In its year-end review of advisor-managed portfolios, Natixis Investment Managers Portfolio Clarity US Trends Report shows moderate portfolios returned -5.1% for calendar year 2018, following a painful fourth quarter that saw a sharp decline of -8.3%, driven by US equities. Despite significant equity losses, advisors increased allocations to US large-cap and growth stocks, counterbalanced by short-duration government bonds, marking the return of fixed incomes traditional role as a risk reducer.
The US Trends Report provides a twice-yearly analysis of moderate portfolios reviewed by Natixis Portfolio Research & Consulting Group. According to the analysis, US equities were the biggest contributor to the fourth quarter losses, as large-caps declined 13.5% and small-caps were down just over 20%. Even so, US large-caps still outpaced international for the year, besting emerging market equities by 10% and international developed equities by 9.2%.
Despite the significant underperformance of US equity in Q4 2018, advisors increased their allocations to US large-cap and growth stocks. They also favored emerging market over foreign developed equity, yet despite increasing allocations, emerging market equity contributed less risk to diversified portfolios.
On the fixed income side, advisors shortened duration throughout the year, with credit quality at above-average levels and allocations to short and ultrashort bonds reaching all-time highs. Short-term and ultrashort-term bond allocations accounted for 17% of the fixed income sleeve, while the allocation to intermediate-term bonds was just under 30%. The 10-year Treasury yield started the year at 2.4% and climbed to 3.23% in November before retreating into year-end.
As advisors digested the outlook for rising interest rates and economic growth, they increased government bond holdings to 8%, on average, in the fourth quarter as ballast, while maintaining exposure to higher yielding fixed income, resulting in reduced risk as intended. The strategy proved out especially well for top quartile portfolios performance, where higher fixed income allocations contributed to better overall return, smaller drawdowns and lower risk. For 2018, top quartile portfolios returned -3.1% compared to bottom quartile portfolio performance of -7.0%.
The big takeaway for 2018 was the increase in volatility coupled with rising rates that pushed investors towards higher quality fixed income, said Marina Gross, Executive Vice President of Natixis Portfolio Research and Consulting Group. We remain optimistic for equity performance over the remainder of this year, but we see controlled upside pressure on yields. For this reason, extending duration, rather than running from it, might serve investors better over time.
Growing use of minimum volatility products
According to the US Portfolio Trends analysis, 22% of advisors now use minimum volatility products in their portfolios, following the uptick in equity volatility in 2018. Advisors have mainly used minimum volatility products in the large-cap space, most commonly with large blend, foreign large blend and diversified emerging markets.
As volatility continues, we expect this trend will also continue, amplified by investor concerns over late-cycle dynamics and increased sensitivities to systemic trading, added Gross.
Allocation trends by asset class
During the second half of 2018, the clearest trend in asset allocation was the slight uptick in the use of alternative funds, with alternatives exposure increasing from 4.2% in mid-2018 to 5.3% at year-end. Despite that fact, alternatives are still well below highs in 2016 of 7.5% as investors appear to be more interested in higher quality credit than in alternatives as ballast for their portfolios.
- Equities: 53.5%, down from 53.7% at year-end in 2017
- Fixed income: 31.6%, down from 31.8%
- Alternatives: 5.3%, up from 5.2%
- Asset allocation funds: 5.5%, up from 4.8%
- Cash/money market: 2.5%, down from 3.9%
- Other: 1.5%
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 236 portfolios submitted by financial advisors from 7/1/18 to 12/31/18 and 3,765 portfolios submitted from 1/1/13 to 12/31/18.
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 2018. 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 Investment Managers, 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.
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1 Cerulli Quantitative Update: Global Markets 2018 ranked Natixis Investment Managers as the 16th largest asset manager in the world based on assets under management as of December 31, 2017. 2 Net asset value as of December 31, 2018. Assets under management (AUM), as reported, may include notional assets, assets serviced, gross assets and other types of non-regulatory AUM. AUM does not include Vega Investment Managers, which was transferred to Natixis Wealth Management in December 2018. 3 A division of Natixis Advisors, L.P. 4 A brand of DNCA Finance. 5 A subsidiary of Ostrum Asset Management. 6 Flexstone Partners assets as of 9/30/18. Flexstone was established in 2018 by bringing together four specialized private investments firms: Caspian Private Equity, Euro-Private Equity France, Euro-Private Equity Swiss and Eagle Asia Partners. 7 Natixis Investment Managers transferred ownership of McDonnell Investment Management, LLC to Loomis, Sayles & Company, L.P. on 1/1/19. 8 Operated in the U.S. through Ostrum Asset Management U.S., LLC.
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