We’ve been on a financial roller coaster over the last few years. From rising inflation and rate hikes, to the possibility of recession and a weak job market, to the stock market being at an all-time high, advisors have had their work cut out for them when allocating client assets. So, what have the more than 1,500 advisory firms that use Advyzon for portfolio reporting been recommending and investing in? Let’s take a look at some of the top takeaways from Advyzon’s recent Asset Allocation study.
What’s happening with cash?
One of the biggest headlines from 2023 was the drop in cash allocations. According to our study, cash allocations have been on the decline, with a decrease from 10% in 2021 to 4.6% by the end of 2023. Advisors are moving away from holding large cash reserves, which makes sense given the Federal Reserve’s expected rate cuts. This shift suggests advisors are seeking higher yields in other investment avenues like longer-dated bonds. But here’s the kicker – some may have missed out on the sweet short-term yields we saw in late 2023.
ETFs take the throne
Remember when mutual funds were the go-to? Well, those days are fading into the rearview. ETFs have officially taken over as the top choice for advisors. By the end of 2023, ETFs made up almost 30% of allocations, while mutual funds lagged behind at about 22%. While this trend isn’t new – it started in 2022 – it is growing stronger.
There are two key trends driving this shift. Firstly, the rise of “buffer ETFs”, designed to minimize downside risk, has made them an attractive alternative to structured notes. Secondly, the popularity of lower-cost ETFs has grown, although SPDR’s SPY remains an exception being a pricey favorite due to its history and returns.
Equities and fixed income: The shifts
When it comes to equities, large-cap stocks are still leading the pack. At the close of 2023, nearly 36% of allocations were in large-cap stocks – up from around 29% in 2019. Advisors are leaning into mega-cap stocks for their perceived safety and strong performance. At the end of 2023, advisors using Advyzon had roughly $3.7 billion invested across Apple and Microsoft.
Meanwhile, small-cap and mid-cap stocks have had their ups and downs. Small-cap allocations stayed pretty stable, but mid-caps saw some swings, showing how advisors are reacting to market changes.
The bond market – usually a rock – had its share of drama. Advisors’ allocations to fixed income dipped just below the usual 20-25% range, hitting 19.9% by the end of 2023. The bond market’s wild ride last year left many questioning the role of traditional bonds in their portfolios.
What’s next in 2024?
Looking ahead, there are some big trends to keep an eye on. How will the yield curve impact bank stocks? What about the potential strain from rising corporate debt on equities? And let’s not forget the upcoming election and its ripple effects on the economy.
Kaitlin Hendrix, Asset Allocation Research Director at Dimensional Fund Advisors, has some sage words of wisdom that remind us to keep a long-term view: “Regardless of who wins (the election), nearly a century of returns shows that stocks have trended upward.” She says disciplined investors have historically seen rewards, no matter the political climate.
As we keep an eye on these trends, one thing is clear: staying adaptable and informed is key in the world of asset management.
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