Reversal of Fortune: Equities Accounted for Two-Thirds of Portfolio Losses in 2018 after Driving 2017 Gains, Finds Natixis Global Portfolio Barometer

  • Investment returns were negative around the world in every market and
    nearly every asset class studied, with steepest losses coming from
    stocks.
  • The most-diversified portfolios had lower risk and higher returns than
    the least-diversified portfolios.
  • Huge international disparity was found in asset allocations used to
    construct moderate-risk portfolios, with equity allocations ranging
    from greater than 50% in the UK and US to 20% in Italy.
  • Italy was the best-performing region, Spain was the worst; US
    investors were most negatively affected by outsized equity exposure.

BOSTON–(BUSINESS WIRE)–Global equity markets fell across the board in 2018, contributing to
roughly two-thirds of the losses investors saw in their portfolios
during the year, and losses weren’t mitigated by fixed income, according
to the annual Global Portfolio Barometer published today by Natixis
Investment Managers’ Portfolio Research and Consulting Group (PRCG).
Investment returns were negative in every market and nearly every asset
class.


Natixis analyzed “moderate-risk” or “balanced” model portfolios in seven
nations and regions, including France, Germany, Italy, Latin America,
Spain, the United Kingdom and the US. Italian investors, with the most
conservative equity allocations among the nations studied, were rewarded
with the least-negative performance (-3.2% on average) followed by Latin
America (-4.4%), UK (-4.2%), France (-4.9%), US (-5.1%), Germany (-5.4%)
and Spain (-5.9%).

For US investors, their largest equity allocation to US equities was one
of the “least-bad” markets in 2018, faring better than most major equity
markets. However, US investors’ second-largest allocation to global
equities (ex-US) performed far worse, declining 14% for the year. The
negative performance impact from US and global stocks, combined, meant
that the falling equity markets hurt US investors the most compared to
international peers.

“Volatility returned in 2018 and portfolio risk levels were
substantially higher. At the same time, signs of an end to the long bull
market began to materialize,” said Marina Gross, Executive Vice
President of Natixis’ Portfolio Research and Consulting Group. “In a
complete reversal of fortune, moderate-risk portfolios that saw
double-digit gains aided by overweight allocations to equities in 2017
suffered grave losses due to overexposure to the same asset class in
2018. Moving forward, it is more important now than ever for investors
to consider increasing risk-mitigating investments to reduce market
exposure.”

Risk Doesn’t Translate Internationally in Portfolio Construction

Natixis found significant differences in asset allocations among
moderate-risk model portfolios in different countries, meaning investors
with similar risk tolerances might get completely different portfolios
and risk exposure depending on where they live. Moderate-risk portfolios
in the UK and US were most bullish, with equity weights in portfolios
over 50%, whereas Italians allocated just 23% to equities. In Italy and
Latin America, around 40% of moderate portfolios were allocated to fixed
income, compared to 20% in the UK and France. According to the Natixis
analysis, the different ways regional advisors assigned their equity
allocation was just as important as the performance of individual equity
markets.

For instance, advisors in France, Germany and Spain allocated a large
proportion of their clients’ equity exposure to broad European markets
and less to global and US equities. With European equities
underperforming US equities by 10% and global equities by 5% (EUR), this
caused European equities to have the largest negative impact on
performance. Natixis found that the negative impact of equities
represented 3%–5% in losses on average.

Truly Diversified Portfolios Fare Better

It is notable that fixed income allocations did not help to mitigate
losses and contributed negatively to portfolios in all regions except
France. While fixed income markets began to contribute positively to
returns toward the end of the year, it was a case of too little, too
late as the magnitude of the losses from equities was too great to be
offset by other asset classes. The same was true for alternative
strategies, which offered only slightly positive contributions.

However, Natixis research still shows that diversification still plays
an important role in portfolio construction. When Natixis computed the
diversification benefit1 of all the portfolios in the 2018
sample, the analysis found a strong negative correlation with portfolio
risk and a moderate positive correlation with returns. The
most-diversified portfolios had lower risk and higher returns than the
least-diversified portfolios, demonstrating the important contributions
that sound diversification provides.

In previous PRCG research, Natixis has shown that the most diversifying
strategies are market-neutral, managed futures, global macro and long
volatility. Many of these strategies performed positively in 2018, but
investors either did not own these strategies at all or did not own
enough of them to make a difference in their portfolios.

Global Portfolio Trends

  • United States: Broad allocations changed little from the end of
    2017. In equities, investors increased exposure to US large caps, and
    reduced exposure to international developed. Alternatives remained in
    line with 2017 weights except for a shift from managed futures to
    option writing strategies.
  • France: Investors reduced their allocation to multi-asset
    flexible funds on the back of poor performance throughout 2018.
    Investors in France have since been turning to absolute return fixed
    income strategies to diversify away from traditional fixed income and
    equities.
  • United Kingdom: The only allocation change was a small
    reallocation from multi-strategy alternatives to other asset classes.
    Investors may be waiting for clarity on the Brexit process before
    deciding on other allocation changes.
  • Italy: There was a large shift back into fixed income, in
    particular to European fixed income, while investors reduced positions
    in multi-asset funds. Italian government bonds also appeared in
    portfolios once again.
  • Latin America: Investors’ aversion to equity risk was stronger
    than their fear of rising rates as there was an overall shift from
    equity to fixed income, specifically global, emerging market and US
    fixed income categories.
  • Germany: Alternative strategies saw strong demand in 2018,
    especially absolute return bond funds to generate return in a low-rate
    environment. Exposure to alternatives is now close to that of
    multi-asset funds.
  • Spain: The main change investors made in 2018 was a decrease in
    higher risk fixed income and conservative multi-asset funds.

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 US. 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
analyzed 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.

About the Portfolio Research & Consulting Group

Natixis Portfolio Clarity® is the portfolio consulting
service of Natixis Investment Managers. Specialized consultants provide
objective portfolio analysis to investment professionals who seek a
deeper level of insight, using sophisticated analytical tools to
identify and quantify sources of risk and return.

For more information, visit im.natixis.com/us/natixis-portfolio-clarity.

This material is provided for informational purposes only and should not
be construed as investment advice. The views and opinions expressed are
as of September 2018. Any opinions or forecasts contained herein reflect
the subjective judgments and assumptions of the authors only and do not
necessarily reflect the views of Natixis Investment Managers, or any of
its affiliates. There can be no assurance that developments will
transpire as forecast, and actual results will be different. Data and
analysis does not represent the actual or expected future performance of
any investment product. We believe the information, including that
obtained from outside sources, to be correct, but we cannot guarantee
its accuracy. The information is subject to change at any time without
notice.

Risks

Investing involves risk, including the risk of loss. Unlike passive
investments, there are no indexes that an active investment
attempts to track or replicate. Thus, the ability of an active
investment to achieve its objectives will depend on the effectiveness of
the investment manager. Alternative investments involve unique
risks that may be different from those associated with traditional
investments, including illiquidity and the potential for amplified
losses or gains. Investors should fully understand the risks associated
with any investment prior to investing. Diversification does not
guarantee a profit or protect against a loss.

About Natixis Investment Managers
Natixis Investment
Managers serves financial professionals with more insightful ways to
construct portfolios. Powered by the expertise of 27 specialized
investment managers globally, we apply Active Thinking® to
deliver proactive solutions that help clients pursue better outcomes in
all markets. Natixis ranks among the world’s largest asset management
firms2 with nearly $1 trillion assets under management3
($999.5 billion / €860.6 billion AUM).

Headquartered in Paris and Boston, Natixis Investment Managers is a
subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a
subsidiary of BPCE, the second-largest banking group in France. Natixis
Investment Managers’ affiliated investment management firms and
distribution and service groups include Active Index Advisors®;4
AEW; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA
Investments;5 Dorval Asset Management;6 Gateway
Investment Advisers; H2O Asset Management;6 Harris
Associates; Investors Mutual Limited; Loomis, Sayles & Company; Managed
Portfolio Advisors®;4 McDonnell Investment
Management; Mirova;7 MV Credit; Ossiam; Ostrum Asset
Management; Seeyond;7 Vaughan Nelson Investment Management;
Vega Investment Managers; and Natixis Private Equity Division, which
includes Seventure Partners, Naxicap Partners, Alliance Entreprendre,
Euro Private Equity, Caspian Private Equity8 and Eagle Asia
Partners. Not all offerings available in all jurisdictions. For
additional information, please visit the company’s website at im.natixis.com
| LinkedIn: linkedin.com/company/natixis-investment-managers.

Natixis Investment Managers includes all of the investment management
and distribution entities affiliated with Natixis Distribution, L.P. and
Natixis Investment Managers S.A.

Natixis Distribution, L.P. is a limited purpose broker-dealer and the
distributor of various registered investment companies for which
advisory services are provided by affiliates of Natixis Investment
Managers.

1 Natixis PRCG defines diversification benefit =  

1 –

 

actual portfolio risk

undiversified portfolio risk

2 Cerulli Quantitative Update: Global Markets 2018 ranked
Natixis Investment Managers as the 16th largest asset manager in the
world based on assets under management as of December 31, 2017.
3 Net asset value as of September 30, 2018. Assets under
management (“AUM”), as reported, may include notional assets, assets
serviced, gross assets and other types of non-regulatory AUM.
4 A division of Natixis Advisors, L.P.
5 A brand of DNCA Finance.
6 A subsidiary of Ostrum Asset Management.
7 Operated in the U.S. through Ostrum Asset Management
U.S., LLC.
8 Caspian Private Equity is a joint venture between
Natixis Investment Managers, L.P. and Caspian Management Holdings,
LLC.

2410761.1.1

Contacts

Maggie McCuen
Natixis Investment Managers
617-449-2543
[email protected]

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