Top-performing portfolios benefited from higher bond allocations and exposure to select alternatives in the second quarter of 2016, according to data from Natixis.

Portfolio diversification levels rose in the second quarter of 2016, due largely to increasing usage of alternative strategies, which reached a three-year high, according to data from Natixis.

“Prior to the third quarter of 2015, investors generally were taking on more risk to achieve higher returns, and many got hurt when the recent sharp, episodic bouts of volatility hit the markets,” said John Hailer, chief executive of Natixis Global Asset Management for the Americas and Asia.

“The trends we’re seeing suggest the return of more traditional market dynamics, where investors are rewarded with enhanced returns for taking diversified risks,” Hailer said.

The greatest diversification drivers in Q2 were managed futures, gold, market-neutral strategies and long duration government bonds. Meanwhile, US advisors continued to favor domestic over international stocks, and equity concentration remained high, contributing to 92 per cent of overall portfolio risk, according to Natixis’ latest quarterly Portfolio Clarity Trends Report.

“However, investment professionals began broadening portfolio diversification when volatility picked up in earnest last August,” the report said. “They are now allocating more of their client assets to alternatives and to a greater variety of alternative strategies within the allocation, which helped lessen the severity of equity market drawdowns for the most diversified portfolios over the past year.”

In Q2 2016, the average moderate-risk portfolio in the study had 52.7 per cent of assets in stocks, down from 54.8 per cent for the same period a year earlier. Average allocation to US equities, meanwhile, was 35 per cent compared to 14 per cent for international. Bond allocations, having leveled out last year on the prospect of higher interest rates, ticked up 3 per cent in Q2 to 30 per cent from 27 per cent of holdings. Municipal bonds (all types) accounted for 8 per cent of fixed income allocations.

Allocations to alternatives rose to 8 per cent on average from 6 per cent as of the end of Q2 2015. Of the 66 per cent of portfolios using alternative funds, the average weight was 11 per cent. Another 5 per cent of the portfolios were in allocation funds, with the remaining allocations split among cash, REITs and commodities.

“Diversification matters,” said Marina Gross, executive vice president of Natixis’ portfolio research and consulting group. “In an environment distinctly lacking in precedent and visibility, diversification may be one of the best defenses an asset allocator has.”

Natixis emphasized that, for greatest impact, diversification should not be confined to asset classes but also across geographic regions, currencies and investment strategies.

The firm's latest Portfolio Clarity Trends Report tracks the asset allocations and performance of 347 portfolios submitted by US financial advisors to the Natixis Portfolio Clarity consultant team for review from January-June 2016.