Natixis Global Asset Management
Top Trends to Asset Allocation & Portfolio Construction
The second half of 2016 was a pretty easy period for investors. Volatility was mild on all fronts, and while the market was already on a comfortable upward trend, it responded with unexpected enthusiasm to the US Presidential Election.
The result was many US indices hitting record highs in December based on the expected business-friendly tax policies and infrastructure build out of the incoming administration.
“That’s all great news for advisors, but you need to tread carefully moving into 2017,” says Nick Elward, SVP and head of ETFs at Natixis Global Asset Management. Natixis Global Asset Management’s active transparent ETF provides lower-cost, lower-risk access to international stocks in pursuit of better outcomes in today’s unpredictable markets.
In the wake of the momentum in US equities over the past year, Elward says, “The key moving forward is to look carefully at risk-adjusted returns and position your portfolios for what is likely to be a year of higher volatility.”
To help mitigate that volatility risk, Elward suggests focusing on three important trends that should drive asset allocation and portfolio construction in 2017:
1. Active transparent ETFs
In the ETF market, the vast majority of U.S. domiciled products ($2.4T and ~2000 ETFs) are passively designed to track specific indices. Pure passive may not be the most desirable solution for many advisors—especially those who want to apply their experience with the potential outperformance and risk mitigation of active management. There are many new ETF issuers coming into the market, many with a foundation in active management from their previous days managing mutual funds. These Active Transparent solutions are appealing since they offer the benefits of active management combined with the benefits of the ETF structure, which includes tax mitigation and intraday trading. In what could become a volatile market in 2017, this trading flexibility enables active money managers to trade based on what’s happening in the markets at any point in the day to protect shareholders. This is not possible with pure passive products. The flexibility, potential to outperform, and the ability to potentially reduce risk appeals to a lot of advisors.
2. International Equities
The US equities market experienced a considerable run up after the US Presidential election, with the S&P 500 up roughly 4% and the Dow up roughly 6% in less than 6 weeks. This positive performance boosted the US equity allocation in most client portfolios. At the same time, investors were encouraged by US equity markets’ returns, creating very strong flows into this single asset class. As a result, many portfolios may be overweight in US equities at year-end. Reallocating a portion of those assets to more reasonably valued international equities could help create greater diversification and lower risk within portfolios.
3. Managed Volatility
It’s no surprise that we’re on the back end of the US business cycle as 2016 comes to a close, which may lead to lower returns in the US equity market. With lower returns and potential investor fear, volatility may increase considerably, creating a rocky road for investors who have been used to a smooth, comfortable sail for quite some time. As the name would suggest, low volatility equity ETFs generally carry lower risk than standard equity indices—sometimes as much as 20-30% less risk. For investors who are seeking equity exposure without the same level of risk as the index, incorporating a managed volatility ETF can help mitigate the short- and long-term impact of that volatility and, perhaps even more importantly, create a less rocky ride for investors.
After a year of such growth, your clients may not be at all interested in making changes to their portfolios, but be sure the conversation doesn’t end there. “When you sit down with your clients at year end, they’ll probably be thrilled with how their portfolios performed in 2016. It’s all too easy to look only at the year-over-year return, celebrate a great year, and stop there,” says Elward. “But with increased market volatility expected in 2017, one of the most important things you can do as a trusted advisor is set client expectations by actively discussing the difference between risk-adjusted returns and typical market returns.” This can help open the door to a real and valuable conversation about the importance of not just chasing returns, but finding the right balance of risk and return based on their needs and goals—and putting the most appropriate strategies in place to achieve that balance.
Natixis Global Asset Management serves thoughtful investment professionals with more insightful ways to understand and manage risk. Through our Durable Portfolio Construction® approach, we help construct more strategic portfolios that seek to produce better outcomes in today’s unpredictable markets. The Natixis Seeyond International Minimum Volatility ETF (MVIN) is specifically designed to provide exposure to the growth and diversification opportunities of international stocks, using a risk-reduction strategy that invests in low-volatility international stocks and is actively managed to pursue optimal risk-adjusted returns.
Click here to visit the 2017 Market Outlook Channel home page.
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