US Investment Portfolios Outperform International Peers in 2017, Finds Annual Natixis Global Portfolio Barometer
- International study of portfolio performance and allocation decisions shows US and Latin America were best performing regions, Continental Europe lagged in comparison
- Equities drove performance in all major markets
- Currency risk played a major role in portfolio performances
BOSTON, Mar. 22, 2018 – US investors fared better in 2017 than their international peers, particularly Continental Europe, according to the Global Portfolio Barometer published today by Natixis Investment Managers. Aided by overweight allocations to US growth stocks and higher international exposures in both stocks and bonds, moderate risk portfolios in the US returned 14.7% on average. The returns outperformed similar portfolios in eight other international regions included in the study.
The in-depth analysis of model portfolio performance drivers and asset allocation decisions across the world looked at a global sample of 466 “moderate risk” or “balanced” portfolios in nine total regions: France, Germany, Italy, Latin America, the Netherlands, Spain, Switzerland, the United Kingdom and the United States.
Performance was positive for all regions in a year where investors around the world benefited from synchronized improvements in economic outlook for both developed and emerging economies. While the US performed best, Latin America ranked just slightly behind with an average gain of 14.2%. Portfolios in Continental Europe lagged, with average gains in the United Kingdom at 10.8%, Switzerland at 9.4%, France at 8%, the Netherlands at 7%, Spain at 6%, Germany at 5.5%, and Italy at 4.5%.
Deeper analysis by Natixis found that investors in the US and Latin America, where allocations to US and global equities were highest, benefitted as the US dollar weakened against other major currencies. Meanwhile European investors overweight in European equities were hurt in their local currency. In a year when US equities were up over 20% in dollar terms, a European investor would have seen gains of just 6% due to the fall in the value of the dollar vs. the euro. However, dollar-based investors saw the opposite effect. European equities rose around 10% in euro terms, but dollar investors would have seen gains of 25% taking into account the appreciation of the euro vs. the dollar. On a consistent currency basis, European equities would have outperformed US equities. Moreover, Natixis found that many investors in international fixed income who did not hedge currency risk experienced unexpected losses in 2017 even though their funds generated gains in native currencies.
“Currency was a major source of risk and for some investors excess returns in portfolios, while many investors were unaware of how much they were taking when investing internationally,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “We continued to see overall risk in portfolios fall throughout 2017. However, we believe that real risk going forward has been understated using recent historical data, and with the return of volatility in 2018, investors may want to increase risk-mitigating investments to reduce market exposure and find diversified sources of return.”
Fixed Income and Alternatives Contribute to Performance
Fixed income performance in 2017 was generally positive in all regions, though unspectacular when compared to equities. Investors in the US and Latin America gained the most from fixed income exposures, with return contributions of 1.7% and 2.2% respectively, while Germany had the lowest exposure at 0.2% due to the negative yields in German bonds.
Emerging market fixed income performed well in 2017, with local currency debt up 14% in the US dollar, and hard currency around 10%. Investors in Latin America unsurprisingly had the highest exposures and benefited the most relative to this asset class. Investors allocating to emerging market fixed income, with currency hedging, experienced the greatest gains.
Alternative strategies were a positive contributor to performance in 2017 and outperformed fixed income in all regions except the UK where the largest allocation to multi-alternative funds underperformed. In the US, alternatives returned 7.2% in the moderate portfolios, outperforming fixed income by about 200 basis points. In other regions, alternative returns varied from 2.4% in Germany to 11.6% in Switzerland. Over the past years investors have been increasing allocations to alternatives at the expense of fixed income in the search for yield. This strategy was mostly successful in 2017; however, alternative allocation remain relatively low at around 10% on average, versus around 30% to fixed income.
Differing Approaches to Moderate Risk Portfolio Construction
The Global Barometer finds huge geographic disparity in how investors in different regions construct moderate risk model portfolios. Portfolios in the US and UK are constructed reasonably close to the traditional 60% equity, 40% fixed income model, but with the 40% spread between traditional fixed income, multi-asset funds, alternative strategies and real assets. However, France, Italy and Germany allocate far less to equities and instead allocate the majority of assets to fixed income and allocation funds.
In US portfolios, average allocations by asset class were 55% equities, 32% fixed income, 5% alternatives, 4% asset allocation funds, 2% real assets and 2% cash and other assets. By comparison, in Italy, which had the lowest performance of the nine regions, allocations weightings were 20% equities, 36% fixed income, 18% alternatives, 22% multi-asset funds, and 4% cash and <1% real assets.
“Investors with higher equity allocations would have been expected to have done better, and we find that was generally the case – that the return contribution from equities, no matter the region, was the biggest performance driver in 2017,” Gross added. “Although strong performance in equities meant that allocations to alternatives fell to a multi-year low.”
Key Global Portfolio Trends
- In US portfolios, allocation to international equity rose sharply in 2017 to as high as 17% (up from 12% in 2016), which drove 33% of the return in US portfolios. Of this, approximately two-thirds of equity investments are in developed markets and one-third in emerging markets.
- In France, investors increased portfolio risk in 2017 by reallocating from guaranteed insurance-linked products (Fonds en Euros) to riskier assets as yields continued to fall.
- In Spain, investors increased non-US equities, especially during the second half of the year, slightly increasing portfolio risk levels. They also reduced the exposure to high yield and convertible bonds, most likely to compensate the increase in equities.
- In the United Kingdom, investors began 2017 cautiously in the wake of Brexit and anticipating further political shocks in Europe. As these did not materialize, investors increased risk assets in the second half of 2017.
- In Latin America, there was a major allocation shift in 2017, most noticeably from fixed income, which was cut by nearly 44% to 36%, mainly in global high yield and US corporates. This capital was reallocated towards global equities and moderate/aggressive multi-asset funds.
- In Italy, there were no major asset allocation changes. Investors remained underweight equities and overweight fixed income, fearing a potential simultaneous rise in rates and fall in equity markets.
All figures, unless otherwise stated, are derived from detailed analysis conducted by the Portfolio Research & Consulting Group of 466 moderate risk model portfolios received in the last six months of 2017 across nine different locations worldwide: France, Germany, Italy, Latin America (including US-Offshore), the Netherlands, Spain, Switzerland, the UK and the USA. Peer group allocations shown are the averages calculated across all the models in the sample for each region. The performance data covers 1 Jan-31 Dec 2017 unless otherwise stated. Except for Spain, the Moderate Model Portfolios data is based on model portfolios that have been analyzed by the Portfolio Research & Consulting Group and have been designated as moderate risk by investment professionals. The Portfolio Research & Consulting Group collects portfolio data and aggregates it in accordance with the peer group portfolio category that is assigned to an individual portfolio by the investment professionals. The categorization of individual portfolios is not determined by Natixis Investment Managers, as Natixis’ role is solely as an aggregator of the pre-categorized portfolios.
Data for Spain is derived from VDOS data. The sample includes all moderate risk allocation portfolios having fund weights 70%-100% of total assets, with these weights rebalanced to 100%. Statistics based on weight, returns and return contributions are derived from holdings of portfolios extant in Q3 2017 (the latest data available) and simulated over the period 1 Jan – 31 Dec 2017.
Please note that risk attributes of portfolios will change over time due to movements in the capital markets. Portfolio allocations provided to Natixis are static in nature and subsequent changes in an investment professional’s portfolio allocations may not be reflected in the current data.
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.
Outside the United States, this communication is for information only and is intended for investment service providers or other Professional Clients. This material may not be redistributed, published, or reproduced, in whole or in part.
Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy or completeness of such information. The analyses and opinions referenced herein represent the subjective views of the author as referenced, are as of 27 January 2018 and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.
Performance data quoted represents past performance and is no guarantee of future results.
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1 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.
2 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.
3 A division of Natixis Advisors, L.P.
4 A brand of DNCA Finance.
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6 A subsidiary of Natixis Asset Management. Operated in the U.S. through Natixis Asset Management U.S., LLC.
7 Formerly an investment division within Natixis Asset Management, Seeyond became an independent global affiliate of Natixis Investment Managers effective January 1, 2018. Seeyond is operated in the U.S. through Natixis Asset Management U.S., LLC (Natixis AM U.S.). Natixis AM U.S., which launched in 2014, is majority-owned by Natixis Asset Management (Natixis AM) and minority-owned by Mirova, which is in turn wholly-owned by Natixis AM. Natixis AM U.S. had €467M / $561M / £415M in assets under management as of 12/31/17.