More than two-thirds of global investors say they feel financially secure, emboldened enough by strong market gains to take additional investment risks. But the record highs and historic calm over the past year aren’t enough to soothe their fear of losses. Investors’ definition of risk seems to be focused on the loss of capital and not on investment opportunities, Natixis reported.
Although 84 per cent of UK investors said they prefer safety over performance compared with 77 per cent globally; they also expect relatively high annual returns (an average real annual return of 9.3 per cent above inflation). At a time when many market experts are forecasting low single-digit returns over the long-term, investors may need to rethink their strategy and turn to truly active managers that strive to outperform market benchmarks through superior security selection.
Closet Indexing, Passive Investing and Misplaced Expectations
Sixty-four percent of UK investors say they expect their mutual funds to have portfolios that differ substantially from their benchmarks, but 82 per cent cite the prevalence of closet indexers who charge active fees while really just tracking an index. In Natixis surveys last year (2016 Natixis Institutional Investors Survey released in March 2017), 57 per cent of institutional managers and 43 per cent of financial advisors cited the prevalence of closet indexers as a reason they used passive strategies.
Previous Natixis surveys have also found misperceptions about index investments. Seventy-five percent of global institutions said investors have a “false sense of security” about passive investing. Asked to compare the relative strengths of active and passive investments, 86 per cent of institutional investors say active is better suited to generating alpha, to generating risk-adjusted returns (64 per cent), for accessing emerging market opportunities (76 per cent), and for ESG investing (75 per cent), while passive investment management is regarded above all as a way to reduce management fees.
These differences in perception reflect the challenges that individual investors are facing. The good news is that investors are ultimately seeking out the assistance of financial advisors: 57 per cent of UK investors receive some form of financial advice and 65 per cent of them believe they need an expert to find the best investment opportunities.
Matt Shafer, executive vice president of international distribution at Natixis Global Asset Management, said: “Investors receive a constant barrage of information, but through our research, they tell us loud and clear they need advice, they’re confused about passive investing, and they want transparency and value for their money.
“Individual investors tend to attribute to index funds advantages that they don’t always have in terms of risk control. Truly active management, on the other hand, can help to optimise risk management and generate alpha over the long term,” Shafer said.
ESG demand grows, but may not be compatible with indexing
Almost 67 per cent of UK investors say they want their investments to reflect their personal values and adhere to high standards for environmental, social and governance (ESG) criteria. Seventy-two percent say it is important to invest in companies that are ethically run, while 63 per cent believe it is important to invest in companies that have a positive social or environmental impact.
But the desire for investments to better match personal convictions is difficult to rationalise for investors who rely solely on traditional passive index funds, as hundreds of companies are included in many popular indexes, regardless of their corporate behaviour or ethics. Only 44 per cent of UK investors say index funds contain companies that reflect their personal values.
Investors Looking for Alternatives, but Need Help
In last year’s Natixis survey of Global Individual Investors, UK investors already expressed a great need to integrate risk management into their investments. Seventy-six percent said they seek investment solutions that provide them with greater diversification, a better risk/reward pairing (78 per cent), protection from volatility (75 percent) and de-correlated performance (74 per cent).
This year, UK investors say that, in order to achieve their goals, they are prepared to shift away from traditional asset classes, with 67 per cent willing to invest in assets other than stocks and bonds; 44 per cent say that it is essential to invest in alternatives to reduce risk, yet only 36 per cent actually invest in alternatives.
This could be attributed to some confusion surrounding these products, indicating that the industry has not explained alternatives well enough. Even though two-thirds (67 per cent) of UK investors say their advisor has spoken to them about alternative investments, 55 percent think alternatives are too complicated for them to invest in (as compared to 60 per cent globally).
Whilst investors are aware of the need to widen investment horizons to both diversify risk and achieve greater returns, they require guidance to break free from short-termism and to help them to really understand all the investment strategies available to them and their role in a portfolio.
Shafer compounded this view this by saying: “The emphasis on risk is set against a backdrop of short-termism, where losses even at monthly intervals are enough to raise concern among some investors. In a world of instant gratification, investors have to learn to play the long game and our responsibility as an active asset manager is to accompany them on this path and provide them with the support and solutions they need.
“By working together with advisers we need to help investors to identify new ways to meet their goals within their own predetermined risk parameters. Actively investing in alternatives and ESG investments can help. For many investors, alternative investments are the missing link in achieving true portfolio diversification as they can help to generate returns that are uncorrelated to the stock market,” Shafer says.
What Investors Want From Advisors
Overall investors in the UK are far happier with the performance of their financial advisors than their global counterparts – with 64 per cent of UK investors saying there was nothing their managers could be doing better compared to 29 per cent globally. Of the suggestions for improvement amongst investors, the most popular was for them to listen more, followed by clearly explaining fees; offering investments reflecting their personal values; helping investors discuss financial planning with their family; helping with tax issues, estate planning, and charitable giving; and helping investors manage volatility.