As we turn the page to 2019, it is important to think about asset allocation and the importance of building portfolios carefully, with thoughtful diversification and attention to forward-looking risk/return characteristics.

Methods of diversification
Investors can consider various ways to seek portfolio diversification. All-in-one funds, such as target date retirement funds, are one approach. Another is choosing the asset allocation mix and underlying products within a portfolio. The all-in-one fund approach can work well for those seeking a hands-off approach. For those wanting to be more involved, considering allocation and product mix details might be of interest.

Unpacking pure alpha
Sometimes the underlying investments are go-anywhere funds designed to seek the best opportunities across broad market universes (also known as “pure alpha” seekers). Here, investors get some asset allocation expertise built into their underlying funds – but there are potential drawbacks. Many flexible, “go anywhere” funds can make it difficult to predictably maintain the asset allocation mix at the top level, which may create a higher probability for overlap and unexpected risk concentration in the portfolio.

Portfolio building blocks
As a result of these potential drawbacks, many investors are now utilizing what’s known as a “building block” approach to asset management. Here, an investor – or financial professional working on their behalf – decides upon the asset allocation mix that is right for them from an equity, fixed income and alternatives perspective, and then scours the universe for the underlying investments that fit their strategic and tactical perspectives.

This approach is increasingly popular among many investors who use exchange-traded funds (ETFs) as their underlying investments, probably in part because they have over 2,000 US-domiciled ETFs to choose from. In brief, a building block asset allocation approach relies upon finding underlying ETFs that play a specific role within a portfolio, rather than frequently changing their positioning. This can improve the ability of the asset allocator to choose a portfolio’s underlying investments while better understanding how the portfolio might behave and react prospectively to market events.

Here are a few simple examples showing how some investors may use a building block asset allocation approach:

RISK-FOCUSED
US Equity
  • US Higher Risk Equity
  • US Lower Volatility Equity
Non-US Equity
  • Developed Markets ex US Higher Risk Equity
  • Developed Markets ex US Lower Volatility Equity
  • Emerging Markets Higher Risk Equity
  • Emerging Markets Lower Risk Equity
US Fixed Income
  • High Yield
  • Pure Investment Grade
  • Cash
Non-US Fixed Income
  • High Yield
  • Pure Investment Grade
Alternatives
  • Market Neutral
  • Global Macro
SECTOR AND DURATION-FOCUSED
US Equity
  • 11 Sectors (e.g., Technology, Finance, Healthcare, etc.)
Non-US Equity
  • 11 Sectors (e.g., Technology, Finance, Healthcare, etc.)
US Fixed Income
  • Investment Grade Long Duration
  • Investment Grade Intermediate Duration
  • Investment Grade Short Duration
  • Cash
Non-US Fixed Income
  • Investment Grade Long Duration
  • Investment Grade Intermediate Duration
  • Investment Grade Short Duration
Alternatives
  • Global Macro
  • Hedge Fund Replication
  • Duration Neutral
  • Flexible Duration
As with any approach to investing, it is important to carefully observe how the underlying allocations have performed historically and how they are positioned for the future. Asset allocators do not want to be surprised with strategy changes that could affect their overall portfolio risk/return characteristic. The Natixis Seeyond International Minimum Volatility ETF (MVIN) and the Natixis Loomis Sayles Short Duration Income ETF (LSST) are examples of two ETF strategies than can undertake a specified role in a building block asset allocation approach, helping to enhance portfolio diversification while addressing a specific tactical need within it.
RISKS: Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETFs, unlike typical exchange-traded funds, do not attempt to track or replicate an index. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing.

LLST specific risks: Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity. Below investment grade fixed income securities may be subject to greater risks (including the risk of default) than other fixed income securities. Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets. Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors.

MVIN specific risks: Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund's investments to decline.

Alpha: A measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.

MVIN: The Fund seeks long-term capital appreciation with less volatility than typically experienced by international equity markets.

LSST: The Fund seeks current income consistent with preservation of capital to pursue higher yield potential in short duration yield securities.

Before investing, consider the fund's investment objectives, risk, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Diversification does not ensure a profit or guarantee against loss.

ALPS Distributors, Inc. is the distributor for the Natixis Seeyond International Minimum Volatility ETF and the Natixis Loomis Sayles Short Duration Income ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.

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