BOSTON--(EON: Enhanced Online News)--Investment advisors continue to diversify their portfolios, increasing allocations to strategies with lower correlation to traditional asset classes as they position client assets for potentially volatile market conditions ahead, according to the latest quarterly Natixis Portfolio Clarity® U.S. Trends Report, recently released by Natixis Global Asset Management.
“Financial advisors and institutions today have a wide range of options to help increase diversification, and it’s important to systematically leverage these tools to tailor each investor’s portfolio to their unique goals and risk tolerance”
The quarterly review of advisors’ moderate-risk model portfolios by Natixis in Q3 found allocations to a more diverse mix of investment strategies, including increased use of strategies with lower correlation to industry benchmarks and a shift to alternative investments that prioritize risk mitigation over return enhancement. By actively increasing allocations to less-correlated assets, the diversification benefit to advisor portfolios, which measures the percentage of risk diversified away by lower correlations, rose to an average of 19.2% in the third quarter. Other diversification trends in the report include:
- The use of strategic beta strategies, indexes based on factors other than market capitalization, has doubled since 2013, with 52% of advisors using them in their moderate-risk portfolios. The average portfolio had 9.8% of its assets in strategic beta strategies at the end of the third quarter, accounting for 45% of passive portfolio allocations in the third quarter as advisors sought differentiated sources of returns from factor-driven products.
- Managed futures was the most popular alternative investment strategy, accounting for more than one-third of allocations to alternatives, and the use of option-writing strategies also increased while exposure to multi-alternatives and long/short equity strategies1 declined, reflecting a larger trend toward alternatives for risk-reducing benefits.
- Portfolios with 10% or more allocated to alternatives continued to deliver better risk-adjusted returns the majority of the time than those with no alternative allocation.
“Financial advisors and institutions today have a wide range of options to help increase diversification, and it’s important to systematically leverage these tools to tailor each investor’s portfolio to their unique goals and risk tolerance,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia and Head of Global Distribution.
Third Quarter Allocation and Performance Trends
The average moderate-risk model portfolios analyzed by Natixis gained 3.24% in the third quarter, compared to 0.46% for the Bloomberg Barclays U.S. Aggregate Bond Index and 3.85% for the S&P 500®. Year-over-year allocation trends demonstrated a gradual rebalancing of moderate-risk model portfolios, which continue to favor U.S. equities.
In the third quarter:
- Despite the trend toward diversified holdings, exposure to U.S. equities soared to 80% of equity allocations, the highest level in the history of the program. That hindered performance during the quarter as investors missed a rally in global and emerging market equities.
- The average moderate-risk portfolio allocated 53% of assets to stocks and 30% to bonds, which is unchanged from the second quarter.
- Though equities accounted for only 53% of portfolio holdings, they represented 92% of overall portfolio risk, up from 86% in 2013, the highest proportion of risk since evaluation of this data began in 2013.
“After years of artificially low interest rates distorting global markets and suppressing volatility, investors are now concerned about potential shocks reverberating through the financial system due to increasing political, economic or social risks,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “Our research shows their efforts to diversify will serve investors well when volatility returns to the market.”
Low Cost Doesn’t Always Equal Good Value
The average overall expense for portfolios reviewed by Natixis has declined to 69 basis points in the third quarter from 83 basis points in 2013. For the first time this quarter, Natixis compared portfolio performance by expense ratios and found that higher expense portfolios outperformed lower expense portfolios 60% of the time over the past three-year period.
1 Long/Short Equity strategies is an investing strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline.
The third quarter 2016 Natixis Portfolio Clarity® Trends Report tracks the asset allocations and performance of 306 Moderate Model Portfolios submitted by U.S. financial advisors to the Natixis Portfolio Clarity® consultant team for review from April 1, 2016 through September 30, 2016. These portfolios are among a broader sample of 2,377 portfolios submitted in the three-year period from January 2013 through September 2016. The report is designed to track trends in professional investor behavior over time.
Investing involves risk, including the risk of loss. Alternative investments involve unique risks that may be different from those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing. Managed Futures use derivatives, primarily futures and forward contracts, which generally have implied leverage (a small amount of money used to make an investment of greater economic value). Because of this characteristic, managed futures strategies may magnify any gains or losses experienced by the markets they are exposed to. Managed futures are highly speculative and are not suitable for all investors. Diversification does not guarantee a profit or protect against a loss.
About Natixis Portfolio Clarity®
Natixis Portfolio Clarity® is a portfolio consulting service provided by the company’s Portfolio Research and Consulting Group, where specialized consultants work with investment professionals who seek a deeper level of insight to build smarter portfolios, using sophisticated analytic tools to identify and quantify sources of risk and return.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of September 30 2016. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Global Asset Management, or any of its affiliates.
There can be no assurance that developments will transpire as forecast, and actual results will be different. Data and analysis does not represent the actual or expected future performance of any investment product. We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy. The information is subject to change at any time without notice.
About Natixis Global Asset Management, S.A.
Natixis Global Asset Management serves thoughtful investment professionals with more insightful ways to understand and manage risk. Through our Durable Portfolio Construction® approach, we help them construct more strategic portfolios that seek to produce better outcomes in today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.
Natixis is ranked among the world’s largest asset management firms.2 Uniting over 20 specialized investment managers globally ($897 billion AUM3), we bring a diverse range of solutions tailored to meet every strategic challenge. From insight to action, Natixis helps our clients better serve their own with more durable portfolios.
Headquartered in Paris and Boston, Natixis Global Asset Management, S.A.’s assets under management totaled $897 billion as of September 30, 2016.3 Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index AdvisorsSM;4 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;5 Dorval Finance;6 Emerise;7 Gateway Investment Advisers; H2O Asset Management;6 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors®;4 McDonnell Investment Management; Mirova;6 Natixis Asset Management; Ossiam; Seeyond;8 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.
2 Cerulli Quantitative Update: Global Markets 2016
ranked Natixis Global Asset Management, S.A. as the 16th largest
asset manager in the world based on assets under management ($870.3
billion) as of December 31, 2015
3 Net asset value as of September 30, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
4 A division of NGAM Advisors, L.P.
5 A brand of DNCA Finance.
6 A subsidiary of Natixis Asset Management.
7 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
8 A brand of Natixis Asset Management.