Portfolio Construction

Portfolio Construction Pulse

Financial Professional Portfolio Construction data, trends, and observations to inform your investment decisions.

Our team of Portfolio Construction Specialists work closely with financial professionals every day, consulting with them to pursue the investment goals they’ve set for their model portfolios. Portfolio Construction Pulse details the current trends, challenges, and ideas arising from these conversations.

Access additional data on financial professional portfolio construction trends and observations, as well as how T. Rowe Price is positioning our multi-asset portfolios, by downloading the latest edition of Portfolio Construction Pulse.

As of March 31, 2022
Overall Model

  • Inflation, interest rates, and volatility were key areas of discussion with clients. This was reflected in shifts in client model compositions as well as client questions and concerns.
  • Overall, clients continued to reduce risk in their model portfolios with 5-year betas edging down to 1.05 from 1.07 last year.
  • Trends showed continued emphasis on U.S. equities, but interest turned to select cyclical areas of the market due to inflation-related pressures.
  • Clients used a variety of fixed income strategies to navigate policy shifts and an evolving interest rate environment.
  • We saw increased interest in alts, especially commodities and strategies offering downside protection. This reflects concerns about equity drawdowns and inflation impact on fixed income solutions.

Financial Professional Model Allocations (Average)

The following section provides a current snapshot of the average allocations, portfolio statistics, and strategy usage from the financial professional models our Portfolio Construction Solutions team has reviewed and analyzed.

Financial Professional Model Allocations (Average)

As of December 31, 2021.

For financial professionals Alts includes investment strategies in the following categories: Commodities, MLPs, Real Estate, Global Real Estate, Multistrategy, Options Trading, Long-Short Equity, Relative Value Arbitrage, Event Driven, Systematic Trend, Macro Trading, Derivative Income, Equity Market Neutral. Alts play a defined role in T. Rowe Price Multi Asset portfolios serving as an illiquid cash-plus alternative that is carved out of fixed income.

T. Rowe Price utilizes “Other Equity” to invest in outcome-oriented equities to address inflation. Financial professionals typically utilize “Other Equity” for specific allocations to sector oriented exposure.

Diversifiers include fixed income strategies that offer diversification to traditional core fixed income. This includes: Bank Loan, Convertibles, Emerging Markets Bond, Emerging Markets Local-Currency Bond, High Yield Bond, High Yield Muni, Multisector Bond, Nontraditional Bond, Preferred Stock, and World Bond. For select T. Rowe Price Multi Asset portfolios, the firm’s nontraditional bond fund is used as a liquid cash-plus alternative that is carved out of the cash position in fixed income allocations.

SOURCE: CIP Database.

Equity

  • Exposure in U.S. large value increased by 1.7%—the largest change in allocations in 2021. More recently, industry cashflow trends pointed to a broader move away from growth across U.S. large, mid, and small-cap equities.
  • At 24.6% of total equity, the allocation to international remained below our strategic target of 30% and more heavily tilted to growth than in the U.S. Both trends represent areas where procyclical exposure is lacking. However, the tides may be turning. Industry cashflows for foreign large blend are trending positively with $123 billion inflows over the last 12 months.

Equity Statistics4
Equity Statistics
Equity Statistics

As of December 31, 2021.

Based on Morningstar categories.

Fixed Income

  • Financial professionals continued to look for solutions to navigate the current interest rate environment and central bank policy shifts.
  • Average model duration rose to 4.6 years from 4.4 years in December 2020. However, trends in 2022 may be shifting with industry cashflows pointing to a variety of strategies. In addition to intermediate core and core plus bond funds, inflation-protected bond, floating rate bank loan, short-term bond, and flexible bond strategies saw inflows. This reflects concerns over inflation and interest rates.

Fixed Income Statistics5
Fixed Income Statistics
Fixed Income Statistics

As of December 31, 2021.

Based on Morningstar categories.

Diversifiers include fixed income strategies that offer diversification to traditional core fixed income. This includes: Bank Loan, Convertibles, Emerging Markets Bond, Emerging Markets Local-Currency Bond, High Yield Bond, High Yield Muni, Multisector Bond, Nontraditional Bond, Preferred Stock, and World Bond. For select T. Rowe Price Multi Asset portfolios, the firm’s nontraditional bond fund is used as a liquid cash-plus alternative that is carved out of the cash position in fixed income allocations.

What to Watch

Are you positioned for: (1) inflation, (2) the interest rate environment, and (3) managing volatility?

  • Growth estimates are trending lower on heightened geopolitical risk and COVID lockdowns in China are weighing on supply chains and potentially exacerbating already elevated inflation. In a period of rising rates and higher inflation, growth could underperform. Accordingly, financial professionals have added to value as well as small- and mid-caps. Amid slowing U.S. earnings growth, markets with greater exposure to cyclical industries and global trade could benefit—thereby favoring international equity.
  • With the Fed implementing rate hikes in 2022 to address inflation, fixed income investors must pick their spots carefully. Inflation‑linked bonds and bank loans have historically performed well in inflationary environments. Flexible bond strategies may also be a solution if policymakers continue to hike rates.
  • The road to post-pandemic normalization may be bumpy. Financial professionals have turned to alts to help manage volatility. Taking a balanced approach that considers the role and fit of such strategies relative to traditional asset classes and the portfolio as a whole can help. Volatility can also be addressed in other ways. For equities, this suggests a broadly cautious approach, which could favor durable businesses with reasonable valuations. For fixed income, diversifying interest rate volatility though shorter duration, credit risk, and international exposures may help provide offsets.

Portfolio Construction Solutions from
T. Rowe Price

We work with financial professionals to find practical solutions for critical investment and practice challenges. Used independently or in combination, each component of our integrated suite of Portfolio Construction Solutions provides access to T. Rowe Price’s world-class multi-asset expertise and global investment resources to address your portfolio construction needs.

IMPORTANT INFORMATION

Portfolio Construction Solutions discussed are available only to financial professionals and not the retail public. Art of Clean Up® and Asset Allocation Model Review are offered by T. Rowe Price Investment Services, Inc. Model Construction is offered by T. Rowe Price Associates, Inc.

Past performance cannot guarantee future results. All investments involve risk. The charts and tables are shown for illustrative purposes only.

This material has been prepared by T. Rowe Price Investment Services, Inc. for informational purposes only. Information and opinions are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed.

Under no circumstances should this material, in whole or in part, be copied, redistributed, or shown to any person without prior consent from T. Rowe Price. This material is not intended to be investment advice or a recommendation to take any particular investment action. This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Copyright © 2022 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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