BOSTON--(BUSINESS WIRE)--In its year-end review of moderate-risk advisor-managed portfolios, Natixis Investment Managers’ Portfolio Clarity® US Trends Report shows that investors whose portfolios tilted toward active investments performed slightly better than those more reliant on passive in 2017. Active management returned 15.0% versus 14.4% for passive weighted portfolios. While passive allocations spiked to 22.8% early in the year, they fell to 20.7% by year-end, a sign that the steady rise of passive investments since 2013 may be beginning to taper and could decline as volatility returns.
The US Trends Report provides a twice-yearly analysis of moderate portfolios reviewed by Natixis’ Portfolio Research and Consulting Group. The average moderate model portfolio returned 14.7% in 2017,1 driven by strong international and US equity performance, beating the 60/40 portfolio represented by the S&P 500® and the Bloomberg Barclays US Aggregate Bond Index by 0.50% at year-end.
All of the major indexes performed better in the second half of 2017 than they did in the first. Major themes continued to play out, with the biggest surprises being the ongoing strength of the equities market and a steep 14% decline in the US dollar against the euro. Earnings growth endured, volatility remained stunted and equities continued to rule. The most successful strategies during the second half of 2017 included higher allocations to equities, especially international and emerging market equities; actively managed mid-cap, small-cap and international funds; and portfolios with lower exposure to alternative investments.
“Risk-taking strategies paid off in 2017, and concentrated portfolios with an equity tilt performed best,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “We’re already seeing a new market dynamic this year with impressive year-to-date inflows into fixed income. Our research shows that active intermediate term fixed income funds have overwhelmingly outperformed passive over the past three to five year periods, on average.”
What worked in the second half of 2017
- Higher allocations to equities: Equities accounted for 91% of portfolio risk at year-end, but portfolios with an equity tilt were the winners in 2017. The top performing portfolios had higher stock allocations overall than the average portfolio (61% compared to 55%, respectively) and returned 17.4% compared to average portfolios, which returned 14.7%.
- International equity exposure: As the US dollar weakened against a wide swath of currencies during 2017, foreign stocks were more attractive to financial professionals, who adjusted their equity allocations accordingly. International equity allocation rose to 17.5%, up from 15.9% in the first half, and international emerging markets exposure increased to 4.7% from 4.1%. Emerging markets delivered the best return, with a gain of over 37%, followed by international developed at 25%.
- Actively managed funds: The top quartile of portfolios had lower exposure to passive investments and outperformed the bottom quartile by more than 5% in 2017. Use of active products in the intermediate term bond category enhanced overall performance.
- Lower exposures to alternatives and fixed income: Use of alternatives declined during 2017 and ended the year with an allocation of 5.2%, slightly down from 5.9% in 2016, which is below the five-year average weight of 6%. Managed futures, options-based and multi-alternative funds each accounted for nearly 25% of the alternatives sleeve, with the remaining 25% divided between long-short equity, long-short credit and market neutral. Fixed income allocations remained steady, as advisors spent time thinking about equity portfolios, but exposure to intermediate term bonds ticked up by 0.5%.
Allocation trends by asset class
During the second half of 2017, the clearest trend in asset allocation was the continued decline in the use of alternative funds. The use of allocation funds increased during the second half but was still down at year-end. Meanwhile, equity allocations remained high and bond allocation declined slightly.
- Equities: 53.7%, up from 51% at year-end in 2016
- Fixed income: 31.8%, down from 32.1%
- Alternatives: 5.2%, down from 5.9%
- Asset allocation funds: 4.8%, down from 6.7%
- Cash: 3.9%, up from 2.1%
“In 2017 we saw alternative allocations decline, which is a sign that advisors may be wrestling with the best way to use them,” said Gross. “With the return of volatility, it’s as important as ever for financial professionals to have diversifying and risk-mitigating assets in their portfolios. Although alternatives are not immune from market swings, they can protect against losses, and reduce or completely avoid market exposure.”
The US Trends Report provides a twice-yearly analysis of moderate portfolios submitted to the Natixis Portfolio Clarity® consultant team for review. Analysis compares performance and asset allocations of Moderate Model Portfolios with each other and selected benchmarks. Data in this issue represents 277 portfolios submitted by financial advisors from 7/1/17 to 12/31/17 and 3,118 portfolios submitted from 1/1/13 to 12/31/17.
About the Portfolio Research & Consulting Group
Natixis Portfolio Clarity® is the portfolio consulting service of Natixis Investment Managers. Specialized consultants provide objective portfolio analysis to investment professionals who seek a deeper level of insight, using sophisticated analytical tools to identify and quantify sources of risk and return.
For more information, visit im.natixis.com/us/natixis-portfolio-clarity.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of December 2017. 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.
Investing involves risk, including the risk of loss. Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager. 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. Diversification does not guarantee a profit or protect against a loss.
About Natixis Investment Managers
Natixis Investment Managers serves financial professionals with more insightful ways to construct portfolios. Powered by the expertise of 26 specialized investment managers globally, we apply Active ThinkingSM to deliver proactive solutions that help clients pursue better outcomes in all markets. Natixis ranks among the world’s largest asset management firms2 ($997.8 billion AUM3).
Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Investment Managers’ affiliated investment management firms and distribution and service groups include Active Index Advisors®;4 AEW; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;5 Dorval Asset Management;6 Gateway Investment Advisers; H2O Asset Management;6 Harris Associates; Investors Mutual Limited; Loomis, Sayles & Company; Managed Portfolio Advisors®;4 McDonnell Investment Management; Mirova;7 Natixis Asset Management; Ossiam; Seeyond;8 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Private Equity Division, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Not all offerings available in all jurisdictions. For additional information, please visit the company’s website at im.natixis.com | LinkedIn: linkedin.com/company/natixis-investment-managers.
Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.
1 Performance data covers January 1-December 31, 2017.
2 Cerulli Quantitative Update: Global Markets 2017 ranked Natixis Investment Managers (formerly Natixis Global Asset Management) as the 15th largest asset manager in the world based on assets under management as of December 31, 2016.
3 Net asset value as of December 31, 2017. Assets under management (“AUM”), as reported, may include notional assets, assets serviced, gross assets and other types of non-regulatory AUM.
4 A division of Natixis Advisors, L.P.
5 A brand of DNCA Finance.
6 A subsidiary of Natixis Asset Management.
7 A subsidiary of Natixis Asset Management. Operated in the U.S. through Natixis Asset Management U.S., LLC.
8 A brand of Natixis Asset Management. Operated in the U.S. through Natixis Asset Management U.S., LLC.