Moderate risk portfolios in the U.S. and Latin America recorded the best performances in 2017, while those of Continental European investors lagged in comparison, Natixis Investment Managers reported Thursday.

Natixis analyzed model portfolio performance drivers and asset allocation decisions across a sample of 466 “moderate risk” or “balanced” portfolios in nine regions.

Performance was positive for all regions last year, as investors benefited from synchronized improvements in economic outlook for both developed and emerging economies, Natixis found.

Return contribution of asset classes by country Source: Natixis Investment Managers Portfolio Research & Consulting Group 2017 Global Portfolio Barometer

U.S. portfolios returned 14.7% and Latin American ones 14.2%, while European portfolios recorded these returns:

  • U.K., 10.8%
  • Switzerland, 9.4%
  • France, 8%
  • Netherlands, 7%
  • Spain, 6%
  • Germany, 5.5%
  • Italy, 4.5%

Last year, the U.S. and Latin America also had the lowest annualized volatility over 12 months, at 2%, according to the report, which also noted that risk had dropped in all regions since 2016 when the range was 4% to 7%.

Currency played a key role in the disparate Western Hemisphere and European portfolio performance in 2017. Investors were not always aware how much risk they were taking when investing internationally, according to Marina Gross, executive vice president of Natixis’ portfolio research and consulting group.

Natixis found that U.S. and Latin American investors had the highest allocations to U.S. and global equities, benefiting from the U.S. dollar’s weakness against other major currencies. For their part, European investors, overweight in European equities, were hurt in their local currency.

With U.S. equities up more than 20% in dollar terms, the report said, European investors would have had gains of only 6% because of the greenback’s fall in value vs. the euro. However, dollar-based investors experienced the opposite effect.

European equities rose approximately 10% in euro terms, but dollar investors would have enjoyed gains of 25%, taking into account the euro’s appreciation versus the dollar. On a consistent currency basis, European equities would have outperformed U.S. equities.

Natixis research also showed that many investors in international fixed income that did not hedge currency risk suffered unexpected losses in 2017 even though their funds generated gains in local currencies.

“We continued to see overall risk in portfolios fall throughout 2017,” Gross said in a statement. “However, we believe that real risk going forward has been understated using recent historical data, and with the return of volatility in 2018, investors may want to increase risk-mitigating investments to reduce market exposure and find diversified sources of return.”

Fixed Income and Alternatives

In 2017, fixed income performance was generally positive in all regions, with U.S. and Latin American investors again gaining most from these exposures, 1.7% and 2.2%. Germany had the lowest exposure at 0.2% because of negative yields in German bonds, according to the report.

Emerging market fixed income turned in good performance in 2017, with local currency debt up 14% in the U.S dollar, and around 10% in hard currency. The report said investors that allocated to emerging market fixed income were rewarded, but only if they invested in funds that hedge their currency risk.

Latin American investors had the largest exposures and benefited the most relative to this asset class.

Alternative strategies made a positive contribution to 2017 performance, outpacing fixed income in all regions except the U.K. where the largest allocation to multi-alternative funds underperformed.

In the U.S., alternatives returned 7.2% in moderate portfolios, besting fixed income by some 200 basis points. Returns in other regions varied, from 2.4% in Germany to 11.6% in Switzerland.

Natixis noted that investors in search of yield have been increasing allocations to alternatives in recent years at the expense of fixed income. Last year, this strategy was mostly successful, even as alternative allocation remained relatively low at around 10% on average, versus about 30% to fixed income.

Regional Allocation Patterns

The report also looked at how investors in different regions constructed moderate risk model portfolios.

Those in the U.S. and the U.K. are constructed close to the traditional 60% equity/40% fixed income model, but with the 40% spread among traditional fixed income, multi-asset funds, alternative strategies and real assets.

French, Italian and German investors allocate far less to equities and instead allocate the majority of assets to fixed income and allocation funds.

In U.S. portfolios, average allocations by asset class are 55% equities, 32% fixed income, 5% alternatives, 4% asset allocation funds, 2% real assets and 2% cash and other assets.

By comparison, in Italy, where performance was lowest of the nine regions, allocations weightings were 20% equities, 36% fixed income, 18% alternatives, 22% multi-asset funds, 4% cash and less than 1% real assets.

“Investors with higher equity allocations would have been expected to have done better, and we find that was generally the case — that the return contribution from equities, no matter the region, was the biggest performance driver in 2017,” Gross said. “Although strong performance in equities meant that allocations to alternatives fell to a multi-year low.”

Global Trends

Allocation to international equity in U.S. portfolios rose sharply in 2017, to as high as 17% from 12% in 2016, driving 33% of the return in these portfolios. Of this, about two-thirds of equity investments were in developed markets and one-third in emerging markets.

French investors increased portfolio risk in 2017 by reallocating from guaranteed insurance-linked products (Fonds en Euros) to riskier assets as yields continued to fall.

In Spain, investors raised allocations to non-U.S. equities, especially during the second half of the year, slightly increasing portfolio risk levels. Spaniards also reduced their exposure to high yield and convertible bonds, most likely to compensate the increase in equities, according to Natixis.

British investors began 2017 cautiously in the wake of the country’s vote to exit the EU and in anticipation of further political shocks in Europe. When these did not materialize, investors increased risk assets in the second half of the year.

In Latin America, a major allocation shift took place in 2017, most noticeably from fixed income, which was reduced by nearly 44% to 36%, primarily in global high yield and U.S. corporates. This capital was the reallocated toward global equities and moderate/aggressive multi-asset funds, the report said.

No major asset allocation changes occurred in Italy. Investors remained underweight equities and overweight fixed income, fearing a potential simultaneous rise in rates and fall in equity markets.

The report’s data came from Portfolio Research & Consulting Group, which analyzed 466 moderate risk model portfolios received in the last six months of 2017 France, Germany, Italy, Latin America (including U.S.-Offshore), the Netherlands, Switzerland, the U.K. and the U.S. For Spain, data were derived from VDOS data.

Peer group allocations were the averages calculated across all the models in the sample for each region. The performance data covers Jan. 1 to Dec. 31.

— Check out Bill Gross: Don’t Expect 3 to 4 Fed Hikes This Year on ThinkAdvisor.