The Natixis Investment Managers Solutions Portfolio Barometer offers trends and observations derived from in-depth analysis of 32 moderate model portfolios submitted for analysis by Latin American & US Offshore wealth advisors in the second half of 2021.1

Market Recap
We finished 2021 with another strong performance from the equity markets, particularly in the US. But in January 2022 the momentum changed. The S&P 500® approached correction territory, falling 9.8% before clawing back some of those losses by month end. History has shown that equity markets tend to correct about three months before the onset of a Federal Reserve rate hiking cycle, so this was not a complete surprise. Historically, after the period of indigestion, stocks tend to regain their footing. That may well happen this time, too, as we are far from seeing signs of a recession.
From a style tilt, Growth and Cyclicals were down, while energy rallied, with West Texas Intermediate Crude oil gaining more than 17% during the month. As of early February, markets have remained choppy, and returns have been negative across equity and fixed income.

Equity Allocations Reach All-Time High as Advisors See No Alternative
Analysis of the model portfolios submitted for evaluation shows that the allocation to equities climbed steadily over the past 18 months, from 39.5% in the first half of 2020 to 48.8% at the end of 2021. This is the largest average equity allocation we have on record since 2015 and clearly shows that TINA (There Is No Alternative) has been driving allocation decisions.

  • Despite the headwinds of the Omicron variant, we still saw a healthy increase to equity allocations in 2H 2021, likely driven by negative real yields across fixed income as inflation took hold.
  • Extending trends that began in 2020, advisors have confirmed their interest in thematic strategies (megatrends, consumer thematic), sector equities (tech and healthcare) and ESG funds, which now account for 33% of the total equity allocation, another record high.
  • We’re seeing a rotation within the average equity bucket toward stocks with higher “pricing power”, specifically information technology, healthcare, and energy, as well as European stocks (Figure 2).

FIGURE 1: Average Allocations in Latin American & US Offshore Moderate Model Portfolios (2H 2021)
LAT22 0222 LatAm US Offshore Portfolio Barometer Repor Charts F Web 01
Source: Natixis Investment Managers Solutions data from July 1 to December 31, 2021. Asset classes are based on Morningstar categories. Real Assets represents the sum of commodities, property and miscellaneous.

Appetite for Fixed Income Limited; Multi-Asset and Liquid Alts Allocations Unchanged
Fixed income allocations contracted by 1.2 percentage points to 37.8% in 2H 2021, driven by negative expectations for US government bonds ahead of projected rate increases.

  • While allocations declined, the decrease would likely have been larger if advisors did not need fixed income to diversify away their growing equity risk.
  • Ahead of the expected rate hikes in the US, we’ve seen a geographical shift from North America Fixed Income to Global and European Fixed Income.
  • Advisors favored credit risk (High Yield allocation up +1.3 percentage points) over duration in their portfolios.
  • Multi-asset allocations remained at 7.8% but reshuffled under the surface from aggressive to moderate.
  • Liquid alternatives allocations were also stable at 2.7% -- but down sharply from 7.1% of the average Moderate portfolio just 18 months earlier.

FIGURE 2: Allocation Changes in Moderate Model Portfolios – 1H 2021 to 2H 2021 (%)
LAT22 0222 LatAm US Offshore Portfolio Barometer Repor Charts F Web 02
Source: Natixis Investment Managers Solutions data from July 1 to December 31, 2021.

Average Portfolio Outperformed the Benchmark, but Dispersion Was Wide
On average, the Latin American & US Offshore moderate portfolios have better risk-adjusted performance than the DJ Moderate TR USD index over three years, but the dispersion between portfolios was wide.

  • The difference in volatility between the most prudent and the most aggressive moderate portfolios spanned 10 percentage points in the second half of 2021.
  • The 12-month rolling volatility of the portfolios declined, but largely because of a base effect from year-end 2020. With a larger allocation to equities and risk assets such as high yield, the average moderate portfolio is intrinsically riskier than it was a year earlier.

Typical Portfolio In-Line With International Counterparts
The composition of the average moderate Latin American & US Offshore portfolio is comparable to what we observe in other regions of the world, specifically Europe and Asia. For example, the average equity allocation of 49% aligns with 51% for a typical European moderate portfolio.

  • ESG and thematic equity strategies have been the clear winners of 2021 worldwide, including Latin American & US Offshore portfolios.
  • Internationally, as advisors began looking for ways to protect their portfolios against inflation, we saw an increase in allocations to REITs and gold – trends we are just beginning to see in the Latin American & US Offshore models.

Global Financial Institutions Market Outlook
Our analysis of the 2022 market outlook from 24 global wealth managers provides some themes to help guide asset allocation decisions. Consensus among the group was risk on – earnings growth should continue to provide support, despite multipliers going down. We are in mid-cycle, but the road will be bumpier ahead. There is also a trend away from globalization toward more regional themes in China, the US, EU, and emerging markets. Other highlights include:

  • Inflation is likely to be more persistent rather than temporary
  • Spreads will likely remain low due to demand, central bank actions and earnings support, but will become more volatile as markets discount rising rates, central bank tapering and slower earnings
  • Strength in ESG investing – green is the new black
  • Keep some cash available for upcoming opportunities

Key risks for the upcoming year? Stickier inflation, disruption due to the Omicron variant, China’s policies related to specific sectors and Covid – and the Fed’s tapering and subsequent rate hikes.

Portfolio Analysis and Consulting
We’ve all seen how quickly the investment environment can change. If you would like to have your model portfolio reviewed to identify sources of return, diversification, and risk, please contact your Natixis Investment Managers sales representative.

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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.

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