Financial advisors faced asset allocation challenges in the first half as interest rates rose, volatility spiked and international equities produced poor performance, Natixis Investment Managers reported last week
Natixis’ midyear review of moderate-risk portfolios showed that in the afterglow of double-digit returns across global equities in 2017, U.S. stock markets hit new highs in January and then gave up some of those gains through midyear.
The Bloomberg Barclays US Aggregate Bond Index lost 1.6% in the first half as rising rates began to take their toll. Gold sold off, and commodities fell.
The Natixis new Portfolio Clarity U.S. trend report is a semi-annual analysis that compares performance and asset allocations of moderate model portfolios with each other and selected benchmarks. The current data represent 250 portfolios submitted by financial advisors from Jan. 1 to June 30 and 3,495 portfolios submitted from Jan. 1, 2013, to June 20 this year.
The new analysis showed that with minimal opportunities for outperformance through asset class selection, dispersion among the moderate model portfolios was narrower than usual, with the bottom quartile portfolios generating negative returns for the first time since 2013: -0.8%, compared with 1.5% for the top quartile.
The midyear review found that higher exposure to U.S. equities was a relatively successful strategy, particularly U.S. small-cap stocks, which returned 9.4%, followed from afar by their large-cap counterparts, which gained 2.6%.
Lower exposure to foreign and emerging stocks also helped. After producing last year’s top performance, 37.3%, emerging market stocks were down by 6.7% at the end of June. In some instances, the report said, returns were positive in local currency, but turned negative when converted to U.S. dollars.
Lower allocations to alternatives and fixed income also worked in the first half, as these classes’ returns were flat to negative, making downside protection more challenging.
Greater exposure to actively managed investments provided a tiny edge over passive investments at the end of the first half, 12 basis points. The average allocation to passive investments was 21.6% at the end of the first half of 2018, down more than one percentage point from the previous year.
The report noted that median expenses for moderate portfolios seemed to be leveling off in the 65-to-70 basis point range, mainly because of a combination of fee reductions for active management and continuing use of passive products.
Not only that, but as of midyear, no portfolio had a fee higher than 1%, in sharp contrast with fee levels over the previous five years.