Investors seeking high returns, better diversification and lower volatility flock to active management


Louise Watson

Investors prefer active management and professional advice to achieve the diversification they need to combat volatile markets, but many remain confused about the fundamental differences between active and passive investing. They are conflicted about risk, and need a dose of reality when it comes to return expectations.

This is according to the latest Global Survey of Individual Investors (the Survey), which asks 9,100 global investors (400 in Australia) for their views on markets and investing. The Survey was released in Australia yesterday by Natixis Investment Managers.

In a surprising response to one of the most challenging periods in financial markets in a decade, investors’ return expectations actually went up – but failed to tally with their tolerance for risk. 86% of investors say that long-term results are more important than short-term gains, but 77% would take safety over performance if forced to choose. Clearly investors have short memories when it comes to risk, volatility and the importance of staying invested to achieve long-term returns, even in the face of volatile market conditions.

“Investors don’t seem to fully grasp that if they are looking for double-digit returns, they need to invest at the higher end of the risk spectrum,” said Damon Hambly, CEO, Australia for Natixis Investment Managers. “The fundamental disconnect between their expectations about return and their ability to tolerate risk highlights how important it is for investors to work with their advisors to better understand risk and volatility – if they are to be properly equipped to achieve their long-term return goals.”

Investors prefer active management

Despite the popularity of index investing, the Survey revealed that investors’ expectations align more closely with active and not passive strategies – and they do expect to pay higher fees for active management:

  • More than half (56%) are prepared to pay a premium to combat volatility with active management.
  • 70% of investors say it is important to outperform the relevant benchmark.
  • 70% say it is important to have the ability to take advantage of short-term market movements.
  • 68% expect their investment portfolio to differ from the index.
  • 77% believe some ‘active’ fund managers charge high fees, even though in reality they are tracking an index.

The survey also finds a renewed focus on alternative investments. 57% of investors say increased market volatility means they need more than simply stocks and bonds in their portfolio, and 38% say they already own alternative investments.

Past surveys have revealed that when it comes to investing in alternatives, investors particularly value support and advice from financial advisors.

…but remain confused about the differences between active and passive investing

The survey also revealed that investors remain confused about index funds. Two-thirds (68%) said they understand the difference between active and passive investing, yet only 68% recognised that index funds give market returns, up or down, and offer no protection when the market falls.

Nonetheless, two thirds of investors (67%) said that recent market volatility showed that index funds are more risky than they had previously realised.

Financial professionals say investors too complacent about risk

Eight out of ten financial professionals say the 10-year bull market has made investors complacent about risk, and that market volatility in the last quarter of 2019 did very little to change that. Two thirds of investors said they were prepared for market risk at the start of 2018, but with the benefit of hindsight, only 59% said they were actually prepared for the downturn at the end of the year.

“Over the past decade investors have enjoyed strong returns from a bull market supported by low rates and relatively low levels of volatility. As a result, their return expectations may be unrealistic – particularly if they do not fully understand risk, volatility and the difference between active and index investing. Index funds have no built-in risk management, and are exposed to the exactly the same level of risk as the market as a whole” said Louise Watson, Head of Distribution for Natixis Investment Managers in Australia. “In today’s more challenging conditions – a long-term view is more important than ever, and active management is the best way to identify opportunities, but also to manage downside risk.”

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