Barometer: Analyzing 1Q portfolio trends

Advisors entered 2026 with a constructive but increasingly selective outlook, which largely held throughout Q1 and the Iran conflict. Among the trends we saw during the quarter were:

• The active/passive fund mix moved decisively toward active strategies in Q1’26, with active allocations reaching 80% of equity allocations — matching the highest level since the inception of our trends analysis. 
• Equity allocations continued to reflect a deliberate push toward global diversification. 
• Advisors continued to favor large-cap exposure, extending the late-2025 shift toward larger capitalization stocks.
• Fixed income duration increased but remained below the Bloomberg Aggregate index.

We believe this positioning underscores advisors’ desire for flexibility and security selection amid evolving market conditions, elevated geopolitical risks and ongoing economic uncertainty.

Less defensive, less focused, more global

Portfolio risk dynamics shifted. Portfolio beta, a measure of portfolio risk, trended lower through most of 2025 but edged higher to 0.60 in Q1’26. This is closer to its normal observed range, indicating a willingness among advisors to accept a typical level of equity risk. At the same time, portfolio cross-correlations remained subdued, contrasting sharply with the elevated cross-asset correlations seen in early 2025, when tariffs entered the conversation and risk-aversion peaked. In Q1, strong relative performance from international equities — including emerging markets — small caps and large value, helped sustain diversification benefits amid a market where mega-cap, Magnificent Seven–led performance had abated.

Equity allocations continued to reflect a deliberate push toward global diversification. Within equity portfolio sleeves, international equity exposure rose to 22% and domestic equity exposure declined to 78% in Q1’26, from over 80% during most of 2025, signaling advisors’ preference for maintaining exposure beyond US markets. 

This commitment was tested during a volatile quarter marked by the initiation of conflict with Iran and ensuing tensions in the Strait of Hormuz, a critical chokepoint for global energy supply. Despite these challenges — and a modestly stronger US dollar — international equity allocations rose to a record high for our observations, supported by strong relative performance. Developed international equities drove the increase, while emerging markets allocations remained largely unchanged, even as both segments outperformed the S&P 500 during the quarter. Regionally, allocation changes remained concentrated in Europe and Asia Pacific, with Europe rising to nearly half of the international equity sleeve and Asia Pacific holding near recent highs.

Large, but not necessarily growth

Within equities, advisors continued to favor large-cap exposure. Large-cap allocations increased to 68%, extending the late-2025 shift into Q1. Small cap stocks (and their managers) had their hopes pinned on additional Federal Reserve rate cuts to support performance. But expectations diminished through the quarter, and a potential catalyst for small/mid-cap performance faded. Mid-cap exposure remained underweight following sustained relative underperformance, while small cap allocations held within a narrow range, reflecting cautious optimism tempered by limited near-term visibility. 

Equity style and capitalization exposures have evolved meaningfully over the long term, as you might expect. However, this can be partially attributed to a 2024 reclassification among large technology companies that shifted from growth to blend categories. These changes highlight the importance of understanding the fluid nature of classification and benchmark construction methodologies, which can influence perceived portfolio exposures and client communications. 

Sector positioning remained anchored by a significant overweight to technology, even as the sector underperformed and energy led the market during the quarter. Advisor portfolios continued to hold higher technology exposure than global market-cap-weighted benchmarks, reinforcing the sector’s central role within economically sensitive allocations. Over the past three years, exposure to economically sensitive sectors has increased meaningfully, led by technology, while allocations to defensive sectors have steadily declined.

Longer duration, risk-aware

In fixed income, advisors continued to extend duration, with portfolio duration rising to 4.73 years and moving toward the upper end of its historical range in our observation period. This shift builds on adjustments made in late 2025 following rate cuts, as many fixed income fund managers moved out on the yield curve. Credit positioning remained balanced, with investment-grade allocations increasing modestly to just over 80% despite spread volatility throughout the prior year. 

Sector allocations reflected a growing preference for structured credit, as exposure to asset-backed securities, commercial mortgage-backed securities and non-agency MBS increased incrementally. In contrast, corporate bond exposure declined — the largest reduction we saw across fixed income sectors.

An interesting note to fixed income sector allocations is not the trend, but the lack of such with US Treasury bonds. Treasuries, widely perceived as a safe haven, have seen their exposure remain meaningfully below index exposure — and relatively constant — compared to corporate and mortgage-backed securities, even as the macro environment remains “uncertain”. This allocation points to the long-term strategic nature of advisor allocations and the ballast that a “permanent” exposure to Treasury bonds seeks to provide.

Things can always change, but…

Collectively, these trends evidence a measured, risk-aware approach as advisors sought to balance diversification, income and growth in a more fragmented and dynamic market environment. Our analysis indicates that many of these trends began last year and were observable through the quarter. This includes the continued prominence of international equities, in terms of both increased advisor exposure and investment performance, in the face of large-scale global conflicts. Although our analysis ends in March, we saw the market broaden through April and into May, giving us further reason to believe that these trends we’ve observed since last year have staying power.