Portfolio construction

Where do multi-asset portfolios stand?

CONSULT WITH US

Multi-asset portfolio construction trends

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.

Trends roadmap

Scroll down for the full insight or click on these sections

Use of passive strategies

Turn toward dividends

Bond sector rotation

Investment options

Download PDF
USE OF PASSIVE STRATEGIES

Active or passive: That depends on client goals

Active allocations in the average professionally managed portfolio were 76%, as of March 31, 2022; the average passive allocation was 24%. Expense ratios for the average professionally managed portfolio were higher than all models (not including tax-aware models), except American Funds Global Growth Model Portfolio.

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.

TURN TOWARDS DIVIDENDS

Consider new sources of yield

This chart shows that the highest dividend payers held up better than low dividend payers for the S&P 500 Index, MSCI All Country World Index (ACWI) and MSCI All Country World Index (ACWI) ex US from January 1, 2022 through March 31, 2022. Returns for the highest yielding tercile of the S&P 500 Index were 1.5% for the period; returns for the middle tercile were -6.3% and -9.3% for the bottom tercile. Returns for the highest yielding quartile of the MSCI ACWI were 3.0%, -5.2% for the second quartile, -7.8% for the third quartile and -11.5% for the fourth quartile. Returns for the highest yielding quintile of the MSCI ACWI ex US were 4.9%, -1.4% for the second quintile, -4.9% for the third quintile, -9.8% for the fourth quintile and -16.0% for the fifth quintile.

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.

How have your funds held up in market corrections?

USE OUR ANALYSIS TOOL
BOND SECTOR ROTATION

Think flexibly about bond sector rotation

This chart shows that annual (cumulative) bond sector returns have varied dramatically year to year from 2008 through 2022 year to date as of March 31, 2022. The Bloomberg U.S. High Yield index is represented by the maroon color, the Bloomberg U.S. Investment Grade Corporate Index is represented by dark blue, the J.P. Morgan EMBI Global Diversified Index is represented by light blue, the Bloomberg U.S. Aggregate Index is represented by grey and the Bloomberg U.S. Treasury Inflation-Protected Securities Index is represented by green. Annualized returns from 2008 through March 31, 2022 were as follows: 7.3% for U.S. high yield, 5.2% for emerging markets debt, 4.8% for U.S. investment grade corporates, 3.9% for TIPs and 3.4% for U.S. aggregate bonds.

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.

“In our model portfolio construction process, we favor flexible funds, such as American Funds Multi-Sector Income Fund℠ and American Funds Strategic Bond Fund℠, which can quickly move across fixed income asset classes or change characteristics such as duration or inflation-linked bond positioning. This dynamic approach allows us to respond appropriately for market situations like the current conditions.”

 

 

— SAMIR MATHUR

Chairman of the Portfolio Solutions Committee

investment options

Stay focused on client goals as markets shift

Challenge

Meeting long-term goals through periods of market volatility, style and sector rotations.

Potential solutions

  • In a challenging interest rate environment, it can be tempting to reach for yield. Instead, focus on multi-sector funds that aim to limit volatility without meaningfully reducing income, such as American Funds Multi-Sector Income Fund. For the goal of high income, American High-Income Trust® aims to take a well-researched, diversified approach to high-yield investing. Additionally, The Bond Fund of America® seeks to provide high-quality bond exposure and diversification.

Objective-based model portfolio construction

This chart shows that the American Funds Conservative Growth and Income Model Portfolio allocated 42% to fixed income (with 16% in American Funds Multi-Sector Income Fund, 16% in The Bond Fund of America, and 10% in American High-Income Trust), 38% to equity income (19% Capital income Builder, 19% The Income Fund of America) and 20% growth and income funds (10% American Mutual Fund and 10% Washington Mutual Investors Fund) as of March 31, 2022.

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

Model portfolios are only available through registered investment advisers. This content is intended for registered investment advisers and their clients.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Model portfolios are subject to the risks associated with the underlying funds in the model portfolio. Investors should carefully consider investment objectives, risks, fees and expenses of the funds in the model portfolio, which are contained in the fund prospectuses.
The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.
Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
American Funds Strategic Bond Fund may engage in frequent and active trading of its portfolio securities, which may involve correspondingly greater transaction costs, adversely affecting the fund's results.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.
Nondiversified funds have the ability to invest a larger percentage of assets in securities of individual issuers than a diversified fund. As a result, a single issuer could adversely affect a fund's results more than if the fund invested a smaller percentage of assets in securities of that issuer. Refer to the applicable prospectus for details.
There may have been periods when the results lagged the index(es) and/or average(s). The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. Index/Index blends for Capital Group/American Funds Model Portfolios are those that the Portfolio Solutions Committee believes most closely approximate the investment universe of a given model portfolio. The index/index blends do not specifically represent the benchmarks of the underlying funds in the American Funds model portfolio.
MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.
This report, and any product, index or fund referred to herein, is not sponsored, endorsed or promoted in any way by J.P. Morgan or any of its affiliates who provide no warranties whatsoever, express or implied, and shall have no liability to any prospective investor, in connection with this report. J.P. Morgan disclaimer: https://www.jpmm.com/research/disclosures
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). Bloomberg or Bloomberg's licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg's licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Each S&P Index ("Index") shown is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Portfolios are managed, so holdings will change. Certain fixed income and/or cash and equivalents holdings may be held through mutual funds managed by the investment adviser or its affiliates that are not offered to the public.
  1. Expense ratios are as of each fund's prospectus available at the time of publication.
  2. Expense ratio for the model is the weighted average of the underlying mutual funds' and/or exchange-traded funds' gross expense ratios as of their most recent prospectuses. Underlying mutual funds are based on Class F-2 shares. Expense ratios do not reflect any advisory fee charged by model providers.
Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.
Model portfolios are provided to financial intermediaries who may or may not recommend them to clients. The portfolios consist of an allocation of funds for investors to consider and are not intended to be investment recommendations. The portfolios are asset allocations designed for individuals with different time horizons, investment objectives, and risk profiles. Allocations may change and may not achieve investment objectives. If a cash allocation is not reflected in a model, the intermediary may choose to add one. Capital Group does not have investment discretion or authority over investment allocations in client accounts. Rebalancing approaches may differ depending on where the account is held. Investors should talk to their financial professional for information on other investment alternatives that may be available. In making investment decisions, investors should consider their other assets, income, and investments. Visit capitalgroup.com for current allocations.
American Funds Distributors, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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.