Financial advisors wave the caution flag in client portfolios

Fidelity research shows a trend toward de-risking and an increased focus on diversification in the portfolios advisors build for their clients.

A behind-the-scenes look at the portfolios financial advisors are building for their clients shows a clear trend toward increased caution and a return to global diversification, according to Fidelity Investments.

“This isn’t just about moving to cash when you sense trouble, we’re seeing allocations dialing up safety within the individual asset classes,” said Mayank Goradia, head of investment product analytics and strategy at Fidelity Institutional.

Goradia’s full report, which will be published early next month, is based on an analysis of 2,000 professionally managed portfolios that were presented to Fidelity for feedback. Some of the things that stood out included a 32% average allocation to fixed income across all the model portfolios, which is the highest level since the first quarter of last year.

Within the fixed-income allocation, there was a 77% weighting in investment-grade bonds, representing a 4% increase over the prior quarter and the highest level in two years.

Goradia also identified what he described as a return to diversification, which reflects the evolution of the stock market moving past a 14-year bull market run.

“The portfolios we analyzed are seeing an uptick in two asset classes: emerging markets and alternatives,” he said.

In the emerging markets space, Goradia said China is gaining appeal. And the increased appetite for alternatives can largely be attributed to new technologies and platforms that are making alternative investments more accessible to a broader universe of retail-class investors.

“We have been looking at this data for three or four years, and over the last two years it was like watching paint dry,” Goradia said. “But it has never been this obvious. You’re seeing some really meaningful changes.”

In a similar sign of changes in the works, Morgan Stanley’s first-quarter earnings report cited a 23% allocation to cash in client accounts, which is up from a historical average of 18%.

Goradia isn’t interpreting the data as the edge of doom and gloom for the financial markets, but he does see the next stage of the cycle around the next corner,

“The data is telling us we are really late in the late stage of the cycle,” he said. “Recession is next, but it’s hard to say when and how hard or soft it will be.”