International equities, including emerging markets, actively managed stock funds and growth stocks were key drivers of the relatively strong performance of investment portfolios in the first half of 2017, according to the latest Natixis Portfolio Trends Report.
The average moderate-risk model portfolio gained 6.8% in the first half, outperforming the traditional 60/40 portfolio split between the S&P 500 index and Bloomberg Barclays U.S. Aggregate Bond Index by 0.30%, and portfolios favoring active managers outperformed by 0.26%.
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A 13% allocation to international equities drove 31% of portfolio returns, and the top quartile of moderate-risk portfolios outperformed bottom-quartile portfolios by more than 3%, due in large part to the higher level of active management among top quartile performers.
“High exposure to U.S., international and emerging market equity was the key to success in the first half of 2017 coupled with lower allocations to fixed income and alternatives,” according to the report. Commodities were the only asset class that lost money in the first half.
“The portfolios that fared best were overweight equities and geographically diversified, but that leaves them now with a high degree of market risk,” says Marina Gross, executive vice president of Natixis’ Portfolio Research and Consulting Group.
She expects the general trends of the first half will continue in the second half though returns won’t be as strong. “I have a hard time expecting the S&P 500 will add another 10% and emerging market stocks another 20%.”
Gross suggests that investors remain in equities but be prepared for a potentially material rise in volatility and offset some market risk by adding alternative investments.