Spike in Market Volatility Driving Investors to Diversify Portfolios, Natixis Analysis Shows

Investment professionals shifted client portfolios away from stocks in favor of bonds and alternative assets in the first quarter to limit the impact of increasing market volatility, according to data from Natixis Global Asset Management. The moves exemplify an emerging trend where the financial markets seem to be increasingly rewarding diversified portfolios.

The average moderate-risk portfolio in the Natixis Portfolio Clarity Trends Report gained 0.61% in the first three months of 2016, but portfolios with greater diversification fared best. The best-performing portfolios, those in the top quartile of the sample, gained 1.5% in the quarter, benefitting from the lowest allocation to stocks (43% of assets), the highest allocation to alternatives (9.7%) and the largest “diversification benefit” (22.4%), a measure of how much risk is reduced through diversification. The report is based on a review of 352 moderate-risk portfolios submitted to Natixis by U.S. financial professionals.

In the first quarter, the average portfolio in the study had 50% of assets in stocks, down from 53% a year earlier. Investors held 29% in bonds (up from 28%) and raised allocations to alternative strategies to 7.7% (from 6%). Of the remainder, 7.6% was held in allocation funds and 5.4% in real estate investment trusts (REITs), commodities and cash. The use of low- and minimum-volatility funds tripled since the beginning of 2015, making their way into nearly 18% of advisors’ portfolios.

“The return of volatility to the markets has been a not-so-subtle reminder of the importance of diversification and risk management,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Markets can be unpredictable, so it is important to build durable portfolios that can weather the storm and keep you on track to meet your financial goals.”

What worked in the first quarter:

1) Patience: The Standard & Poor’s 500 Index had its worst opening since 1928, falling as much as 10% by February. The index rebounded sharply, finishing the quarter 1.4% higher. Investors who cashed out in the middle of the quarter locked in losses; those who didn’t sell performed well.

2) Bond duration risk: Fixed-income investors were rewarded for taking on duration risk, a measure of bonds’ sensitivity to interest rate changes, as market behavior continued to imply an expectation that interest rate hikes will be gradual and cautious while the global economic outlook remains challenged.

3) Alternatives: Portfolios that held managed futures or market-neutral funds fared better than those that had most of their allocations to long/short equity and multi-alternative categories.

Trends to watch:

1) Shift to alternatives: Portfolios with 10% or more allocated to alternative investments have consistently demonstrated lower volatility than those without alternatives since the study began in 2013, and advisors are allocating more of their clients’ assets to a larger number of alternatives. Allocations in the first quarter averaged 7.7%, more than double the 3.5% average in 2013, and the average number of funds in a portfolio has grown from 1.7 in 2014 to 2.2, with 40% of advisors using three or more.

2) Volatility product use growing: The tripling of low- and minimum-volatility products since 2015 likely reflects growing concern about equity risk and volatility. U.S. stock market volatility exceeded historical levels on only about 3% of trading days from January 2013 to June 2015, but on nearly 37% of trading days from June 2015 through March 2016.

3) Higher credit exposures: Advisors are adding to credit exposures, taking advantage of the opportunities created by the sharp selloff of high yield. Credit has rebounded from its lows, with the increase lead by the high yield and multisector categories. Bank loan allocations continue to decline.

“Investors see the end in sight for the long period of relative calm in the markets driven by the Federal Reserve’s stimulus programs,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “With interest rates starting to rise and asset correlations dropping, it will be more important than ever for advisors and investors to diversify.”

Methodology
The Spring 2016 Natixis Portfolio Clarity Trends Report measures the composition and performance of 352 portfolios submitted by financial advisors to the Natixis Portfolio ClaritySM consultant team for review from October 2015 through March, 2016, which are among a broader sample of 2,032 portfolios submitted from January 2013 through March 2016. The report is designed to track trends in professional investor behavior in an effort to encourage financial portfolios tailored to investors’ long-term financial goals and risk tolerance.

About Natixis Portfolio Clarity
Natixis Portfolio Clarity is a portfolio consulting service provided by the company’s Portfolio Research and Consulting Group, where specialized consultants work with investment professionals who seek a deeper level of insight to build smarter portfolios, using sophisticated analytic tools to identify and quantify sources of risk and return.

About Natixis Global Asset Management, S.A.
About Natixis Global Asset Management
Natixis Global Asset Management serves thoughtful investment professionals with more insightful ways to understand and manage risk. Through our Durable Portfolio Construction® approach, we help them construct more strategic portfolios that seek to produce better outcomes in today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.

Natixis is ranked among the world’s largest asset management firms.1 Uniting over 20 specialized investment managers globally ($884.9 billion AUM2), we bring a diverse range of solutions tailored to meet every strategic challenge. From insight to action, Natixis helps our clients better serve their own with more durable portfolios.

Headquartered in Paris and Boston, Natixis Global Asset Management, S.A.’s assets under management totaled $884.9 billion (€776.4 billion) as of March 31, 2016.2 Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Investment Advisors;3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;4 Dorval Finance;5 Emerise;6 Gateway Investment Advisers; H2O Asset Management;5 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors;3 McDonnell Investment Management; Mirova;5 Natixis Asset Management; Ossiam; Seeyond;7 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.

1 Cerulli Quantitative Update: Global Markets 2015 ranked Natixis Global Asset Management, S.A. as the 17th largest asset manager in the world based on assets under management as of December 31, 2014.
2 Net asset value as of March 31, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
3 A division of NGAM Advisors, L.P.
4 A brand of DNCA Finance.
5 A subsidiary of Natixis Asset Management.
6 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
7 A brand of Natixis Asset Management.

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