Prolonged market volatility triggering innovation in investing

A new study released today by CREATE-Research and commissioned by Principal Global Investors finds continued market volatility has sidelined conventional investment wisdom.

Therefore, innovation is essential in exploring new ways of investing and managing assets through this extended period of economic uncertainty.
 
The report, titled Innovation in the Age of Volatility, is a US follow-up to Market Volatility: Friend or Foe?, the global report released June 25, 2012. It surveys 289 respondents including asset managers, pension plans, pension consultants and fund distributors from 29 countries with combined assets under management totaling more than $25 trillion. The survey was followed by 100 interviews.
 
“In the wake of the 2008 credit crisis, prolonged volatility has enjoined investors and their managers alike to explore new ways of investing and managing the asset business to cope with the new reality,” said Prof. Amin Rajan, CEO of CREATE-Research and the report’s author. “The conventional wisdom has been severely tested and a new approach is duly emerging. Now, success is about understanding the dynamics of price dislocations and devising appropriate strategies for different volatility regimes.”
 
Major findings of the report include:
Market volatility will persist and be driven by politics and policy decisions more so than economic fundamentals.

Smart investing is no longer about diversification across style boxes or indices. Opportunism trumps diversification.

Investment choices will blend opportunism with caution, and professional asset allocation skills will be in demand. Investors recognize they do not have the skills necessary to capitalize on opportunities created by volatility in the markets. These trends will fuel flows into target-date and target-risk funds.

Income in retirement products will focus on replacement of income earned in employment as fewer and fewer individuals receive defined-benefit-style pensions. Target-date funds especially will see significant innovation, as they will have a retirement income benchmark similar to liabilities in defined-benefit plans. And innovation in portfolio risk management is abundant and moving away from diversification across style boxes as a focus.

Innovation in the business models for asset managers will center around the need to become a trusted advisor to clients as products are increasingly outcome-oriented and customized.

“These are exciting—but challenging—times for asset managers as the landscape continues to change rapidly. As markets remain volatile, investors no longer care about benchmarks and instead want to focus on particular outcomes,” said Barb McKenzie, chief operating officer of Principal Global Investors.
 
“Asset management talent who can opportunistically allocate across sectors, regions and assets classes are in high demand, as are sales people who can partner with clients and investment professionals to design suitable portfolios to meet client needs. The industry hasn’t seen change of this magnitude in decades.”