2022 is already shaping up to be a year of major changes in investment markets. Equity valuations are dipping from record levels and bond yields are expected to rise significantly for the first time in years to combat inflation. We’ve been thinking about the impact of these changes on portfolios as they are typically positioned now, and what advisers should do.
It’s very common to find portfolios filled with investments that have done well. Most commonly we see a large concentration of growth equity funds. Delving deeper with clients we find one of two reasons for this. The first is simply that portfolios haven’t been fully rebalanced, either because of time constraints around reviews or because the adviser is reluctant to recommend that the client realises some capital gains.
The second reason is usually that the adviser is selecting funds based largely on historical performance either by deliberately choosing the best performing funds or by ruling out funds that have underperformed in recent years.
The problem is that funds that have done well tend to have common exposures. Within equities, funds that are heavily-overweight technology stocks and consumer cyclical names with high valuations and long-term growth expectations have done extremely well over recent years. So the resulting portfolio, even if it contains several funds in each asset class, is actually much less diversified than...