Anticipating potentially volatile market conditions, investment advisors continued to diversify their portfolios in the third quarter, Natixis Global Asset Management reported Thursday.

An analysis of advisors’ moderate-risk model portfolios found increased use of strategies with lower correlation to industry benchmarks and a move to alternative investments that prioritize risk mitigation over return enhancement.

According to the latest Natixis Portfolio Clarity U.S. Trends Report, the diversification benefit, which measures the percentage of risk diversified away by lower correlations, climbed to an average of 19.2% in the third quarter.

The report is based on a review by the Natixis consultant team of the asset allocations and performance of 306 moderate model portfolios submitted by U.S. financial advisors between April 1 and Sept. 30.

Diversification Trends

The review found several other diversification trends.

For one, use of beta strategies doubled since 2013, with 52% of advisors deploying them in their moderate-risk portfolios. At the end of the third quarter, the average portfolio had 9.8% of its assets in indexes based on factors other than market capitalization.

This accounted for 45% of passive portfolio allocations in the quarter.

In addition, managed futures accounted for more than a third of allocations to alternatives, making it the most popular alternative strategy. Use of option-writing strategies also increased.

However, exposure to long/short equity strategies and multi-alternatives declined. Natixis said this reflected the larger trend toward alternatives for risk-reducing benefits.

The review found that portfolios with at least 10% allocated to alternatives continued to deliver better risk-adjusted returns a majority of the time, compared with portfolios lacking an alternative allocation.

Allocation and Performance Trends

Natixis’ analysis showed that the average moderate-risk model portfolios gained 3.2% in the third quarter, compared with 0.5% for the Bloomberg Barclays U.S. Aggregate Bond index and 3.9% for the S&P 500 index.

Year-over-year allocation trends exhibited a gradual rebalancing of moderate-risk model portfolios, which continued to favor U.S. equities.

Despite the diversification trend, exposure to U.S. equities shot up to 80% of equity allocations in the third quarter, the highest level since evaluation of these data started in 2013, Natixis said. That restrained performance as investors missed a rally in global and emerging market equities.

The average moderate-risk portfolio allocated 53% of assets to stocks and 30% to bonds in the third quarter, unchanged from the previous quarter.

Although equities accounted for little more than half of portfolio holdings, they represented 92% of overall portfolio risk, up from 86% in 2013, the highest proportion of risk since 2013, according to the report.

“After years of artificially low interest rates distorting global markets and suppressing volatility, investors are now concerned about potential shocks reverberating through the financial system due to increasing political, economic or social risks,” Marina Gross, executive vice president of Natixis’ portfolio research and consulting group, said in a statement.

“Our research shows their efforts to diversify will serve investors well when volatility returns to the market.”

Natixis noted that the average overall expense for portfolios its consultant team reviewed declined to 69 basis points in the third quarter from 83 points in 2013.

For the first time this quarter, Natixis said, it compared portfolio performance by expense ratios and found that higher expense portfolios outperformed lower expense portfolios 60% of the time over the past three-year period.

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