Equity allocations rose, with advisors favoring North America and emerging markets
Advisors’ average allocation to equity increased to 39.5% during the second half of 2020, helped by market action and greater confidence in the recovering economy (Figure 1). As the equity markets regained their footing in the second half of the year, advisors adjusted equity positioning to benefit from the stay-at-home economy driven by Covid lockdowns across the globe.
Latin American & US Offshore advisors decreased their global equity allocation by 4.7 percentage points compared to the prior six-month period, but added exposure in North America, Europe, and emerging markets. North American equities were the largest allocation, rising to 14.5%, while EM equity showed the greatest increase from the prior period.
FIGURE 1: Average allocations in Latin American & US Offshore moderate model portfolios (2H 2020)
Source: Natixis Portfolio Clarity® data from July 1 to December 31, 2020. Asset classes are based on Morningstar categories. Real assets represents the sum of commodities, property and miscellaneous.
Latin American & US Offshore financial advisors reduced their allocations to global fixed income during the period, as rates remained negative in many parts of Europe. Exposure to high yield and emerging markets also declined as these sectors saw increased volatility in the second half of 2020.
Portfolios tilted toward North American fixed income, which is the largest single allocation in the average moderate model. There was also a slight uptick in allocation to inflation-linked securities as concerns about the impact of extensive monetary stimulus have heightened inflation fears.
Growing comfort with risk paid off in returns
As Figure 2 shows, advisor portfolios varied considerably in the level of risk they were willing to take – and the returns they were able to generate. As equity market dispersion increased in the second half of 2020, 3-year annualized returns in the moderate portfolios ranged from 5.1% to 17.5% while risk ranged between 4.0% and 14.8%.
On average, the 3-year annualized risk for the moderate portfolio is relatively high in historical terms, at 9.7%. This is up by 4.0 percentage points – a 70% increase from just 12 months earlier – although still well below the risk profile of the DJ Moderate TR USD benchmark.2 Yet despite the more cautious positioning, the average Latin American & US Offshore model outperformed the benchmark index over the three-year period.
FIGURE 2: 3-year risk/return of Latin American & US Offshore moderate model portfolios
Source: Natixis Portfolio Clarity® data from July 1 to December 31, 2020. Past performance is no guarantee of future results. Performance data from January 1, 2018 to December 31, 2020.
Stay-at-home economy drove asset allocation decisions
In their equity allocations, advisors generally favored large growth and blend, believing that larger names would be more stable amid the economic uncertainty created by the pandemic. When our consultants scaled the equity bucket to 100 and examined the underlying holdings, Information Technology, Health Care, Consumer Discretionary and Communication Services dominated sector allocations (Figure 3).3 All four sectors benefited from the stay-at-home economy.
FIGURE 3: Average allocation to equity sectors in moderate model portfolios favored the stay-at-home economy (2H 2020)
Source: Natixis Portfolio Clarity® and Morningstar; data from July 1 to December 31, 2020.
As we move into 2021, advisors are focusing on how the trends of the past 12 months may change with declining Covid cases and the vaccine rollout shifting the economy to “reopen” status. Sectors such as Health Care and Consumer Staples which have thrived over the past year may no longer lead the pack. As reopening becomes a reality, sectors that have been hard hit by the stay-at-home economy are likely to rebound.
Figure 4 plots the correlation of 11 equity sectors to the two ends of this spectrum, Stay-at-Home and Reopen. Notice that the current equity holdings in the moderate model portfolios are positioned to benefit more from the stay-at-home economy. But sectors like Energy, Industrials and Financials, which had a difficult year, are much more strongly correlated with reopening.
FIGURE 4: Correlation of equity sectors with Stay-at-Home vs. Reopen economies
Source: Natixis Portfolio Clarity® and Morningstar. Performance data from January 1 to December 31, 2020. Past performance is no guarantee of future results. Chart displays the correlation of excess returns of stated S&P 500 sectors against the S&P 500® TR USD with the Reopen and Stay-at-Home equity buckets. The closeness of the circle to either end denotes the strength of the relationship to that bucket of stocks. The size of the circle expresses its Beta or responsiveness to that bucket of stocks. See Appendix A in the report for a list of underlying indices used.
For a more detailed look at the risk and return characteristics of Latin American & US Offshore advisors’ model portfolios, please read the full report.
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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 to the peer group.
3 Equity sectors are based on GICS (Global Industry Classification Standard), a methodology jointly developed by MSCI and S&P, assigning every public company to the economic sector and industry group which best defines its business.
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, 2020. These statistics are therefore representative, rather than actual historical figures.
Reopen and Stay-at-Home groups consist of equal weighted composites reflecting companies that will benefit from the respective economic environment as grouped and defined by Natixis Investment Managers.
The analyses and opinions referenced herein are as of March 17, 2021. 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.
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