U.S. investors were rewarded by a rally in risk assets during the second half of last year, following a market that favored diversification in the first half, according to the year-end review of financial advisors’ moderate-risk portfolios, released today by Natixis Global Asset Management.
- Average Moderate-Risk Portfolio returned 8.3% in 2016
- Fixed income allocations reach highest level since Q2 2013
- 90% of actively managed intermediate-term bond funds outperformed their index since rate rise
- Option-writing becomes fastest-growing alts category, accounting for 31% of allocations
- Broadly, alternative allocations continue to shift from return-generating to risk-mitigating
BOSTON, March 27, 2017 – A volatile first half that began with the worst start for the Standard & Poor’s 500 since 1928 and concluded with the U.K.’s Brexit referendum favored portfolio diversification during that period, but U.S. investors who owned more higher-risk assets ultimately outperformed their peers during 2016, according to the latest Natixis Portfolio Clarity® U.S. Trends Report.
The year-end review of financial advisors’ moderate-risk model portfolios by Natixis Global Asset Management showed that markets rewarded a completely different set of asset allocations in the last six months of 2016 than in the first six months:
- The average portfolio in the analysis gained 4.32% in the first half of the year, when the best-performing portfolios were diversified with holdings such as precious metals, international government bonds, emerging market debt and commodities which helped offset equity market volatility.
- The opposite was true in the second half, when the average portfolio rose 3.77% and the best performers had larger allocations to U.S. high-yield debt and equities – especially small-caps – and less exposure to interest rate-sensitive bonds.
- The second half also featured a wider variation in performance between portfolios than the first half, with the top-performing quartile outperforming the bottom quartile by 4.13%.
“The dichotomy we saw in the markets in 2016 illustrates why durable portfolios are so important,” said David Giunta, CEO for the U.S. and Canada at Natixis Global Asset Management. “Investors should build portfolios geared toward their long-term goals and risk tolerance so they are prepared when volatility strikes.”
Active Management Outperforms as Investors Position for Rising Rates
Investors steadily increased their fixed income allocations in 2016 to 31% at year-end, up 2.7% compared to the prior year and the highest level since the second quarter of 2013. The increase was driven by investment in categories less sensitive to interest rates – primarily multi-sector bonds, high yield debt and bank loans – as investors positioned their holdings in anticipation of a rising interest rates.
The shift to a rising-rate environment early in the second half favored active managers in the intermediate-term bond fund category, with more than 90% of actively managed funds in the category outperforming comparable index funds by an average of 1.15% since mid-year. That followed a three-year period where index funds in the category outperformed active strategies by a total of 0.14%, on average, and received 130% of net fund inflows.
Allocation trends by asset class
While fixed income allocations increased in 2016, all other asset classes declined or were relatively flat compared to a year ago:
- Equities: 52%, down from 52.9% at year-end 2015
- Asset allocation funds: 7.2%, down from 7.6%
- Alternative assets: 5.5%, down from 6.9%
- Real Estate & Commodities: 2.1%, up slightly from 1.8%
- Cash: 2.2%, down slightly from 2.5%
Trend toward risk-mitigation in alternatives
While allocations to alternative funds were down compared to the prior year, they rebounded 0.5% from the end of the third quarter and illustrated two continued trends:
- Using alternatives to reduce risk: Allocations within the alternatives category continue to shift from return generation to risk reduction. At the end of December, 70% of alternative allocations in the moderate model portfolios were in risk-mitigating strategies (managed futures, market neutral, option writing and long?short credit), compared to 30% four years ago.
- Use of option-writing funds as a substitute for bonds: These income-generating funds were the fastest-growing alternative category, accounting for 31% of alternative allocations, as advisors look for bond alternatives.
“Investors concerned about potential volatility brought on by rising rates, valuations, central banks and geopolitical risk would do well to remember the lessons of a year ago,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “Though a rising tide lifted many investors in the second half of 2016, the heightened volatility of the first half is much more typical and favors broad diversification.”
The Natixis Portfolio Clarity® U.S. Trends Report is designed to track trends in professional investor behavior over time by analyzing the composition of financial advisors’ model portfolios. The fourth quarter 2016 U.S. Trends Report is based on the asset allocations and performance of 286 moderate-risk model portfolios submitted by U.S. financial advisors to the Natixis Portfolio Clarity® consultant team for review from June 30, 2016 through December 31, 2016. These portfolios are among a broader sample of 2,495 portfolios submitted in the three-year period from January 2013 through December 2016.
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.
For more information, visit https://ngam.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 January 27, 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. 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.
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