Rowe Price Multi-Asset Strategic Design | Difference |
|---|---|---|---|
| U.S. Core | 67.5% | 55.0% | 12.5 |
| Developed Ex-U.S. IG (Hedged) | 1.0 | 15.0 | -14.0 |
| Multi-sector Bond | 13.5 | 0.0 | 13.5 |
| U.S. Treasury Long | 1.2 | 10.0 | -8.8 |
| Global High Yield | 7.2 | 7.0 | 0.2 |
| Floating Rate Loans | 1.6 | 3.0 | -1.4 |
| Emerging Markets | 0.7 | 10.0 | -9.3 |
| Nontraditional Bonds | 5.2 | 0.0 | 5.2 |
| Other Diversifiers | 2.1 | 0.0 | 2.1 |
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Fixed Income Allocations
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Diversifiers9,10
7 Based on Morningstar categories.
8 As percentage of total fixed income.
9 Diversifiers include fixed income strategies that offer diversification to traditional core fixed income. This includes: Bank loan, convertibles, emerging markets bond, emerging markets local currency bond, high yield bond, high yield muni, multi-sector bond, nontraditional bond, preferred stock, and world bond. For select T. Rowe Price multi-asset portfolios, the firm’s nontraditional bond fund is used as a liquid cash-plus alternative that is carved out of the cash position in fixed income allocations.
10 As percentage of diversifiers.
Source: T. Rowe Price Client Investment Platform (CIP) database.
Alternatives
ALLOCATIONS FELL OVERALL, BUT EQUITY-LIKE CATEGORIES GAINED11
- Equity-like hedged strategies continued to gain share, with options trading and derivative income showing the largest increases.
- Advisors reduced allocations to real assets and other categories, with real estate and systematic trend seeing the largest reductions.
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Alternative Allocations12
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Alternative Allocations11
11 For financial professionals, alternatives includes investment strategies in the following categories: Commodities, master limited partnerships, real estate, global real estate, multi-strategy, options trading, long-short equity, relative value arbitrage, event driven, systematic trend, macro trading, derivative income, and equity market neutral. Alternatives play a defined role in T. Rowe Price multi-asset portfolios, serving as an illiquid cash-plus alternative that is carved out of fixed income.8 As percentage of total fixed income.
12 As percentage of total alternatives.
SOURCE: T. Rowe Price Client Investment Platform (CIP) database.
ETFs
ETFs SAW GREATER ADOPTION, AND ACTIVE ETFs GAINED SHARE
- Allocations to exchange-traded funds continued to increase in moderate-risk models, rising to 27.2% of vehicle type up from 21.8% and 17.3% in 2023 and 2022, respectively. Chance of usage grew to 74.3% versus 63.1% in 2022.
- Allocations to active ETFs saw large gains as advisors combined active management with the other benefits of the ETF vehicle.
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: ETF Usage
FINANCIAL PROFESSIONAL MODEL PORTFOLIOS: Active ETFs
Source: T. Rowe Price Client Investment Platform (CIP) database.
| Top 5 Equity ETF Categories | Chance of Usage |
|---|---|
| Large Blend | 46.9% |
| Large Value | 40.7 |
| Large Growth | 32.9 |
| Foreign Large Blend | 21.6 |
| Mid-Cap Blend | 20.2 |
| Top 5 Fixed Income ETF Categories | Chance of Usage |
|---|---|
| Intermediate Core Bond | 9.0% |
| Intermediate Core-Plus Bond | 6.2 |
| Muni National Intermediate | 5.9 |
| Long Government | 5.0 |
| Short-Term Bond | 4.5 |
Source: T. Rowe Price Client Investment Platform (CIP) database.
Outlook
Broaden equity exposures:
- Diversification beyond concentrated large-cap growth may benefit investors as valuations are less demanding elsewhere. Earnings growth should broaden into the end of 2024, benefiting sectors that may have lagged. Value, small-caps, and mid-caps may be areas of opportunity.
- Investors could also consider active funds in the large-cap blend category, with differentiated exposures from the passive S&P 500 benchmark. Diversification into broader, less concentrated portfolios may help reduce overall risk and gain exposure to areas with more favorable valuations.
- International stocks may offer favorable valuations and fewer headwinds from monetary policy.
Monetary policy backdrop:
- Developed market central banks are joining emerging markets in gradually easing monetary policy. England, Canada, Switzerland, and the European Central Bank have started to cut rates, and the Federal Reserve is projected to follow later in 2024.
- Liquidity continues to be ample, with U.S. investors sitting on $5.98 trillion in money fund assets as of April 1, 2024.
- Disinflation has continued and goods prices have decelerated. Stickier services inflation is the next flashpoint, with investors looking for tangible progress in reaching a 2% inflation level. Further gains may help broaden the opportunity set.
Fixed income focus:
- Duration moved higher as intermediate core exposures grew at the expense of short duration and bank loans. Clients are expressing interest in moving away from shorter duration exposures as monetary policy loosens. Recession remains a concern for some financial professionals.
- T. Rowe Price’s Multi-Asset Division reduced its cash overweight and redeployed into other fixed income areas. They continue to favor higher-yielding sectors and retain a more modest cash overweight. Fundamentals support higher-yielding sectors despite relatively tighter spreads.
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Risk Considerations
Funds that invest in growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a fund investing in income-oriented stocks.
The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.
Mid-caps generally have been more volatile than stocks of large, well-established companies.
Small-cap stocks have generally been more volatile in price than large-cap stocks.
International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.
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