Portfolio Construction Time to get more active?

Managing downside risk is arguably even more important in today’s environment given the heightened level of economic uncertainty. U.S. equity markets have climbed amid high valuations, historically tight credit spreads and uncertain economic data. Meanwhile, U.S. passive indexes have become ever more concentrated in the “Magnificent 7.” Are advisors’ portfolios positioned to manage these risks while still pursuing growth?

Our analysis of nearly 1,200 actual advisor portfolios for the quarter ending September 30, 2025, suggests that portfolios may have too much passive U.S. equity exposure, leaving them vulnerable to greater volatility and market downturns, while also missing out on potential opportunities to diversify both internationally and into other assets. Here are four trends we observed that argue for taking a more active posture in portfolios:

(The “Magnificent 7” are seven high-performing technology stocks comprised of: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.)

1. Does your U.S. equity exposure carry too big a risk for your portfolio?

“The average advisor portfolio’s passive allocation is near its highest level since 2021¹. One-fifth of average advisor assets are in passive U.S. equity strategies², leaving investors vulnerable to potential pullbacks in concentrated market indexes,” says Mark Barile, manager of the Capital Group Portfolio Consulting and Analytics team.

“Over the past few years, passive U.S. equity exposure has increased in the portfolios we analyze and concentration risk is most notable when various passive equity solutions are paired together,” Barile says. 

The rise in concentration risk is due to the continued appreciation of a handful of names in market-cap-weighted U.S. indexes, primarily in the information technology and consumer discretionary sectors. Nearly 39% of the S&P 500’s market cap was in just 10 companies as of September 30, 2025.

“We help advisors quantify their concentration risk and help them pursue a broader and more flexible range of growth opportunities,” Barile adds.

2. Are you missing opportunities to diversify with non-U.S. equities?

We found that interest among advisors in non-U.S. equity is rising from a multi-year low as they seek an expanded opportunity set for returns and diversification. 

This trend is reflected in Morningstar data, as U.S. equity categories saw fund net outflows and international equities experienced inflows on a year-to-date basis as of September 30, 2025.

“Foreign large blend dominated international equity inflows as advisors appeared to recognize the potential for a longer-term comeback in non-U.S. markets,” says Head of Wealth Solutions Jan Gundersen. “There are reasons to see this rally as sustainable: Bold fiscal stimulus, rising European defense spending, corporate governance reform in Asia, a shift in the regulatory mindset and broader unity in Europe,” Gundersen adds.

Another positive factor: Non-U.S. companies with significant revenue exposure outside the U.S. may be less affected by U.S. tariffs. A weaker U.S. dollar is another potential tailwind. When foreign currencies strengthen, they convert to a greater number of dollars for U.S.-based investors when those gains are brought back home.

3. Can dividend allocations help give your portfolio downside resilience?

One area of potential opportunity for a greater active posture might be found with dividend payers, which offer attractive valuations as well as potentially providing some measure of downside resilience. “More than one-fifth of the average advisor portfolio allocates to stocks paying no dividends, which can contribute to higher levels of volatility,” says Barile. “Increasing exposure to dividend payers could help to reduce that volatility, as historically they have held up better in market downturns than non-payers,” he adds. 

4. Have you considered expanding the sources of fixed income return potential to help manage equity risk?

 “Advisors haven’t forgotten the role fixed income plays to diversify equity risk.  The market drawdown in early 2025 demonstrated the diversification benefits of core bonds.  Declining correlations and high starting yields have accelerated interest,” Barile says. 

Results so far in 2025 have demonstrated fixed income’s potential to hold up well in down equity markets. In addition, fixed income continues to offer compelling yield. Besides providing diversification, fixed income may also generate stronger returns if the U.S. economy falters and provokes accelerated rate cuts from the U.S. Federal Reserve. 

Investors looking to de-risk portfolios might consider moving a portion of the equity exposure to multi-sector income strategies to help expand potential sources of fixed income return. An active multi-sector strategy can invest in a wider range of high-income-producing asset classes than core or credit funds — while striving to balance interest rate and credit spread risk.