What You Need to Know
- Adjustments advisors made to moderate portfolios after the presidential election detracted from Q1 portfolio performance.
- Too few equities overall and too many growth stocks limited gains, according to Invesco Investment Solutions.
- So too did greater exposure to high-quality, longer duration bonds.
Adjustments that advisors made to moderate portfolios after the 2020 presidential election detracted from portfolio performance in the first quarter, according to new research from Invesco Investment Solutions.
“We found that portfolios post-election had less equity exposure and were heavily tilted towards growth across regions and market capitalizations, which was a drag on performance as value surged in Q1 2021,” said Mo Haghbin, chief commercial officer and chief operating officer of Invesco Investment Solutions, in a statement. “As we approach the second half of 2021, portfolios may need to be repositioned to reach client objectives given the changing economic environment.”
That environment has moved from recovery to expansion, according to Invesco.
The analysis by Invesco Investment Solutions, which consults with financial advisors on portfolios, was based on a study of 545 advisor portfolios over three separate periods: Jan. 1, 2020-March 31, 2020 (labeled pre-COVID-19); April 1, 2020- Nov. 3, 2020 (post-COVID-19 drawdown); and Nov. 4, 2020-March 31, 2021 (post-election).
Advisors had previously repositioned portfolios after the pandemic struck, making adjustments that improved performance such as adding to U.S. stock allocations, especially large-cap growth stocks, but after the election they reduced U.S. equity exposure and increased the duration and credit quality of bond portfolios, which didn’t bode well for first-quarter performance.
Not only did growth stocks underperform value stocks, but longer duration and higher quality bonds underperformed shorter duration, lower quality bonds as defaults rates on high-yield bonds fell and interest rates rose.
“What worked for advisors so well for most of 2020 has turned around since,” according to the Invesco report. “After making successful updates to their moderate portfolios post COVID-19, performance drivers flipped in the first quarter of 2021.”
Given the rebound in the U.S. and global economies and global stock markets, due in part to the growing uptake of vaccinations, especially in the U.S., Invesco suggests that advisors consider these adjustments to client portfolios: