Risk-Averse Investors Abandon the Chase for High Returns
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 minimize unrewarded risk exposure.
“We are seeing investors operate with more caution. Income and risk are more important than high returns. Goal-oriented investing is the major theme with investors today,” said Barb McKenzie, senior executive director and chief operating officer of Principal Global Investors.
The report notes that baby boomers are retreating from their previous risk-taking mode, and now favor a high probability of certainty over a low probability of high returns. “We see this in their selection of actively-managed, income-producing funds,” said McKenzie. “Fewer and fewer investors are interested in tactically allocating through purely passive products today. Beta is unpredictable and investors crave predictability and income.”
This shift, a by-product of a sustained low rate environment, marks a fundamental change in investor attitudes rather than a short-term trend. This fundamental change in attitudes can be seen in the behavior of all four different investor groups:
- DB investors that haven’t yet de-risked portfolios are turning toward liability-driven investing as they recognize that interest rates in developed economies are unlikely to increase dramatically for some time. Real assets and alternative credit structures are more prevalent due to their income and inflation protection characteristics.
- DC investors continue to favor 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. Life cycle funds also ensure that assets are re-weighted as market valuations move, guarding against the risk of buying high and selling low.
- Retail investors are recalibrating their yield expectations in the face of sustained low interest rates. Many are recognizing the benefits of dividend paying stocks alongside more traditional income producing bonds.
- 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.
“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,” said Professor Amin Rajan, CEO of CREATE-Research and author of the CREATE series. “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:
- 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%.
- 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%.
- 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.
CREATE-Research is an independent think tank specializing in strategic change and the newly emerging business models in global asset management. It undertakes major research assignments from prominent financial institutions and global companies. It also undertakes advisory work for senior decision makers in reputable organizations across Europe and the United States. Its work is disseminated through high profile reports and events that attract wide attention in the media. Further information can be found at www.create-research.co.uk.
About Principal Global Investors
Principal Global Investors is a diversified asset management organization and a member of the Principal Financial Group(R), with expertise in equities, fixed income and real estate investments, as well as specialized overlay and advisory services. Principal Global Investors manages $328.2 billion in assets1 primarily for retirement plans and other institutional clients2.
About the Principal Financial Group
The Principal Financial Group(R) (The Principal(R))3 is a global investment management leader offering retirement services, insurance solutions and asset management. The Principal offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, asset management and insurance through its diverse family of financial services companies. Founded in 1879 and a member of the FORTUNE 500(R), the Principal Financial Group has $517.9 billion in assets under management4 and serves some 19.4 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG. For more information, visit www.principal.com.
1 As of June 30, 2014.
2 Principal Global Investors is the asset management arm of the Principal Financial Group (R) (The Principal (R)) and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Principal Enterprise Capital, LLC; Liongate Capital Management LLP; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Edge Asset Management, Inc.; Morley Financial Services Inc.; Finisterre Capital, LLP; Origin Asset Management, LLP; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; Principal Global Investors (Japan) Ltd.; Principal Global Investors (Hong Kong) Ltd.; CIMB-Principal Islamic Asset Management Sdn. Bhd.; and the majority owned affiliates of Principal International, Inc. Assets under management includes assets managed by investment professionals of Principal Global Investors under dual employee arrangements with other subsidiaries of The Principal and assets managed in accordance with investment advice provided by Principal Global Investors through the delivery of a model.
3 “The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.
4 As of June 30, 2014.
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