4 hidden risks in advisor portfolios

Capital Group’s proprietary review of more than 1,300 advisor portfolios points to several key trends in late 2024. While it appears from fund flows that advisors are looking to “de-risk” portfolios, Capital Group still identified four potentially hidden risks in advisor portfolios:

1. Potential elevated exposure to equity volatility
2. Significant allocations to low- and non-dividend-paying stocks
3. Relatively high exposure to emerging markets equity
4. Relatively low duration in fixed income portfolios

Capital Group’s Portfolio Consulting and Analytics team reviews advisor portfolios in consultation with advisors, and from these consultations develops valuable, timely insights into the way advisors as a group are constructing portfolios.

“Our ongoing work consulting on portfolios with thousands of advisors gives us a unique capability to spot trends in advisor portfolios,” said Mark Barile, senior manager of the Capital Group Portfolio Consulting and Analytics team. “In our analysis in late 2024 we noticed four potentially hidden risks advisors may not be aware of, and in light of that we strongly encourage advisors to take a clear-eyed look at what they own.” 

Risk 1: Equity concentration and volatility

Equity markets have recently seen historically high concentration in a handful of growth stocks – the “Magnificent Seven” stocks (The largest holdings in the S&P Index as of 12-31-2023; Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) best symbolize this trend. The risks of concentration have been well documented during this bull market, and fund flows indicate investors are trying to de-risk portfolios by moving money out of growth strategies and into blend strategies. Still, our analysis indicates advisors remain heavily exposed to high equity volatility. In relation to the American Funds® Moderate Growth and Income Model Portfolio, the average advisor portfolio has roughly double the exposure to high equity volatility.

“This is where advisors really have to dig into their clients’ portfolios, looking to identify hidden sources of concentration and volatility, and assessing where there may be room to diversify their growth allocations,” said Jan Gundersen, senior investment director on portfolio solutions and services at Capital Group.

Risk 2: Exposure to non-dividend payers

Capital Group also found the average advisor portfolio has significant allocations to low- and non-dividend paying stocks, continuing a trend we have seen throughout the recent bull market led by growth stocks. Dividend-focused investing can help reduce volatility, and dividend-paying stocks should be a staple within most portfolios, especially for clients who are closer to retirement. Advisors seeking to de-risk portfolios and dampen volatility should consider increasing exposure to dividend payers and growers.

Risk 3: Exposure to emerging markets equity