Natixis: Alternatives Playing Growing Role in Portfolio Diversification

Aug 29 2016 | 11:48pm ET

Diversification is still a key way to mitigate volatility, lower risk and provide more stable returns, according to the latest Portfolio Clarity Trends report from Natixis Global Asset Management. 

The quarterly report is an analysis of U.S. investment portfolios conducted by the firm’s Portfolio Research and Consulting Group and includes reviews of approximately 350 portfolios to determine what worked, and what didn’t, Natixis said in a statement.

According to the findings, the most broadly diversified portfolios outperformed and the use of alternatives reached a three-year high, increasing to 8% in the volatile second quarter.

Key findings of the report include: 

  • The most broadly diversified investment portfolios outperformed peers in the second quarter
  • The greatest diversification drivers were managed futures, gold, market neutral, and world government bonds
  • Portfolios well positioned ahead of the Brexit vote in June fared better and proved more resilient to market aftershocks than those that diversified reactively

“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, in the statement. “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 portfolio analyzed by Natixis gained 2.1% in the second quarter, the company stated, handily outperforming the average retail portfolio, which grew by only 0.5%. In comparison, the S&P 500 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, according to Natixis’ research. U.S. advisors continued to favor domestic over international stocks, while equity concentration has remained high, contributing to 92% of overall portfolio risk. 

Investment professionals began broadening diversification last August, when volatility picked up again in earnest, the company said. They are now allocating more assets to alternatives, and to a greater variety of alternative strategies, which has helped lessen the severity of equity market drawdowns for the most diversified portfolios over the past year. 

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. 
  • 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, 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 matters,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group, in the statement. “In an environment distinctly lacking in precedent and visibility, diversification may be one of the best defenses an asset allocator has.”

Based in Paris, Natixis Global Asset Management is one of the world’s largest asset management firms. Uniting over 20 specialized investment managers globally, the firm manages approximately $874 billion across a diverse range of investment solutions and strategies. It is part of Natixis, the international corporate, investment, insurance and financial services arm of France’s Groupe BPCE.

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