Increasing market volatility prompted financial advisors to shift client portfolios away from stocks in the first quarter toward bonds and alternative assets, Natixis Global Asset Management reported Wednesday.

The average moderate-risk portfolio in the report gained 0.6% in the first quarter. However, portfolios with greater diversification fared best.

The top quartile of portfolios gained 1.5%. These had the lowest allocation to stocks (43% of assets), the highest allocation to alternatives (9.7%) and the biggest “diversification benefit”, which measures how much risk is reduced through diversification (22.4%).

“The return of volatility to the markets has been a not-so-subtle reminder of the importance of diversification and risk management,” John Hailer, head of Natixis Global Asset Management for the Americas and Asia, said in a statement.

According to Natixis, the average portfolio in the first quarter had 50% of assets in stocks, down from 53% a year earlier; 29% in bonds, up from 28%; and 7.7% in alternative strategies, up from 6%.

Of the remainder, investors held 7.6% in allocation funds and 5.4% in real estate investment trusts, commodities and cash.

The Natixis Portfolio Clarity Trends Report measured the composition and performance of 352 portfolios that U.S. financial professionals submitted to its consultant team for review from October through March. These were among a broader sample of 2,032 portfolios submitted from January 2013 through March 2016.

The report said several thing worked in investors’ favor in the first quarter. One was patience.

It noted that after a dreadful opening, the S&P 500 Index rebounded nicely and finished the quarter up 1.4%. Investors who cashed out in mid-quarter, with the index down as much as 10% in February, locked in losses, whereas those who did not sell performed well.

In addition, fixed-income investors were rewarded for taking on duration risk—which measures bonds’ sensitivity to interest rate changes—as market behavior continued to imply an expectation of gradual, cautious interest rate hikes while the global economic outlook remains challenged.

Alternatives proved a boon as well, the report found. Portfolios holding managed futures or market-neutral funds performed better than those with most of their allocations to long/short equity and multi-alternative categories.

3 Trends to Watch

Natixis identified three major trends in its first quarter review.

1. Advisors are allocating more of their clients’ assets to a larger number of alternatives.

The report said that since the study began in 2013, portfolios with 10% or more allocated to alternative investments had consistently shown lower volatility than those without alternatives.

First quarter allocations averaged 7.7%, compared with 3.5% average in 2013, and the average number of funds in a portfolio rose from 1.7 in 2014 to 2.2, with 40% of advisors using three or more funds.

2. Use of volatility products is growing.

The use of low- and minimum-volatility funds had tripled since the beginning of 2015, making up nearly 18% of advisors’ portfolios in the first quarter. This likely reflects growing worries about equity risk and volatility, according to the report.

It noted that U.S. stock market volatility exceeded historical levels on some 3% of trading days from January 2013 to June 2015, but surpassed those levels on nearly 37% of trading days from June 2015 through March 2016.

3. Advisors are adding to credit exposures.

Higher credit exposures take advantage of opportunities created by the sharp selloff of high yield, according to the report. It said credit has rebounded from its lows, with the high yield and multisector categories leading the increase. Meanwhile, bank loan allocations continue to decline, it said.

“Investors see the end in sight for the long period of relative calm in the markets driven by the Federal Reserve’s stimulus programs,” Marina Gross, executive vice president of Natixis’ Portfolio Research and Consulting Group, said in the statement.

“With interest rates starting to rise and asset correlations dropping, it will be more important than ever for advisors and investors to diversify.”

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