This article looks at a couple of key trends in asset allocation. We look at the evolution of investor portfolio allocations to stocks, bonds, and cash both across time and more recently. Importantly, we look at how it ties into the valuation picture against the backdrop of a coming full circle in the global monetary policy experiment. It seems for investors a brave new world is upon us as we move into a more challenging phase of the cycle.
The key takeaways on the trends (and challenges) in asset allocation are:
-Cash allocations are at almost 20-year lows, which is typically something you see later in the cycle.
-Equity allocations have drifted up at the expensive of cash and bond allocations.
-From the 80’s to the 90’s we saw what looks like a structural shift in portfolio allocations.
-With the major asset classes all looking expensive, and central banks moving into quantitative tightening, it’s a brave new world for asset allocators.
1. Cash Allocations: As regular readers will know, I’ve talked about this chart a lot and I think it does capture a few key issues. It also serves to highlight or contrast with the rest of the charts in this article, particularly the one on valuations at the end. Firstly, for clarity, the chart shows surveyed cash allocations across individual investors in America (the AAII survey), and implied allocations (derived from ICI mutual fund statistics). They both say basically the same thing – that cash allocations are near record lows, certainly at a cycle low. Investors have been both drifted out of cash (drift = changes in asset allocation driven by market movement), and basically bullied out of cash by central banks. And as I implied, there is a cyclical element to it – this is usually the type of condition you’d see toward the later stages of the market cycle.
2. AAII Portfolio Allocation Survey: Delving deeper into the AAII survey, the chart below shows the allocations across stocks, bonds, and cash. Interestingly there was a big rotation out of cash and into bonds around 2008-09 – no doubt some substituting of zero-rate cash into the relatively attractive yields of bonds (it was a different story when cash was earning 5.25% and US 10-year yields were in the high 4’s… compared to when cash was earning 0 and 10-year treasuries were yielding in the high 3’s in the years immediately after the crisis). But going back to the concept of drift, there has been a steady down-weighting to bonds and cash in favor of equities. Portfolio drift is inherently a passive concept, yet as I often note – many “passive” constructs in investing are actually active decisions in disguise.