Research reveals investor appetite for dynamic approach to managing volatility

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An annual, independent study released today by CREATE-Research, commissioned by Principal Global Investors, identifies investor appetite for a more dynamic approach to managing volatility and asset allocation, with 78% of survey respondents agreeing that markets are in an era of prolonged turbulence.

The report, entitled Market Volatility: Friend or Foe, provides a view of the challenges and opportunities presented by market volatility.  It surveyed 289 respondents including asset managers, pension plans, pension consultants and fund distributors from 29 countries with a combined AuM of over US$25 trillion. The survey was followed by 100 interviews.

Prof. Amin Rajan, CEO of CREATE-Research and the report’s author, comments:
 
“The last four years have been the most volatile in the history of equity markets. Price fluctuations of 4% or over in intra-day sessions have occurred six times more than they did on average in the previous 40 years. Extreme spikes in market volatility and closer asset class correlations have been common.  History shows that opportunity is inherent in periods of high risk and that high risk can reward active management.  Investors want to know whether asset managers can convert market volatility into an investment opportunity.”
 
The headline findings suggest that the asset management industry faces significant challenges in converting the opportunity of persistent volatility into investment performance.  71% of asset managers in the study signalled that prolonged market turbulence offers great opportunity for active managers to deliver good returns.  Conversely, only 13% believe that the industry can currently capitalise on this. 
 
The report identifies four key actions that respondents believe asset managers should take to overcome the challenge and prevent another ‘lost decade’ of returns: develop multi-asset class capabilities (53%); ensure interests are more aligned with clients to share pain and gain (53%); encourage free thinking and high conviction investing (50%), and promote greater client engagement to minimise risk (66%).
 
Grant Forster, CEO of Principal Global Investors Australia, comments:
 
“What this report clearly signals is that the asset management industry must take urgent and specific action if it is to capitalise on the inherent opportunity in volatility for clients. 
 
“It’s never been more important to partner with clients and provide customised solutions based on their changing needs and investment goals. In Australia in particular, where there is more soul searching about asset allocation than any other country, the Report has shown that Asset Managers have been – and will be – enhancing their capabilities across a wide range of asset classes, after a clear acceptance of two facts: that the domestic equity market is now susceptible to the contagion effect of globalisation; and that new opportunity sets are vital if the managers are to maintain their relevance in a fast changing pension landscape. At Principal Global Investors, we have relationship managers focussed on understanding and delivering against client needs and align our compensation with the results – we don’t succeed unless they do.”
 
The report reveals that investors, like asset managers, see opportunity in volatility, but that their requirements of asset managers have changed. Specifically, in an environment of prolonged uncertainty, they no longer see risk on / risk off trades as a binary choice and are becoming more goal-orientated, managing risk more than return.
 
In practical terms, this means investors, most notably Defined Contribution (DC) and retail, will seek a more dynamic asset allocation strategy; blending elements of both risk on and risk off.  The study reveals that managers believe 49% of Defined Benefit (DB) clients, 45% of DC clients and 47% of retail clients will de-risk as well as re-risk and that they will use a variety of avenues:
 
DB clients:

  • De-risking – Liability-driven investment strategy (LDI) (57%), diversification (56%), and fiduciary management (44%)
  • Re-risking – absolute return strategies (45%), unconstrained mandates (37%), active trading strategies like hedge funds (34%) and high conviction investing (32%)

DC clients:

  • De-risking –advice-embedded products (55%), diversification (52%) and capital preservation tools (38%)
  • Re-risking – dynamic glide path strategies (48%), absolute return strategies (27%) & high conviction investing (24%)

Retail clients:

  • De-risking – diversification (48%), advice-embedded products (46%) and capital preservation tools (36%)
  • Re-risking – active trading strategies (34%) and absolute return strategies (28%)

Grant Forster, CEO of Principal Global Investors Australia, continues:
 
“The effectiveness of diversification has been a topic of debate over the last few years. One of the most compelling insights from the study is that investors’ views about risk and return are evolving rapidly, calling for a more dynamic approach to managing volatility. Many Australian investors are now opting to manage their own funds in a Self-Managed Super Fund, a hugely popular option with an emphasis mostly on de-risking. Most supers in Australia are expected to move away from the traditional 70:30 equity-bond mix un favour of the old balanced approach but with two big differences: a very broad asset base and the facility to implement tactical changes.“A nimble business structure that allows the craft of asset management to thrive along with a focus on risk management and long-term investment are imperative to executing dynamic strategies in turbulent markets, whether it is for capitalising on volatility or capital preservation.”
 
The full report is available at: www.createresearch.co.uk and www.create.principalglobal.com

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