From July 1 to September 30, 2022, Capital Group’s Portfolio Consulting and Analytics team analyzed 210 RIA portfolios as part of its Portfolio Analysis Review service. The overall goal of these reviews is to help advisors gain a better understanding of how their portfolio exposure compares to their stated goals and objectives and to provide deeper insight on portfolio risk and positioning in the current environment.

The team’s recent portfolio analyses highlight interesting data on factor timing and approaches to international and income allocations. Among their findings, Capital Group’s portfolio consultants discovered that advisors may be missing out on performance upside by trying to time shifts between growth and value exposure. They also found that advisors may be able to improve their international equity exposure if they view exposure by revenue rather than just by a company’s domicile.

Think beyond growth vs. value

Capital Group’s analysis of RIA portfolios show increases in U.S. large value portfolio exposure over the last few quarters. Our portfolio reviews indicate that advisors may be attempting to capitalize on shifting style preferences between growth and value investing. However, growth and value have exchanged market leadership many times in the last few decades, and it can be very difficult to anticipate the timing and magnitude of these moves.

Growth- or value-led market returns since 1981

Sources: PLY Insights Hub. Capital Group, FactSet. Data as of June 30, 2022. Past results are not predictive of results in future periods.

Trying to time allocations between growth and value can be detrimental to portfolio performance. For example, if an investor were just two months late timing a style shift between growth or value leading, our analysis shows that clients would have experienced an average of 7% potential value loss.

Negative results if two months late timing growth vs. value

Sources: PLY Insights Hub. Capital Group, FactSet. Data as of August 31, 2022, based on the returns of the Russell 1000 Growth Index and the Russell 1000 Value Index.

A dynamic approach to investing for capital appreciation may offer better results through changes in market leadership. In addition, Capital Group’s portfolio analyses also have shown that advisors continue to have lower concentrations of dividend-paying companies compared to other holdings in their portfolios. This may be a good area for advisors to focus on rather than concentrating on shifts between growth and value.

Being active in international

International and emerging market stocks have experienced mixed asset flows in the past 12 months. Timing international market exposure can be difficult, and the risk is high.

When considering adjustments to international equity exposure, it may help to start with a more nuanced view of geographic diversification. Looking only at a company’s domicile can make it difficult to build the geographic diversification advisors seek with an appropriate level of precision. Analyzing the portfolio’s revenue generation by country, however, is a much more telling measure of how a portfolio’s exposure to business risk is spread across borders and may provide a better foundation for making changes.

As shown in the charts below, when the MSCI Europe, Australasia, and Far East (EAFE) Index is weighted simply by each company’s domicile, two of the top three individual revenue contributors — the United States and China — aren’t even listed in the index. Viewing international exposure through a company’s revenue generation by country may provide a deeper level of understanding.

MSCI EAFE Index highlights importance of revenue vs. country weighting

Source: FactSet as of September 30, 2022.

Accessing international markets via flexible, actively managed funds that make decisions at the company level may help align portfolio allocations with client objectives and reduce timing risk.

Fixed income environment highlights need for flexible duration and sector exposure

Capital Group’s portfolio reviews show that many advisors have remained hesitant to put capital to work in fixed income markets. But fixed income yields have risen, and there is more risk in sitting on the sidelines today given where yields stand. By not extending duration and being invested in active fixed income, advisors may lose purchasing power due to elevated inflation, forgo attractive bond income opportunities and miss chances to rebalance a portfolio.

Yields of key fixed income markets (%): Recent lows to June 30, 2022

Sources: Bloomberg, Bloomberg Index Services Ltd., JP Morgan, Federal Reserve. As of 6/30/22. Sector yields above include Bloomberg U.S. Aggregate Index, Bloomberg U.S. Corporate Investment Grade Index, Bloomberg U.S. Corporate High Yield Index and 50% J.P. Morgan EMBI Global Diversified Index / 50% J.P. Morgan GBI-EM Global Diversified Index blend. Period of time considered from 2020 to 6/30/22. Dates for recent lows from top to bottom in chart shown are: 8/4/20, 12/31/20, 7/6/21 and 1/4/21.

Further yield increases may be on the horizon. Therefore, taking advantage of opportunities across the yield curve could be critical to success in fixed income going forward. Common solutions to income may underestimate risk and introduce timing challenges. The evolving fixed income market emphasizes the need for more dynamic credit and curve positioning, such as an active yield curve strategy, to ensure a portfolio is prepared to benefit from increased volatility.

Examine your portfolios to avoid common pitfalls

Are you curious to know how your portfolios stack up relative to other advisors? If you are a financial professional interested in getting a detailed review of your clients’ portfolios, Capital Group can help. Request a personal consultation from one of our portfolio specialists to help you address your clients’ specific investment needs and goals.