Fidelity’s Scarsciotti: Embrace Market Risk

Increased volatility across financial markets presents a unique opportunity for financial advisors to speak with clients about returning portfolios to a neutral position, according to Mike Scarsciotti, head of investment specialists at Fidelity Investments.

As part of an interview with etf.com, Scarsciotti highlighted some of his recent research on advisor portfolios and asset allocation patterns that he is seeing across the platform at the Boston-based financial services company.

With the Federal Reserve keeping interest rates higher as it continues to try and tamp down inflation, Scarsciotti said financial advisors have not had an easy time convincing clients to move away from conservative cash positions and back into the equity markets where there is more potential for returns that will beat inflation.

“The challenge many advisors are facing is convincing an investor who is comfortable earning 5% in a money market fund to get back to a neutral allocation,” he said.

As advisors generally start to find success in steering client portfolios toward more risk, Scarsciotti said he is seeing increased allocations beyond just the standby large-cap growth strategies and into small-caps, value and international funds.

Bond Duration and Interest Rate Risk

On the fixed income side, Scarsciotti is pleased to see more advisors gradually move portfolios out on the duration curve to be better positioned for lower interest rates.

In simple terms, a bond with a 5% yield and a six-year duration would produce a 1% negative return over one year if rates increased by 1% as duration is subtracted from the yield.

However, if that same bond saw rates decline by 1% over one year the total return would be 11% as duration is added to the yield.

“It’s a pretty compelling argument,” Scarsciotti said.

Active ETFs a Consideration

Even though above-average cash positions are starting to come down as advisors put more of that money back to work in the markets, Scarsciotti said some of the recent market volatility could still be driving investor nervousness. And that, he said, is something advisors need to get ahead of or risk leaving clients underexposed to the potential performance of the equity markets.

“Although, we are seeing an uptick of cash in advisor portfolios, this could be due to market uncertainty, making clients a bit more nervous and wanting to play it safe,” he said. “However, active ETFs (that target specific asset categories) can be an option to help advisors nudge their clients back to their planned allocations.”