Three checks to ensure your portfolio is in line

Has your client's portfolio deviated too much? Now's the time to recalibrate its direction and balance

Three checks to ensure your portfolio is in line

Is your portfolio looking a little tired? Like you, maybe, does it need a makeover?

After the challenges and market swings of 2020, many investors may have deviated from their long-term investment plan. To reinforce, or freshen up your allocation, Capital Group’s portfolio and analytics team reviewed more than 4,000 portfolios to uncover persistent trends that are worth considering.

Go global

Its 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 is common but ultimately hurts long-term returns.

This mindset also puts too much emphasis on broad averages rather than individual companies, many of which are dynamic and market leaders within their industries. A Capital Group study that analyzed the top stocks each year over the past decade revealed that 75% of them were based outside the U.S.

Rob Lovelace, portfolio manager on the Capital Group Canadian Focused Equity FundTM (Canada), said: “There is more innovation outside the U.S. than you might think. You don't want to be over-committed to the United States, but rather look for those great companies wherever they're based.”

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.

Maintain balance in equity holdings

As returns for consumer tech and digital companies have dwarfed most other industries, it’s probably no surprise investors have shifted towards these big winners. U.S. investors have significantly reduced allocations to value equities over the past three years.

Advisors should take this opportunity to check if their clients’ equity holdings are still aligned with their long-term goals and check to see if their growth stocks haven’t outgrown their role.

Avoid excess risk in bond portfolio

Another trend has been the shift toward 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.

Equities have bounced back strongly since then but don’t let a “rosier outlook” give you a false sense of security.

“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.”