ARTICLES JANUARY 2021
Portfolio makeover: 3 steps to take in 2021
Capital Group shares their research on how asset allocations shifted in the last year, and what steps you should consider for a more balanced portfolio in 2021.
Have you made your New Year’s resolutions yet? Are you ready to close the books on 2020 and set your sights on a happier and healthier 2021?
In addition to setting fitness or nutrition goals, the new year is a great time to aim for healthier investment portfolios. Especially after the challenges and wild market swings of 2020, many investors may have deviated from their long-term investment plan. These investors could benefit from a portfolio makeover.
To gain insight into investing behaviours, Capital Group’s Portfolio and Analytics team reviewed more than 4,000 portfolios of U.S. advisors. Their analysis uncovered a variety of noteworthy and persistent portfolio construction trends. Below we share our thoughts on the investment implications and three potential actions financial professionals may want to consider for their clients’ portfolios.
1. Go global
International travel may be limited in 2021, but international investing shouldn’t be. Yet our research found that the average portfolio in the U.S. had almost three times as much U.S. equity as international. This home country bias — the tendency to invest mostly in domestic stocks — is common for investors but often hurts long-term returns.
The average portfolio is heavily weighted to U.S. equities
Many investors shy away from foreign stocks, knowing that they generally haven’t kept pace with U.S. equities. But this mindset focuses too much on broad averages, instead of looking at individual companies. Many of these international businesses are dynamic, growing market leaders within their industries.
A Capital Group study that analyzed the top stocks each year over the last decade revealed that 75% of them were based outside the U.S.
Rob Lovelace, a portfolio manager on Capital Group Canadian Focused Equity FundTM (Canada) encourages investors to look beyond borders. “There is more innovation outside the U.S. than you might think,” Lovelace says. “So you don't want to be over-committed to the United States, but rather look for those great companies wherever they're based.”
There are many ways you can add international exposure to your portfolios. One approach is to invest in global portfolios that don’t have geographic restrictions. Managers in these strategies can invest in their highest conviction ideas, no matter where they are located. An example is Capital Group Global Equity FundTM (Canada), a flexible mandate that can go anywhere in the world in seeking opportunities.
2. Maintain balance in your equity holdings
High-flying growth stocks have gotten much of the attention over the last decade, and rightfully so. Returns for consumer tech and digital companies have dwarfed those of most other industries. It’s probably no surprise then that investors have shifted their portfolios toward these recent winners.
According to our team’s analysis, U.S. investors significantly reduced allocations to value equities over the last three years. Within large caps, the average allocations to growth and blend categories were 35% and 41%, respectively, compared to value, which was 25%. In 2017, the three categories had a nearly identical split.
Investors have scaled back their exposure to value funds
As we head into 2021, financial professionals should take this opportunity to check if their clients’ equity holdings are still aligned with their long-term goals. The message isn’t to avoid growth stocks, but rather to ensure that they haven’t outgrown their intended position and role in the portfolio.
After years of being overlooked, many dividend stocks now trade at attractive valuations. But there is a fine line between stocks that present a good value and those that are just plain cheap. So it’s important to invest with managers that do the rigorous company-by-company research needed to help identify the difference. One portfolio that fits these criteria is Capital Group Capital Income BuilderTM (Canada), a mandate that places an emphasis on sustainable dividend-paying companies.
3. Avoid excess risk in your bond portfolio
Another noteworthy trend has been the shift toward riskier bonds. Over the last two years the average U.S. investor’s portfolio exposure to riskier bond categories — which include any fixed income category that maintains yield above a comparable U.S. Treasury — increased from 11.7% to 19.5%. This “hunt for yield” left many investors ill-prepared for 2020’s volatility at a time when they needed their bond portfolios to shine brightest. Investors who bucked this trend and held strong with high-quality core bond funds were rewarded when these investments did exactly what they were meant to do: preserve capital and provide diversification from equities.
Fixed income portfolios have become riskier in recent years
Equities have bounced back strongly since then, but don’t let a rosier outlook give you a false sense of security. Market recoveries are often bumpy, and the need for a core bond fund, such as Capital Group World Bond FundTM (Canada) is as strong as ever.
“No matter the environment, a high-quality core bond fund is critical to act as ballast and fortify your portfolio for whatever the future holds,” says Mike Gitlin, head of fixed income at Capital Group. While total returns may be more modest in the coming years, the need for diversification, capital preservation, income and inflation protection in a balanced portfolio is still vital.”
Brad Freer is an equity portfolio manager with 27 years of experience. Earlier in his career, he was an equity investment analyst covering multiple sectors as a generalist in both Australia and India. He holds a bachelor’s degree in international relations from Connecticut College, as well as the Chartered Financial Analyst® designation.
Mike Gitlin is head of fixed income at Capital Group. He has 26 years of investment industry experience. Before joining Capital in 2015, Mike was head of fixed income and global head of trading for T. Rowe Price. He holds a bachelor's from Colgate University.
Rob Lovelace is vice chairman of Capital Group, president of Capital Research and Management Company, and serves on the Capital Group Management Committee. He has 34 years of investment experience, all with Capital. He holds a bachelor's in geology from Princeton and is a CFA charterholder.