Active asset management strategies came out ahead in the first half of 2017, with the portfolios that had higher allocations to US and international equities, and active managers over index funds, performing best, according to Natixis Global Asset Management.
Based on a review of “moderate-risk” portfolios of financial advisors, the Boston-based asset management firm reports that the average portfolio in this group turned in a 6.8% return for the first half of the year, overtaking the typical portfolio with a 60% allocation to the S&P 500, and a 40% allocation to the Bloomberg Barclays US Aggregate Bond Index, by 0.30%.
The top quartile of the porfolios reviewed, which had a lower exposure to passive investments, did even better, overtaking those in the bottom quartile by more than 3%. Although portfolios that leaned towards passive managers did slightly better in 2015 and 2016, the trend reversed in the first half of 2017, with portfolios that favored active managers ahead by 0.26%.
The allocation strategies that turned out to be the most successful in the first half of the year were those that inclined towards US and international equities (including emerging markets); growth equities over value; and actively managed funds, including mid-cap, small-cap, and international. A move away from fixed-income and alternative investments also paid off, a sign that portfolio diversification may have been less beneficial.
International equities exposure was a strong driver of returns, with a 13% allocation to this category helping drive up returns 31%, although it was also a riskier strategy than others.
Allocations to bonds have also risen as interest rates rose, with allocations tilting towards bonds that are less interest-rate sensitive, such as “world bonds,” emerging-market debt, and “nontraditional” bonds. Even then, these portfolios still face “substantial” interest-rate risk if interest rates go up more broadly.
And given that there is greater correlation between bonds and stocks in recent years, one allocation strategy is to add alternative investments, including option writing instead of bonds, in a bid to diversify further.
“Investors are increasingly concerned about market volatility, but they’ve recently reduced allocations to a group of assets that could offer protection from a market shock – alternatives,” said Marina Gross, executive vice president of Natixis’ portfolio research and consulting group. “Although greater diversification hasn’t paid off in the last few quarters, alternatives could play a more important role going forward by giving investors peace of mind once the unexpected inevitably occurs.”
Allocation to equities and fixed-income edged up to 52.3% and 32.1%, respectively, in the first half of 2017, compared to the first half of 2016. Asset allocation funds saw their share rise to 6.3%, from 5.2%. And alternative assets were down to 5.5%, from 7.5%. Cash holdings were down to 2%, from 2016’s 2.4%.