The report also found growing interest in alternative investments: 15% of all the third quarter portfolios had some type of investment in the space. Part of the reason for that is greater access: Investors can now gain a foothold in these investments with lower minimums than they could in the past.
When determining how much of an overall portfolio an advisor should put into alternatives, Ma said 8% was a good starting point. As for which type of alternatives to use, it depends on the investor, he added.
“It’s not about pushing a product, which is what a lot of advisors do,” he said. Advisors must “figure out the goal of the pain they’re trying to solve for and then match the right category.”
For instance, if the investors are looking for enhanced returns over stocks and bonds, then it makes sense to use private equity. If they are seeking better diversification over bonds, then a market neutral hedge fund could fit. Finally, if the investor wants reliable income they could invest in private credit, Ma said.
The report found that investors are less allocated to fixed income; 30% of the portfolios were invested in the asset class, down from 33% in the second quarter. Eighty percent of those allocations were to investment-grade bonds.
Advisors are starting to figure out that GDP could start to slow down if higher interest rates start to harm the economy, Ma said. Investment-grade bonds have become more interesting for that reason, since their duration is helpful in a recession.
“Based on our data, advisors are actually getting smarter about it; they’re elongating the duration a little bit [and] they’re getting more investment-grade bonds,” Ma said. “They’re getting the message that going forward … high interest rates might hurt the economy.”
Fidelity conducts the quarterly “Portfolio Construction Insights” report to track the way advisors are building and managing portfolios. It helps them find out what their colleagues are doing and the strategies they are employing, Ma said.