Grant Forster
An independent survey by CREATE-Research, commissioned by Principal Global Investors, has revealed a fundamental shift in the mind-set of investors. The priority for investors is now focused on adopting goal-oriented approaches that mitigate unrewarded risk, rather than chasing the highest potential returns.
As markets continue to defy previously held investment logic, investors understandably remain cautious. This has led to an increased demand for strategies tailored to take account of investor concerns and minimise unrewarded risk exposure.
The shift, a by-product of a sustained low rate environment, marks a fundamental change in investor attitudes rather than a short-term trend.
Grant Forster, CEO of Principal Global Investors Australia, commented: “The financial crisis taught investors a number of lessons, but a key takeaway for all was greater caution. Investors have become more risk-aware and more agile than ever before. In 2013, the quest for yield was evident. In 2014, as caution has become more embedded in the investor psyche, investors have recalibrated their return expectations.
“While the debate around active versus passive has been resurgent, the real focus of the industry should be on adapting investment solutions to the new goal-oriented and risk-adverse mind-set of investors worldwide. Customisation is the name of the game.”
This fundamental change in attitudes can be seen in the behaviour of all four different investor groups.
- DB investors are turning to real assets and alternative credit because inflation protection and regular income have gained importance over high returns, and phased diversification is preferred over asset maximisation.
- DC investors continue to favour life-cycle funds thanks to their time-based, tailored approach. These funds support the goal of downside protection as they adjust to varying market conditions and the risk-appetite of investors at different times during the market and life cycle.
- Retail investors are displaying a general acceptance of lower yield with solutions alpha gaining importance over product alpha.
- High net worth investors have moved away from a blanket focus on alpha to an emphasis on risk mitigation. They have become particularly cautious in developed markets and especially demanding in emerging markets in order to manage unrewarded risk. A preference for active management remains.
Professor Amin Rajan, CEO of CREATE-Research and the author of the CREATE series, commented: “While the investment environment remains challenging, investors want two things: low-cost options to meet their perceived needs and assets that can deliver specific goals. The latter includes capital growth, regular income, inflation protection and capital conservation. This is the age of goal-oriented investing.”
Key global trends in asset allocation and investor preference for certain asset classes that have developed between 2012 and 2014, include:
DB investors
- The popularity of real estate has increased by 26%, from 40% in 2012 to 66% in 2014 while infrastructure has experienced an equally significant increase of 23%, from 43% to 66%.
- The popularity of alternative credit has increased by nearly 20%, from 38% to 56%.
DC investors
- Target-income funds recorded the largest increase in investor interest of 22%, from 34% in 2012 to 56% in 2014.
- Target-risk funds saw an increase of 14%, from 36% to 50%.
- Target-date funds, an increase of 12%, from 52% to 64%.
Retail investors
- Funds with an income focus have become the most popular choice over the last two years with an increase in investor interest of 14%, from 48% in 2012 to 62% in 2014.
High Net Worth investors
- Real estate has become notably popular, showing an increase of nearly 25% in investor interest, from 37% in 2012 to 61% in 2014.
- Investors continue to prefer active management with an increase of 25%, from 29% in 2012 to 54% in 2014.
Principal Global Investors is an investment solutions provider catering for all four investor groups. The full 2014 report, Not All Emerging Markets are Created Equal and the asset allocation paper,Asset Allocation: No Longer One Size Fits All, are both available at: create.principalglobal.com and www.create-research.co.uk.