Financial advisers look to active management and alternatives to meet investor needs in volatile markets

From

Damon Hambly

Keeping clients’ irrational emotion in check is a challenge for eight out of ten Australian financial advisers, but keeping up with changing regulation is causing headaches for nine out of ten, according to the 2018 Natixis Investment Managers Global Survey of Financial Professionals, (the Survey).

Seventy-eight percent of global financial advisers say they think the prolonged bull market has made investors too complacent about risk, and just over 80% of Australian financial advisers say the same thing. Even more concerning is the fact that 57% of Australian financial advisers say they are worried their clients don’t understand the risks in the current environment, whereas only 43% of global advisers are similarly concerned.

Almost three-quarters of Australian investors don’t even recognise risk until it has been realised in their portfolio, according to their advisers, slightly below the almost eight in ten globally

Active management front and centre in ‘very challenging’ low-yield worl

Australian financial advisers agree that active management is the best antidote to choppy and uncertain markets, but they remain more confident than their global counterparts in their ability to find returns in a low-yield world. Only 5.3% of Australian advisers said that it was ‘very challenging’, whereas 25.3% of global advisers did.

Geopolitical events were judged likely to have a negative impact on performance by 75% of Australian investors, whereas globally, only 58% were said they would. At the same time, Australian advisers were more bullish when it came to return expectations, citing likely long-term performance as 6.4%, compared with 5.5% globally.

Financial advisers globally are focused on managing clients’ emotional responses to what are expected to be volatile markets. Active management as well as increased exposure to alternative investments to mitigate risks were cited as the primary tools at their disposal

Despite indicating in Natixis’ 2016 survey that they would moderate their active allocation to 63%, financial advisers around the world actually increased allocations to active strategies slightly over the past two years, from 68% in 2016 to 69% this year.

Australian investors, on the other hand, are slightly less exposed to active strategies, at 63.5% of their portfolio. Eighty-two percent of Australian advisers said they used passive investments because of their lower fees, but at the same time, 73% said that investors have a false sense of security when it comes to passive investment.

Damon Hambly, CEO for Natixis Investment Managers in Australia said: “In light of on-going revelations from the Royal Commission, and the increased focus on regulation in Australian financial services, it is not surprising that over 90% of financial advisers say keeping up with regulation is challenging, compared with only 83% of their global counterparts. At the same time, and despite the volatility that has returned to the markets after nine years of steady growth, Australian financial advisers are more bullish than their international counterparts about their ability to find returns.

Active management is in the spotlight as the means to achieve portfolio diversification, risk management and return generation, as are alternatives, and the top two choices for Australian adviser are infrastructure (55.4%) and real estate & REITs (35.3%).

Alternatives gaining favour globally

Almost a third (73%) of global advisers recommend alternatives, with different strategies advocated for different desired outcomes.

For diversification, respondents most commonly cited multi-alternative strategies (48%) and real estate (39%) and for fixed-income replacement, the top choice to provide a source of stable income was real estate (22%). Fifty-four percent of Australian advisers said that real estate was also an effective portfolio diversifier.

In conclusion, Mr Hambly said:“Financial advisers globally see rising rates, the threat of geopolitical events and asset bubbles as the biggest potential threats to the market, and Australian advisers are no different.

When advisers were asked about their top portfolio concerns, 68% of Australian advisers said asset price volatility spikes were their biggest worry, followed by interest rate hikes (59.3%) and low yields (41.3%).

It is interesting that globally as well as here at home advisers said that acting as the voice of reason, helping clients make rational decisions, and guiding them through the emotional side of investing was a major part of their role, with over 50% of Australian advisers saying this was very important. However, for Australian advisers, this had to be balanced with justifying fees ,which 69% said was important or very important to their success.

Advisers’ grasp of the risks inherent in volatile markets combined with their ability to look beyond short-term performance will be key to success. And here in Australia, where 90% of advisers already find dealing with regulation challenging, the on-going impact of the Royal Commission is likely to provide them with yet more to focus on.”

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