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.

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Professor Amin Rajan

Outstanding returns from emerging markets may be a thing of the past, as investors become more discerning and economies develop at very different speeds.

This was one of the key findings from “Not all Emerging Markets are Created Equal”, the 2014 annual CREATE-Research report (the Report), commissioned by Principal Global Investors and its parent company, Principal Financial Group® and released today. The Report distills the views from 704 pension plans, sovereign wealth funds, pension consultants, and asset managers from around the world and reveals in-depth insights from structured interviews with 110 organisations.

Given recent volatility and sell-offs in emerging markets, this year’s Report addresses whether emerging and developed markets will continue to converge, and where global investors are likely to see value in the coming years. These questions and others are framed against the backdrop of the likely effect on global markets of four unknowns: the tapering of quantitative easing, slow deleveraging in the Eurozone, the “three-arrow” initiative in Japan and the credit explosion in China.

The Report reveals that despite recent poor performance, investors have not lost faith in emerging markets. However, they are becoming more discerning as as emerging markets are increasingly considered a tactical investment opportunity. In addition, emerging markets are no longer seen as a homogenous group and only those countries embracing a reform agenda are likely to continue to converge with the West, both structurally and financially.

Professor Amin Rajan, CEO of CREATE-Research and the author of the Report, said that by way of example, 35% of respondents said that China would deliver real growth over the next three years, whereas only 15% thought that Brazil would. In the same way, nearly half of respondents believe China will push forward with economic reform, but only 6% think that Russia will.

“Marked volatility and concern about the political will to aggressively pursue a reform agenda has certainly made investors more wary about their previous ‘buy-and-hold’ strategy,” Professor Rajan said. “And as a result, more investors view emerging markets as an tactical play.”

Professor Rajan went on to say that neither emerging nor developed markets would return to full health until some root causes of global weakness are addressed.

“Reducing debt, strengthening public finances, promoting growth and boosting competitiveness are challenges which Governments across the globe must all find ways of meeting,” he said.

Commenting on the findings of this year’s survey in the Australian context, Grant Forster, CEO of Principal Global Investors (Australia) noted that some of the previous strong returns from emerging markets were clearly more about quantitative easing than they were the inherent strength of the economies in question.

“Now that tapering has begun, the cracks are starting to appear in some economies,” he said.

“Countries which continue to backslide on reforms and are struggling under the weight of massive trade and budget deficits are unlikely to perform looking forward.”

Mr Forster said that the revelations from the Report raised important questions for Australian investors, as they come to terms with the fact that the economies within emerging market groups, often described by catchy acronyms, like BRICS, will no longer move in lockstep.

“These acronyms were more marketing driven than investment driven and highlight the inherent dangers of oversimplifying opportunities in complex and less developed economies and markets. These markets contain diverse economies and societies – they do not move in lockstep over the medium-term,” he explained.

Mr Forster went on to say that the Report also raised the interesting questions about the future for frontier markets. Investors have typically been cautious about these markets due to their higher levels of risk.

“It’s true that despite the positive outlook for population and growth in some frontier markets, the political and governance risks remain real, and for the time being these markets are still very illiquid,” Mr Forster explained. “However, it is likely that we will start to see the kinds of changes we saw in emerging markets in frontier markets in the future.”

In conclusion, Mr Forster said that while there may be marked differences in the pace, developing markets will, by their nature, continue to progress.

“A strategic allocation to emerging markets will definitely remain important to investors with a long-term perspective, and even at the moment, emerging market equities look attractive on a relative valuation. Given the diversity and very different stages of development of emerging economies and markets it is also prudent to consider opportunistically shorting from both a hedging or alpha perspective.

“Drawing on the skills of specialist managers to help identify specific opportunities will be the trick,” he said.

Key findings of the report include:

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Investors want their assets to worker harder post-GFC: CREATE

Findings derived from five years of the CREATE survey series (2009-2013), developed by CREATE-Research and commissioned by Principal Global Investors, reveal a surge in popularity for income focus funds amongst investors seeking a new form of diversification.

The five-year trends highlighted an emphasis on risk management and regular income rather than chasing high returns.

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This was a key finding of the annual Principal Global Investors CREATE Report, released today. The Report details the findings of a worldwide survey of 713 asset managers, pension plans, pension consultants, fund distributors and fund administrators from 29 countries. The total assets under management of respondents is US$27.4 trillion.

In the Australian context, this behaviour is exhibited in a number of ways, but most recently in a move toward real assets as ageing demographics and a move globally by governments and corporates to get out of the ‘pension business’ have pushed them to personalise risk by targeting specific investment outcomes to meet their needs.

“The destructive impact of the debt crisis on investors’ wealth has been well documented. What is less appreciated is the nature of powerful undercurrents created by the crisis when combined with ageing populations and persistent pension and retirement income deficits; nor the lasting changes triggered by them,” explained Professor Amin Rajan, CEO of CREATE-Research and the report author.

Grant Forster, CEO of Principal Global Investors (Australia) noted: “Many of the CREATE report findings about changing investor behaviours are linked to these undercurrents.”

Mr Forster went on to explain that personalisation of risk has a big downside, thus posing a complex series of challenges that the superannuation industry is beginning to understand and address.

“Personalising risk essentially entails transferring risk from those who couldn’t manage it to those who don’t understand it. The superannuation and investment industry is responding to this shift by gravitating towards global solutions with a sharpened focus on downside risk such as lifecycle, absolute returns and inflation-plus style investments,” he said.

Professor Rajan commented that, with respect to asset allocation terms, the biggest single change observed in the CREATE report since last year is a shift toward real assets.

“We are seeing moves in commercial property both here and abroad, as well as in debt and equity. At Principal Global Investors we have seen evidence of this demand reflected in an increased demand for our capabilities such as global property securities and direct US real estate, “said Mr Forster.
In addition to the real asset push, the Report found that over two-thirds of respondents wanted asset managers to prioritise a deeper understanding of the world’s prevailing debt dynamic and its risks and opportunities.

“As sovereign debt is no longer the ‘go-to’ safe asset there is increasing demand and interest in diversifying more broadly into various forms of credit which means hiring managers which can take active decisions around sovereign/credit, long duration/short duration and public/private debt,” said Mr Forster.

Aptly enough, the 2013 CREATE Report is titled Investing in a Debt Fuelled World, a topic that resonated so deeply with respondents that the survey response rate increased nearly 100% on previous years.

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