Natixis Investment Managers’ Portfolio Barometer offers insights into Latin American & US Offshore financial advisors’ model portfolios and the allocation decisions they are making. Trends and observations in this report were derived from 29 moderate model portfolios submitted for analysis by Latin American & US Offshore financial advisors and wealth firms in the first half of 2020.1

Equity Allocations Declined in Moderate Portfolios
Latin American & US Offshore advisors reduced their equity allocations to 38.2% during the first half of 2020, a combination of market action and growing risk aversion in response to the COVID-19 selloff. With little consensus about the shape and timing of a recovery, many advisors preferred multi-asset funds over equities, fearing a retest of the lows seen in the first quarter of 2020 (Figure 1).

Advisors tended to favor themes over sectors, as demonstrated by allocations to ESG-related investment strategies. Consistent with the growing interest in global allocation and thematic funds, financial advisors’ use of actively managed equity products also rose compared to the prior six-month period, from 83% to 88%. Active management was most pronounced in the sub-asset classes, while advisors relied on indexing for global large blend and US large blend equity.

Figure 1: Average allocations in Latin American & US Offshore moderate model portfolios (1H 2020)
Figure 1 pie chart shows allocations: Fixed income (42.2%), Equity (38.2%), Multi-asset (11.8%), Alternatives (3.1%), Real assets (2.3x%) and Money market (2.4%).
Source: Natixis Portfolio Clarity®, data from January 1 to June 30, 2020. Asset classes are based on Morningstar categories. Real assets represents the sum of commodities, property and miscellaneous.

Fixed Income Regained Dominance in Portfolios
As pandemic fears increased and risk appetite abated, Latin American & US Offshore financial advisors committed an increasing portion of their portfolio assets to fixed income. The average allocation during the period ending June 30, 2020 was 42.2% across the moderate model portfolios, and fixed income edged out equity as the top asset class.

Weightings to North American fixed income declined, although it still remained the largest fixed income component at 13.5%. Accommodative monetary policy, particularly from the US Federal Reserve, supported allocations to high yield, despite its higher risk profile. Financial advisors continued their strong preference for active managers in fixed income, with 98% of assets actively managed, up from 94% over the previous six-month period. With interest rates virtually certain to remain low, but all other economic and geographic variables unsettled, advisors seem happy to leave security allocation decisions to full discretion portfolio managers.

How Were Portfolios Positioned for the Drawdown – and Recovery?
Allocations shifted over the course of the first six months of 2020 – a period that divided fairly neatly in half from a return standpoint. So how did portfolio allocations affect performance in the COVID-19 selloff that bottomed on March 23, and the subsequent recovery through the end of the period?

While year-to-date returns remained slightly negative, the moderate model peer group average outperformed its benchmark, the Dow Jones Moderate Portfolio Index, for the six-month period.2 The slightly lower return in the recovery period was offset by a higher return heading into the selloff and a smaller loss during the drawdown (Figure 2).

Figure 2: Average moderate model outperformed the index
  YTD Return (1/2–6/30) Pre-Selloff Return (1/2–2/18) COVID-19 Selloff Return (2/19–3/23) Post-Selloff Return (3/24–6/30)
Peer Group Average
-1.01%
-2.22%
-20.06%
21.45%
DJ Moderate Index
-3.66%
1.56%
-23.56%
24.10%
Source: Natixis Portfolio Clarity®, Morningstar. Data from January 1 to June 30, 2020. Past performance is no guarantee of future results.

The COVID-19 selloff was particularly dramatic because it coincided with a sharp drop in oil prices unrelated to the pandemic. This confluence of events may have favored equity funds that factor ESG considerations into their investment strategy (Figure 3). For the first half of 2020, the MSCI USA ESG and World ESG indexes outperformed the MSCI USA and MSCI World Indexes year to date, as well as pre-selloff, during the selloff, and post-selloff.

Figure 3: ESG equity strategies outperformed in 1H 2020
  YTD Return (1/2–6/30) Pre-Selloff Return (1/2–2/18) COVID-19 Selloff Return
(2/19–3/23)
Post-Selloff Return (3/24–6/30)
MSCI USA ESG Universal Index
-0.67%
5.57%
-33.10%
40.64%
MSCI USA Index
-2.45%
4.86%
-33.83%
40.59%
MSCI World ESG Universal Index
-4.25%
3.40%
-33.01%
38.24%
MSCI World
-5.77%
2.82%
-33.69%
38.22%
Source: Natixis Portfolio Clarity®, Morningstar. Data from January 1 to June 30, 2020. Past performance is no guarantee of future results.

Higher ESG exposure could also be a contributing factor to the outperformance of the average moderate model. Equity funds explicitly identified as ESG accounted for about 32% of the equity allocation in the average moderate model portfolio, up from 28% in the second half of 2018. ESG allocations seem to cluster in global large-cap growth and US large-cap value, which account for three-quarters of exposure. Adoption of ESG is less robust in fixed income, averaging just over 4% during the period.3

Wake-Up Call for Risk Management
The volatile market conditions that have characterized the year to date have put increased emphasis on risk management. Risk, as measured by the average 12-month annualized standard deviation of the portfolios, started the year close to its historically low range. It bottomed out at 5% in January, but as the pandemic moved across the globe and equities sold off, risk skyrocketed to over 12.5% in one month and has maintained that level through mid-year (Figure 4).

Figure 4: 12-Month Rolling Risk – 1H 2020 Latin American & US Offshore Moderate Peer Group
Line chart shows 12-month rolling risk moderate peer group average beginning July 2017 at 3.5%, dipping below 2.5% in December 2017, rising to the 7.5% range throughout 2019, dipping to 5% in January 2020 and peaking at 12.5% in April-June 2020.
Source: Natixis Portfolio Clarity® data from January 1 to June 30, 2020. Risk data from July 1, 2017 to June 30, 2020.

Positioned for Continued Uncertainty
While advisors entered 2020 with relatively few worries, the coronavirus pandemic has made uncertainty the new normal and amplified many of the changes already under way across the economy. The COVID selloff and lockdown have highlighted the benefits of thematic strategies related to technology, healthcare and sustainability. Looking ahead, advisors may be more open to strategies such as ESG investing that can mitigate the new risks dominating the markets.

For a more detailed look at Latin American & US Offshore advisors’ portfolio characteristics, please read the full report.
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1 The model portfolios under review were defined as Moderate Risk by the firms submitting them. Please refer to the report for full methodology.

2 The Dow Jones Moderate Portfolio Index is used as the benchmark for the Latin American & US Offshore moderate peer group average due to its similar risk profile and investment universe as the peer group.

3 Natixis Portfolio Clarity® data from January 1 to June 30, 2020. Methodology: “ESG Focus” investments as tagged by Morningstar based on fund manager self-reporting.

Natixis Portfolio Clarity® is a registered trademark of Natixis Advisors, L.P. in the United States.

Statistics in this report are based on simulated returns for the model portfolios from January 1 to June 30, 2020. These statistics are therefore representative, rather than actual historical figures.

The analyses and opinions referenced herein are as of July 24, 2020. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. Past performance information presented is not indicative of future performance.

The provision of this material and/or 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. Investing involves risk including the risk of loss. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. This document is provided for informational purposes only and should not be construed as investment advice.

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