The 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 38 moderate risk-rated portfolios submitted for analysis by Latin American & US Offshore financial advisors and wealth firms in the second half of 2019.1

Modest Decrease in Equity Exposure
While average exposure declined to 40.7% from 43.0% at midyear 2019, equity retained its position as the largest broad asset class in the average Latin American & US Offshore moderate model portfolio. Many of the advisors we work with indicated they wanted to take a little risk off the table by rebalancing back to initial allocations as equity markets continued to rally through year-end.

Some went even further, increasing their allocations to fixed income and alternatives. In the Latin American & US Offshore moderate model portfolio peer group, North American and Global Equity allocations increased slightly, to 17.9% and 11.7% respectively, with a preference for growth stocks over value stocks.

ESG-oriented allocations (environmental, social, governance) accounted for about 30% of average equity exposure.2 ESG allocations were highest in Emerging Market Equity, at just over 50%, compared to 20% in North American Equity, where large-cap indexing is more popular.

FIGURE 1: Average allocations in Latin American & US Offshore moderate model portfolios (2H 2019)
Profile Barometer Chart 1
Source: Natixis Portfolio Clarity® data from July 1 to Dec. 31, 2019. Asset classes are based on Morningstar categories. Real assets represents the sum of commodities, property and miscellaneous.

Allocations to Active Managers Strong Across Stocks and Bonds
Equity generally saw an uptick in active management over the year. Financial advisors tended to favor active managers for emerging market (92%), global (93%) and European equities (100%) but felt more comfortable with passive strategies for North American allocations. Active exposure in North American equities declined to 74% from 76% at midyear, amid an ongoing string of record highs in the S&P 500®.

Financial advisors continue to prefer active management for fixed income by large margins. The category remains 94% actively managed, up from 88% at midyear. The preference for active managers was strongest in global and emerging market fixed income (100% and 95% respectively) and weakest in inflation-linked securities (74%) where the do-it-yourself decision may not have seemed as risky.

FIGURE 2: Use of active managers on the rise
LAT22 0220 LatAM USO Profile Barometer ChaartsWEB F 02
Source: Natixis Portfolio Clarity® data from July 1 to Dec. 31, 2019.

Fixed Income Allocations Pick Up
Strong performance and continuing accommodative monetary policy generally made fixed income slightly more attractive for moderate model portfolios. USD Diversified Bond was the top Morningstar category within the North America Fixed Income asset class, followed closely by Short-Term and Flexible Bond. Quality paper is still in demand.

We saw a similar trend in Global Bonds, with Flexible Bond and USD Hedged Flexible Bond as the top allocations. This seems to reinforce the anecdotal evidence of advisors having less personal conviction about where to allocate and delegating the decision to professional bond managers who can “go anywhere.”

Increased Risk/Return Profile
Advisors started the year on a cautious note following the market plunge in the fourth quarter of 2018. But risk appetite increased as the equity market rebounded. The average 3-year annualized risk for the moderate model portfolios increased from 5.1% at year-end 2018 to 5.7% by the end of 2019. On a one-year basis, risk began to come out of the market, with the average model seeing 12-month standard deviation numbers return to their pre-2018 year-end crisis levels (Figure 3). Every moderate model portfolio we reviewed made a full recovery from the fourth quarter 2018 downturn (Figure 4).

FIGURE 3: 12-Month Rolling Risk – 2H 2019 Latin American & US Offshore Moderate Peer Group
LAT22 0220 LatAM USO Profile Barometer ChaartsWEB Linecharts F 01
Source: Natixis Portfolio Clarity® data from July 1 to Dec. 31, 2019. Risk data from Jan. 1, 2017 to Dec. 31, 2019.

FIGURE 4: 12-Month Rolling Performance – 2H 2019 Latin American & US Offshore Moderate Peer Group
LAT22 0220 LatAM USO Profile Barometer ChaartsWEB Linecharts F 02
Source: Natixis Portfolio Clarity® data from July 1 to Dec. 31, 2019. Past performance is no guarantee of future results. Performance data from Jan. 1, 2017 to Dec. 31, 2019.

Latin American & US Offshore Portfolios Less Aggressive, but Still Competitive
Latin American & US Offshore financial advisors’ allocation decisions varied somewhat from those of their US and European counterparts. The portfolios had the second lowest equity allocation behind France, but due to their higher concentration in US equity, performance outpaced the European models. Higher allocations to US equity resulted in the strongest returns for the US portfolios.

FIGURE 5: Average moderate model allocations varied across geographic regions
LAT22 0220 LatAM USO Profile Barometer ChartsWEB 5Pies 2 F 01
Source: Natixis Portfolio Clarity® data from July 1 to Dec. 31, 2019. Real assets represents the sum of commodities, property and miscellaneous.

Cautiously Optimistic
Entering 2020, markets appeared resilient amid waning concerns about US/China trade relations and growing worries about coronavirus and potentially slower global growth ahead. Consensus was that US markets would likely be supported until the presidential election in November, but earnings would need to grow to sustain the bull market.

But as we saw in late February 2020, the environment can change quickly. Most portfolios were ill prepared for the market rout triggered by coronavirus fears and plummeting oil prices. Now that volatility has returned and the 11-year bull market has ended, financial advisors will have new opportunities to review their models to better understand sources of return, diversification, and risk.

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 themselves. Please refer to the report for full methodology.

2 Natixis Portfolio Clarity®. 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 July 1 to December 31, 2019. These statistics are therefore representative, rather than actual historical figures.

The analyses and opinions referenced herein are as of February 29, 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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