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August 31, 2016 at 09:26 AM
The most broadly diversified investment portfolios performed best in the second quarter, Natixis Global Asset Management reported Wednesday.
Use of alternative strategies, which reached a three-year high in the second quarter, helped boost diversification levels, the report said.
“The trends we’re seeing suggest the return of more traditional market dynamics, where investors are rewarded with enhanced returns for taking diversified risks,” John Hailer, chief executive of Natixis Global Asset Management for the Americas and Asia, said in a 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.”
In the second quarter, average moderate-risk model portfolios analyzed by Natixis grew by 2.1%, outpacing the average retail portfolio’s gain of 0.5%. By comparison, the S&P 500 gained 2.5%.
Although moderate model portfolios had limited exposure to high-yield bonds and international stocks, their strong relative performance benefited from a diverse mix of alternative strategies and fixed-income investments.
Managed futures, gold, market-neutral strategies and long-duration government bonds were the biggest drivers of diversification in the second quarter.
Natixis reported that U.S. advisors continued to favor domestic stocks over international ones, with equity concentration contributing to 92% of overall portfolio risk.
However, when volatility accelerated last August, investment professionals began to allocate more of their client assets to alternatives and to a wider variety of alternative strategies within the allocation. For the most diversified portfolios, this helped lessen the severity of equity market drawdowns over the past year.
In June, Natixis reported that volatility had prompted many investors to diversify their portfolios in the first quarter.
According to the new report, portfolios that were well positioned ahead of plunging oil prices and global growth concerns earlier this year and the June 23 Brexit vote responded better to those market shocks than ones that diversified reactively or sporadically.
From the market peak on Aug. 18, 2015, through June 30, returns by the most diversified, best-performing portfolios in the top quartile grew by 2.7%, exceeding the bottom quartile by 340 basis points.
“Diversification matters,” Marina Gross, executive vice president of Natixis’ Portfolio Research and Consulting Group, said in the statement.
“In an environment distinctly lacking in precedent and visibility, diversification may be one of the best defenses an asset allocator has.”
The second quarter Natixis Portfolio Clarity Trends Report tracked the asset allocations and performance of 347 moderate model portfolios submitted by U.S. financial advisors to its consultant team for review from January through June. These were among a broader sample of 2,290 portfolios submitted in the January 2013 to June 2016 period.
