Advisors’ portfolios are loaded up with risk as stock and bond funds reach for returns, a BlackRock executive said.
“This is the challenge we see in portfolios—valuations are high in an aging bull market, and portfolios are positioned very aggressively,” said Mark Peterson, director of investment strategy and education for BlackRock, speaking Friday before advisors at TD Ameritrade Institutional’s annual conference in San Diego.
Best known for its money management, BlackRock also provides risk analytics for many institutional clients and has found frighteningly high levels of risk embedded in most portfolios.
Some 76 percent of stock and bond funds, including ETFs, are riskier than their underlying indexes and benchmarks, Peterson said. Ten years ago, 46 percent of stock funds had more risk, and 60 percent of bond funds were riskier.
“For bonds, that made sense” a decade ago, Peterson said, “with the Fed pushing down rates. But on the stock side, it made no sense to us” to see risk levels so high.
BlackRock has been surprised at the levels of risk and is advising clients to scale back risk by using strategies such as dividend growth, low volatility, global flexible and some safer multiasset funds for equity exposure, and intermediate-term taxable and municipal bonds on the fixed-income side.
Diversification alone won’t do the trick, Peterson said, as the benefits of a broad mix have eroded over time.
In 1991, the up/down capture percentages for a basic style-box equity portfolio (30 percent large cap value, 30 percent large cap growth, 30 percent international and 10 percent small cap) captured 89 percent of the S&P 500’s upside and only 77 percent of the downside. Today, though, the ratio is an unhealthy 101/109.
“We’ve lost a lot of the diversification benefit,” Peterson said, “especially for that downside piece.”
Limiting risk capture is even more important for riskier asset classes, like international stocks and emerging markets, he said.