Fidelity Financial Advisor Solutions has reported the Q1 2015 results of the Fidelity Advisor Investment Pulse, which revealed a significant increase in financial advisors’ focus on portfolio management and international investing.
Portfolio management took the No. 1 spot during the quarter – up from No. 3 in Q4 2014. In addition, for the first time since results of the Fidelity Advisor Investment Pulse were published, the international market is ranked within the top five themes that are top-of-mind for advisors.
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Topics such as market volatility, interest rates, fixed income and yield remained important for advisors, taking the No. 2, No. 3, No. 4 and joint No. 5 spots respectively.
When combined, these themes help to explain advisors’ overall focus on portfolio management and asset allocation.
Fidelity Financial Advisor Solutions president Scott Couto said: "In a volatile market environment, one of the biggest challenges for advisors is how to help clients diversify their portfolio effectively without taking on undue risk. What we’re hearing is that advisors are trying to leverage multiple asset classes to strike a balance between risk and reward. Their clients want to keep some peace of mind with fairly low-risk investments while potentially increasing returns."
While the outlook for domestic equities is strong as the economy remains in a mid-cycle expansion and continues to benefit from the decline in oil prices, Couto suggests that advisors continue to look outside the U.S. to help clients diversify their portfolios.
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By GlobalDataThis is because historically, international and U.S. stock performance have seen a low correlation. To help clients maintain an exposure to international markets and diversify effectively, advisors should identify international opportunities as they emerge.
"As economies stabilize and recoveries continue, some regions, sectors and companies may present a surprising potential for upside growth. The rest of the world may be more complicated, but opportunities are emerging and advisors should position their clients to take advantage," explained Couto.
Here are some reasons why advisors might be encouraged to help their clients navigate international markets:
1. Bigger opportunity set – Globalization has resulted in an increase in the investment opportunity set. Among the world’s publicly traded companies, around 75 percent are located outside the U.S., including many industry-leading firms. To avoid needlessly narrowing their opportunity set and to tap into the potential of these sector leaders, advisors may need to look at international markets. In addition, international markets may offer better dividend yields than U.S. equities.
2. Potential for growth – While the U.S. economy is a bright spot among developed countries, many of the fastest growing economies in the world have been outside the U.S. Whereas the U.S. comprised 33 percent of global gross domestic product in 2001, the country represented just 23 percent in 2013. In some cases, other economies have grown more rapidly in part because of a younger population and also less mature markets.
3. Valuation anomalies – Macroeconomic uncertainty and event shocks outside the U.S. can present valuation anomalies. In other words, in places where political or economic uncertainty is dominating the headlines, some opportunities may be unfairly punished with lower valuations as investors shy away. A portfolio management team with the flexibility to capitalize on valuation anomalies as well as asset price divergences through active allocation adjustments may potentially help generate better portfolio outcomes.
Active managers with access to global research can help advisors analyze and mitigate the risks and complexities associated with the international investment landscape.
They can make active asset allocation adjustments within a risk-controlled framework, helping advisors improve portfolio outcomes. For example, unlike equities, bond markets are typically more influenced by local factors – these include economic growth, inflation, tax rates, credit, and currency movements.
As a result, bond yields, returns, and therefore risk exposure can diverge significantly from country to country. Because risk factors vary, a global portfolio by its very nature may provide advisors with opportunities to diversify against these risks.
An active manager of a global balanced strategy may potentially be able to improve the portfolio’s risk-return profile by helping advisors navigate this complex terrain.
