BOSTON--(BUSINESS WIRE)--Portfolio diversification is paying off again, rewarding volatility-weary advisors with higher, more stable returns and lower risk, according to the latest quarterly Portfolio Clarity Trends Report published today by Natixis Global Asset Management. The most broadly diversified investment portfolios performed best for the period ending June 30, 2016. Diversification levels rose, largely because of increasing usage of alternative strategies, which reached a three-year high in the second quarter.
“The trends we’re seeing suggest the return of more traditional market dynamics, where investors are rewarded with enhanced returns for taking diversified risks,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Prior to the third quarter of 2015, investors generally were taking on more risk to achieve higher returns, and many got hurt when the recent sharp, episodic bouts of volatility hit the markets.”
The average moderate-risk model portfolios analyzed by Natixis gained 2.1% in the second quarter, handily outperforming the average retail portfolio, which grew 0.5%, and holding their own against the S&P 500®, which gained 2.5%. Despite limited exposure to high yield bonds and international stocks, the strong relative performance of moderate model portfolios benefited from a diverse mix of alternative strategies and fixed-income investments. The greatest diversification drivers in the second quarter were managed futures, gold, market-neutral strategies and long-duration government bonds.
U.S. advisors continued to favor domestic over international stocks and equity concentration has remained high, contributing to 92% of overall portfolio risk. However, investment professionals began broadening portfolio diversification when volatility picked up in earnest last August. They are now allocating more of their client assets to alternatives and to a greater variety of alternative strategies within the allocation, which helped lessen the severity of equity market drawdowns for the most diversified portfolios over the past year. Natixis found that portfolios well positioned ahead of plummeting oil prices and global growth concerns in early 2016 and the Brexit vote in June fared better and proved more resilient to market aftershocks than those that diversified reactively or sporadically.
From the market peak on August 18, 2015 through June 30, 2016, returns by the most diversified, best-performing portfolios in the top quartile grew 2.7%, exceeded the bottom quartile by 340 basis points.
Second Quarter Allocation Trends: What Worked
In the second quarter, the average moderate-risk portfolio in the study had 52.7% of assets in stocks, down from 54.8% for the same period a year earlier. Average allocation to U.S. equities was 35% compared to 14% for international. The high concentration of domestic equities is a reflection of the strong relative performance of the S&P 500® over the past several years and due, in part, to a lack of compelling opportunities in other asset classes.
Bond allocations, having bottomed out last year on the prospect of higher interest rates, ticked up 3% in the second quarter, to 30% from 27% of holdings. Exposure to intermediate term bonds rose to 11% – or about 36% of the typical bond portfolio – on the prospect of interest rates remaining low. Municipal bonds (all types) accounted for 8% of fixed-income allocations.
Allocations to alternatives increased to 8% on average, across all portfolios, up from 6% as of the end of the second quarter last year. Of the 66% of portfolios using alternative funds, the average weight was 11%. Another 5% of the portfolios were in allocation funds, while the remaining allocations were split among cash, Real Estate Investment Trusts (REITs) and commodities.
The best-performing portfolios, those in the top quartile of those analyzed by Natixis, had these factors in common:
- Lower allocations to equity (45% in the top quartile vs. 62% in bottom quartile)
- Higher allocations to fixed-income and alternatives (33% and 11% allocated to fixed income and alternatives, respectively, for the top quartile vs. 24% and 5% for the bottom quartile)
-
Notably higher allocations to intermediate term bonds and managed
futures
- Diversification benefits of 25%. A telling measure of the percentage of risk diversified away due to low correlations between holdings, the Diversification Benefit among top quartile portfolios was more than 10 percentage points higher than the bottom quartile portfolios.
Key Takeaways
“Diversification matters,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “In an environment distinctly lacking in precedent and visibility, diversification may be one of the best defenses an asset allocator has.”
For greatest impact, diversification should be broadened, not only across a variety of asset classes but also across geographic regions, currencies, investment strategies and more traditional economic, market and style risk factors.
Methodology
The second quarter 2016 Natixis Portfolio Clarity Trends Report tracks the asset allocations and performance of 347 Moderate Model Portfolios submitted by U.S. financial advisors to the Natixis Portfolio ClaritySM consultant team for review from January 2016 through June 2016. These portfolios are among a broader sample of 2,290 portfolios submitted in the three-year period from January 2013 to June 2016. The report is designed to track trends in professional investor behavior over time. The retail investor average portfolio is a benchmark constructed from 50,000 retail investor portfolios.
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 constructed as investment advice. The views and opinions expressed are as of May 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.1 Uniting over 20 specialized investment managers globally ($874.5 billion AUM2), 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 $874.5 billion as of June 30, 2016.2 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 Investment Advisors;3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;4 Dorval Finance;5 Emerise;6 Gateway Investment Advisers; H2O Asset Management;5 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors;3 McDonnell Investment Management; Mirova;5 Natixis Asset Management; Ossiam; Seeyond;7 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.
1 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
2 Net asset
value as of June 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.
3 A
division of NGAM Advisors, L.P.
4 A brand
of DNCA Finance.
5 A subsidiary of Natixis
Asset Management.
6 A brand of Natixis
Asset Management and Natixis Asset Management Asia Limited, based in
Singapore and Paris.
7 A brand of Natixis
Asset Management.
