• The rise in interest rates saw many investors move into cash.
  • Falling inflation and higher starting yields have improved the outlook for bonds.
  • Investors should be mindful of the risks associated with tilting or overweighting portfolios in the hunt for growth.

"Appetite for government and high-quality corporate bonds remains strong."

Felicity Main

Portfolio Consultant, Vanguard, Europe

The transition to a higher interest rate environment has driven a number of asset allocation trends in client portfolios, based on observations by Vanguard’s Portfolio Analytics & Consulting (PA&C) team.

PA&C is a global team that provides a free portfolio consulting service to advisers as part of Vanguard’s mission to deliver value to investors. We analyse hundreds of client portfolios every year to identify the performance drivers and aggregate exposures across the portfolio, noting any biases, gaps, tilts, concentrations and security overlaps. Our ultimate goal is to help advisers build and maintain portfolios that align with their clients’ goals and attitudes towards risk.

Here we share the three top trends observed across client portfolios over the past year.

The cash trap

A big theme last year—and in 2022—was the flight to cash. Rates on cash rose as central banks raised interest rates to combat rising inflation. In response, we saw a lot of flows into cash and cash-proxies like money market funds.

While money market funds may at times be a sound location for holding client capital as interest rates rise or as a cash park while deciding how to invest, there are a couple of reasons why going to cash might have put clients further away from their goals.

Firstly, with inflation much higher than savings rates throughout 2023, cash and money market funds were delivering a negative real return. Further, not only did cash fail to match the impacts of inflation, it also posed an opportunity cost, as global equities rose almost 16%1 last year (in nominal terms). Investors that remained invested—particularly in equity markets—would have been better off than those who moved into cash.

The flight to cash

The image shows a bar chart with a line going across. The x-axis shows time in years, from 2019 to the end of 2023. The y-axis shows the cash balance in millions of pounds. The red bars show the cash balance in money market funds, the blur bars show flows into equity funds and the green bars show flows into bond funds. Flows into money market funds increase in 2022, followed by a sharp decrease in 2023.

Source: Morningstar, includes overseas funds, fund of funds, responsible investments, index trackers. Excludes feeder funds. Flows in EUR. Data from 1 January 2019 to 30 November 2023.

Bonds are back

While many investors allocated to cash in 2023, by the end of the year, flows into bond funds picked up on the back of expectations of interest rate cuts in early 2024. Global bond markets posted their best two-month returns in November and December 2023 since the global financial crisis of 2008, gaining 6.2%2.

The fixed income market rally of late 2023 partly reversed in January 2024 as markets adjusted their interest rate outlook—now more in-line with Vanguard’s long-held view that rate cuts are more likely in the second half of 2024.

While bond prices aren’t as cheap as they were in October 2023, appetite for government and high-quality corporate bonds remains strong, which aligns with our view that interest rates are at peak levels. Rising interest rates caused plenty of short-term pain for multi-asset investors in 2022, but the long-term outlook for bond markets has improved markedly thanks to higher interest rates.

The hunt for growth

Some investors will always be looking for the next big thing or growth opportunities. Vanguard doesn’t advocate tactical tilts and biases, but sometimes we see advisers allocating more to certain regions or sectors in a bid to capture a perceived opportunity. One such trend we’ve seen in the past year or so is advisers adopting an overweight position to emerging market (EM) equities—despite a disappointing decade for EM relative to developed markets.

The underperformance of EM equities over the past decade has left the sub-asset class looking attractive based on current valuations3, which might be a driving factor for those investors tilting client portfolios to EM stocks. While the case can be made for and against EM equities, it’s important that investors understand the higher volatility associated with EM stocks before making any strategic allocation decisions.

In any case, investors can gain exposure to EM equities through a global market capitalisation-weighted index fund, exchange-traded fund (ETF) or model portfolio. If EM stocks do outperform, global equity index exposures will capture those gains without taking on additional risk through an overweight to the sub-asset class. Alternatively, for investors with a preference for active management and a higher tolerance for risk, active EM equity funds seek to generate long-term alpha by investing in companies that operate in developing economies.

Regardless of the implementation, Vanguard advocates a balanced, risk-aware approach to portfolio construction, including any tilts or biases investors may want to express. All of Vanguard’s funds, ETFs and model portfolios—whether index or active—are built with balance and risk in mind.


1 Global equities represented by the MSCI All Country World Index. Returns calculated in EUR with dividends reinvested. Data between 1 January 2023 and 31 December 2023.

2 Source: Bloomberg, based on total returns for the Bloomberg Global Aggregate Bond Index (USD Hedged) for the period 16 October 2023 to 29 December 2023.

3 Source: Vanguard calculations, based on the Vanguard Capital Markets Model (VCMM). Emerging market equity is represented by MSCI Emerging Markets Total Return Index (EUR).


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