• Global study of model portfolio performance and allocation decisions shows US and Latin America/US Offshore were best performers in 2017
  • Equities drove performance in all global markets
  • Currency exchange rates played a major role in diverging portfolio results between countries and regions

In a year when US stocks were up over 20% in dollar terms, a European investor would have seen gains of just 6% due to the strength of the euro compared to the dollar.
US model portfolios fared better in 2017 than their international peers, particularly Europe, according to the annual Natixis Portfolio Clarity® Global Portfolio Barometer. Aided by larger allocations to US growth stocks and higher exposures to international stocks and bonds, the average moderate risk portfolio in the US returned 14.7%. US portfolio performance outpaced similar portfolios in eight other international regions included in the study.

The in-depth analysis of model portfolio performance drivers and asset allocation decisions across the world looked at a global sample of 466 “moderate risk” portfolios in nine total regions: France, Germany, Italy, Latin America, the Netherlands, Spain, Switzerland, the United Kingdom and the United States.

It was a very good year
Performance was positive for all regions in a year where investors around the world benefited from synchronized improvements in economic outlook for both developed and emerging economies. While the US performed best, Latin America/US Offshore ranked just slightly behind with an average gain of 14.2%. Portfolios in Europe lagged, with average gains in the United Kingdom at 10.8%, Switzerland at 9.4%, France at 8%, the Netherlands at 7%, Spain at 6%, Germany at 5.5%, and Italy at 4.5%.

Deeper analysis found that US and Latin America/US Offshore portfolios, where allocations to US and global equities were highest, benefited as the US dollar weakened against other major currencies. Meanwhile European investors overweight in European equities were hurt in their local currency. In a year when US stocks were up over 20% in dollar terms, a European investor would have seen gains of just 6% due to the strength of the euro compared to the dollar. Gains in US dollars translated to fewer euros due to prevailing currency exchange rates. However, dollar-based investors saw the opposite effect. European equities rose around 10% in euro terms, but dollar investors would have seen gains of 25%, as gains in euros translated into more dollars. On a consistent currency basis, European equities would have outperformed US equities. Moreover, Natixis found that many portfolios in international fixed income that did not hedge currency risk experienced unexpected losses in 2017 – even though their portfolios generated gains in native currencies.

“Currency was a major source of risk, and for some investors, excess returns in portfolios, while many investors were unaware of how much risk they were taking when investing internationally,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “We continued to see overall risk in portfolios fall throughout 2017. However, we believe that real risk going forward has been understated using recent historical data, and with the return of volatility in 2018, investors may want to increase risk-mitigating investments to reduce market exposure and find diversified sources of return.”

Fixed income and alternatives contributed to performance
Fixed income performance in 2017 was generally positive in all regions, though unspectacular when compared to equities. US and Latin America/US Offshore portfolios gained the most from their fixed income exposures, with return contributions of 1.7% and 2.2% respectively, while Germany had the lowest returns at 0.2%, due to the negative yields in German bonds.

Emerging market fixed income performed well in 2017, with local currency debt up 14% in US dollars, and hard currency around 10%. Latin America/US Offshore portfolios unsurprisingly had the highest exposures and benefited the most relative to this asset class. Investors allocating to emerging market fixed income, with currency hedging, experienced the greatest gains.

Alternative strategies were a positive contributor to performance in 2017 and outperformed fixed income in all regions except the UK. In the US, alternatives returned 7.2% in the moderate portfolios, outperforming fixed income by about two percentage points. In other regions, alternative returns varied from 2.4% in Germany to 11.6% in Switzerland. Over the past years investors have been increasing allocations to alternatives at the expense of fixed income in the search for yield. This strategy was mostly successful in 2017; however, alternative allocations remain relatively low at around 10% on average, versus around 30% to fixed income.

Differing approaches to moderate risk portfolio construction
The Global Barometer finds huge geographic disparity in how advisors in different regions build moderate risk model portfolios. Portfolios in the US and UK generally follow the traditional 60% equity, 40% fixed income model, but with the 40% spread between traditional fixed income, multi-asset funds, alternative strategies and real assets. However, France, Italy and Germany allocate far less to equities and instead allocate the majority of assets to fixed income and allocation funds.

In US portfolios, average allocations by asset class were 55% equities, 32% fixed income, 5% alternatives, 4% asset allocation funds, 2% real assets and 2% cash and other assets. By comparison, in Italy, which had the lowest performance of the nine regions, allocation weightings were 20% equities, 36% fixed income, 18% alternatives, 22% multi-asset funds, and 4% cash and less than 1% real assets.

To learn more about the key trends across nine global regions, read the full report.

Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.

This material is for informational purposes only. Any reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services.

The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted and actual results will be different.

Currency hedging refers to taking an offsetting position to protect against currency rate fluctuations in a portfolio.

Emerging markets refers to financial markets of developing countries that are usually small and have short operating histories. Emerging market securities may be subject to greater political, economic, environmental, credit and information risks than US or other developed market securities. 

Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

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.

Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund’s investments to decline.

Hedging involves taking offsetting positions intended to reduce the volatility of an asset. If the hedging position behaves differently than expected, the volatility of the strategy as a whole may increase and even exceed the volatility of the asset being hedged.

All figures, unless otherwise stated, are derived from detailed analysis conducted by the Portfolio Research & Consulting Group of 466 moderate risk model portfolios received in the last six months of 2017 across nine different locations worldwide: France, Germany, Italy, Latin America (including US-Offshore), the Netherlands, Spain, Switzerland, 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 2017 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 the firms themselves. 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. The 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 2017 (the latest data available) and simulated over the period 1 Jan – 31 Dec 2017.

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 analytic tools to identify and quantify sources of risk and return. Natixis Portfolio Clarity® is a registered trademark of Natixis Advisors, L.P. in the United States.