Portfolio Construction

Advisor portfolio positioning following the first Fed rate cut

Oct 17, 2024|ByCarolyn Barnette

Key Takeaways

We see three trends in advisor portfolios that could change in the coming months: in particular, an overweight to cash and short-term bonds.
Advisor polls taken over the last year uncover potential positioning changes across stocks, bonds and alternative investments.
Given our outlook for markets for the remainder of 2024, if your portfolio needs a refresh, consider extending into the belly of the fixed income curve, balancing out stock portfolios by adding to value, and adding to alternatives.

As Q4 begins, advisors across the country are preparing portfolios for the last few months of the year.

Investment trends

In our analysis of 20,000+ advisor portfolios that we’ve observed over the last 12 months¹, we’ve noticed three trends:

An overweight to cash and short-term bonds
An overweight to smaller cap stocks at the expense of larger cap
A surprisingly large number of advisor portfolios with no allocation to alternatives.

Interestingly, recent advisor polls in combination with market conditions suggest that these trends may shift as advisors consider three key portfolio changes in the coming months: 1) Extending duration and adding to ‘plus’ sector bonds; 2) adding to value stocks; and 3) adding to alternatives.

Extending duration and adding to ‘plus’ sector bonds

First and foremost, as cash rates fall amid a Federal Reserve easing cycle, advisors are considering moving out of cash. 75% of advisors polled in September said they’re holding 5% in cash or less, up from 61% of advisors a year ago. And only 7% of advisors reported holding 10%+ in cash, half of the 14% who reported the same a year ago.

Portfolio cash levels are dramatically lower vs one year ago
Distribution of cash position sizes, % of advisors

Source: BlackRock “In the Know” virtual event polling. Sept poll included 696 responses on 9/19/24 and May poll included 628 responses on 5/30/24 to the question “How much cash are you holding in your portfolios on average?”

In addition, 50% of advisors polled said they are considering extending duration in their bond portfolios, and 25% may be adding to credit or ‘plus’ sectors.

Advisors are considering extending duration and adding ‘plus sector’ exposure
Poll responses on 9/19/24

Source: BlackRock “In the Know” virtual event polling on 9/19/24, including 475 responses to the question “What changes are you considering making to your bond portfolios over the next three months?”

Year-to-date, core or plus sector bond categories have seen the highest influx of investor capital, with the intermediate core and core-plus bond categories pulling in the lion’s share.

Investors have been adding significantly to core bond categories
Top ten Morningstar categories by flows YTD through 8/31/24

Source: Simfund as of August 31, 2024

Adding to value stocks

Within equities, 44% of advisors are considering a move to value, representing a level of interest that has more than doubled since May. This shift in sentiment is likely a reflection of the summer pull-back in tech alongside strong performance in the more defensive/interest rate-sensitive sectors.

Perhaps unsurprisingly, only 12% of advisors polled said they’re considering adding to growth/tech right now.

Source: BlackRock “In the Know” virtual event polling. Sept poll included 559 responses on 9/19/24 and May poll included 654 responses on 5/30/24 to the question “What changes are you considering making to your stock portfolios over the next three months?”

The flows corroborate. In the month of September alone, $2.7 billion flowed out of technology ETFs and into health care, consumer staples, utilities, and materials ETFs.

September flows show a shift towards defensive sectors
ETF flows (in billions), Sept 2024

Source: Bloomberg as of 9/26/2024.

Adding to alternatives

Advisors polled expressed optimism on stocks and bonds, with 76% saying they are neutral or optimistic about stocks and 85% saying they are neutral or optimistic about bonds. Still, when asked what asset allocation changes they are considering for the next three months, 30% said they are thinking about adding to alternatives.

Source: BlackRock “In the Know” virtual event polling on 9/19/24, including 468 responses to the question “What asset allocation changes are you considering making to over the next three months?”

Looking ahead: Q4 investment outlook

The consensus expectation at BlackRock is positive for stocks and bonds. Falling cash rates and an expectation that the U.S. will avoid a near-term recession combine to provide tailwinds for both traditional asset classes.

Within stocks, we prefer large caps over small caps. In our view, near-term election and geopolitical volatility along with potentially slowing growth and still-high interest rates could challenge small cap performance. We believe that large cap quality stocks should be able to weather volatility, and we see opportunity in attractively priced stocks as market performance broadens out beyond the technology sector.

Within bonds, we prefer the ‘belly’ of the curve, in the range of 3 to 7 years. We are cautious on long-term bonds given the high U.S. deficit and our view that short-term bonds may be pricing in too many Fed cuts over the next year.

While we believe it makes sense to extend duration out of cash, picking the right part of the curve to invest in is incredibly important.

We continue to believe in the importance of a strategic allocation to alternatives. With Fed policy likely priced in, near-term bond returns may be predominantly driven by yields. And while investors will likely be happy to hold duration in the event of an equity pullback (we expect stock/bond correlations to return to more normal levels now that the Fed is lowering interest rates), we could see more attractive returns from diversifying alternatives that have the ability to drive uncorrelated alpha on top of current cash yields.

BlackRock can help you construct well-diversified portfolios designed for today’s markets. Contact your BlackRock representative for more information or explore our online investment tools and resources.

Explore the Advisor Portfolio Insights guide – BlackRock’s quarterly piece that analyzes the 20,000+ Advisor portfolios and reinforces trends that relate to our investment views and internal asset allocation ideas.

Advisor Portfolio Insights