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Alternative funds finding favour in conservative and moderate portfolios, says Natixis research

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New research from Natixis Global Asset Management reveals that alternative funds are primarily being held in conservative and moderate model portfolios, with 25 per cent and 16 per cent of average allocations, but surprisingly little in aggressive portfolios with just 6 per cent.

The firm’s latest UK Portfolio Barometer, which offers insights in to financial advisers’ and wealth managers’ model portfolios and the allocation decisions being made over the third quarter of 2015, reveals that the alternatives used are mainly direct property and multi-alternative funds, yet the multi-alternative funds offer the least diversification benefits.

Despite providing an excellent diversification opportunity advisers are reluctant to use alternatives – perhaps a missed opportunity. The research, which reviewed 177 model risk-rated portfolios across 59 firms in the months July-September 2015, also suggests that fund managers need to do more to help advisers and clients understand the benefits of allocating to alternatives in portfolios.
 
Matthew Riley, Head of Research at Natixis says: “From a diversification perspective, adding alternatives to a portfolio makes a huge amount of sense. However, advisers should investigate alternative funds carefully when making selections – often those easiest to understand offer the least benefits.
 
“Most are choosing multi-alternative funds as their main non-property alternative vehicles when in fact they are in fact the most correlated of all alternative fund types to the wider portfolio. Some do offer excellent diversification, however, so careful research and selection is key. We think that advisers should consider all alternatives at their disposal, as there are some compelling arguments from a diversification perspective.”
 
The Barometer also reveals that advisers have cut fixed income allocations in conservative and moderate risk portfolios amid continuing uncertainty over the timing of rate rises. The majority of reallocation from fixed income went to cautious allocation funds – perhaps reflecting the recognition that such funds can respond more quickly to changing market conditions. The remaining fixed income allocations see hints of increasing exposure to government bond funds.
 
James Beaumont, Head of the Portfolio Research & Consulting Group at Natixis, says: “It is no surprise that investors are feeling unsure what to do with fixed income at the moment. The continuing uncertainty emanating from various central banks around rate rises has led many advisers to move the money elsewhere.
 
“The majority of the money taken out of pure fixed income funds over the past quarter has now been invested in cautious allocation funds. Despite being unconstrained, these funds are still heavily weighted towards bonds, so the reallocation may simply be a case of advisers looking for help from a third party in managing duration risk ahead of any rate rises.”

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