Traditional sources of diversification failed to mitigate losses as portfolio performance suffered

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Multi-asset funds failed to protect investors from the impact of volatile equity markets in 2018, according to the Natixis Investment Managers Global Portfolio Barometer.

Adviser portfolios delivered negative returns across all regions, driven by falls in equity markets. But the analysis of investor portfolios in seven markets, conducted by the Natixis Portfolio Research & Consulting Group, found that multi-asset funds did not provide diversification as expected, and instead had very high correlations to adviser portfolios. This suggests multi-asset funds largely replicated what advisers were doing themselves.

Equities were the largest contributor to negative returns in all regions, costing around 3-5% on average – except in Italy, where advisers had much lower equity allocations. However, multi-asset funds were the second largest detractor, costing 0.5-2% on average, and particularly affecting France, where these funds have traditionally been very popular.

Alternative investments, like real estate and managed futures, were more resilient to volatility than traditional asset classes, but still contributed marginally to portfolio performance at best, due to lacklustre performance and low allocations. Real assets contributed little except in the UK, where property funds were a positive contributor to portfolios.

Matthew Riley, Head of Research in the Portfolio Research and Consulting Group at Natixis Investment Managers, commented: “It’s natural for investors to seek shelter from volatile markets by diversifying portfolios, but it is clear from our analysis that, in 2018, the majority of multi-asset funds fell short and largely failed to diversify, which only added to portfolio losses”.

“Our findings show that investors really need to look more closely when selecting a multi-asset fund, ensuring that the fund is aligned with their investment objective. This due diligence should include checking the fund’s correlation to their existing portfolios, as well as to bonds and equities, to make sure it will improve the risk-return profile of the portfolio.”

Italy showing most resilience to volatile markets

In stark contrast to 2017, advisers in all regions suffered negative portfolio performance in 2018 with the impact of falling equity markets and muted fixed income returns taking their toll. Italy was the most resilient market, with estimated losses of 3.2% for the average adviser portfolio, due to a much lower allocation to equities. Advisers in Italy had an average equity exposure of just 20%, while the UK and the US had a more bullish stance, with equity weightings of over 50% in moderate risk portfolios.

Currency risk continues to weigh on portfolios

In 2017, the Global Portfolio Barometer revealed the impact of currency risk on performance. And, while slightly reduced, it remained an important factor in 2018, benefitting European investors compared to their US counterparts. Currency moves remain an often overlooked area of risk, but when considering a more internationally exposed portfolio, not paying attention to it can have a significant impact on overall returns. For instance, in 2018 a European investor allocating to US equities would have experienced a small positive return of 0.3% in euro terms – a US investor would have lost 5%.

The quest for true diversification continues…

In short, the findings of the Global Portfolio Barometer highlight the impact that the return of volatility had on markets and investor portfolios, with portfolio risks potentially rising from the extraordinarily low levels seen in 2017. Multi-asset funds simply failed to provide diversification, which should be food for thought when considering the relationship between diversification, risk and returns in adviser portfolios.

Methodology

All figures, unless otherwise stated, are derived from detailed analysis conducted by the Portfolio Research & Consulting Group of 421 moderate risk model portfolios received in the last six months of 2018 across seven different locations worldwide: France, Germany, Italy, Latin America (including US-Offshore), Spain, the UK and the USA. Peer group allocations shown are the averages calculated across all the models in the sample for each region. The performance data covers 1 Jan-31 Dec 2018 unless otherwise stated. Except for Spain, the Moderate Model Portfolios data is based on model portfolios that have been analysed by the Portfolio Research & Consulting Group and have been designated as moderate risk by investment professionals. The Portfolio Research & Consulting Group collects portfolio data and aggregates it in accordance with the peer group portfolio category that is assigned to an individual portfolio by the investment professionals. The categorization of individual portfolios is not determined by Natixis Investment Managers, as Natixis’ role is solely as an aggregator of the pre-categorized portfolios.

Data for Spain is derived from VDOS data. Our sample includes all moderate risk allocation portfolios having fund weights 70-100% of total assets, with these weights rebalanced to 100%. Statistics based on weight, returns and return contributions are derived from holdings of portfolios extant in Q3 2018 (the latest data available) and simulated over the period 1 Jan-31 Dec 2018.

Please note that risk attributes of portfolios will change over time due to movements in the capital markets. Portfolio allocations provided to Natixis are static in nature and subsequent changes in an investment professional’s portfolio allocations may not be reflected in the current data.

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