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April 22, 2020 at 04:38 PM
Advisor portfolio models sharply underperformed their benchmarks from the stock market’s peak in late February to its trough in late March, but not for the obvious reason.
According to a new report from BlackRock’s latest Advisors Insight Guide, the stock sleeves of advisors’ moderate portfolios were off just 0.4% from their benchmarks, but their bond sleeves underperformed more than 10 times that much, off 5%.
“The typical advisor was overweight credit risk and underweight rate risk — a bad combination in this environment,” according to the guide written by Brett Mossman, head of BlackRock Portfolio Solutions, and Patrick Nolan, a senior portfolio strategist with contributions from Adrian Colarusso, Brian Lawler and Carolyn Barnette.
High-yield credit spreads almost tripled from 3.5% on Feb. 20 to over 10% on March 23, causing huge losses, while 10-year Treasury yields fell about a one-third from 1.5% to under 1% during the same time frame, posting gains.
Since “advisor models didn’t own a lot of Treasuries or anything else with much duration,” conservative advisor models, which hold more bonds than aggressive portfolios, underperformed their benchmarks to a much greater degree than aggressive advisor models, according to the report. Conservative models lagged their benchmarks by almost 6% while aggressive models underperformed by less than 2%.
What Comes Next?
How should advisors reposition client portfolios now, many out of sync with their target weightings? “Doing nothing is not an option,” according to the BlackRock report.
A typical 60/40 stock/bond portfolio was split 50/50 on March 23. BlackRock strategists have several suggestions.
For rebalancing, they suggest that advisors consider doing so not on an annual, semiannual or quarterly basis but on the basis of drift from original target weights. This “threshold strategy,” for example, could adjust weights when allocations drift more than 5% in either direction from their original targets.
The strategy worked quite well during the financial crisis, between October 2007 and year-end 2009, adding almost 1.7% of excess return. Annual rebalancing added even more, 2.87%, but that was due mainly to “fortuitous timing,” according to BlackRock.
“What’s most important — instead of timing the bottom — decide on a rebalancing strategy and stick to it,” according to BlackRock.
Tax loss harvesting is another step advisors should consider taking now for client portfolios, given the sharp drop in asset prices.
