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Pressure to Perform: State Street Global Advisors Research Finds Contradictions in Investor Behavior on Balancing Reward with Downside Risk

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State Street Global Advisors (SSGA) released global research today that highlights significant contradictions in investor behavior.

The pressure to perform is resulting in distinct investor contradictions in three key areas: asset allocation, market expectations, and downside risk protection strategies. The research1 reveals:

  • A continued push into equities with 63% of global investors having increased their holdings of developed market equities, and one in two investors (48%) having raised their allocation to emerging market equities in the last six months
  • However, a majority of the same sample (60%) expect a negative equity market correction of between 10-20% in both developed and emerging equity markets in the near term
  • Furthermore, almost half (44%) believe the market is overvalued and a correction is already overdue, citing the slowdown in emerging markets and rising geopolitical risk as principle reasons
  • 65% of the survey respondents cite funding pressures as the primary reason for increased allocation to equities in the last six months. 53% of respondents also say they would like to reduce allocations to equities, but do not feel that there is a viable alternative given the low yields in other asset classes

“Pressure to secure returns is driving a significant contradiction in what investors believe and the actions that they are taking. Sixty five percent cite funding pressure as a reason for increased allocation to equities in the last six months, but allocations are being made in spite of a strong belief that a market correction is due or overdue,” said Daniel Farley, chief investment officer for SSGA’s Investment Solutions Group. “This contradiction, along with the growing view that volatility is here to stay, increases the need for adequate downside protection strategies. As investors increase their exposure to riskier assets, they should be thinking about how to remove unrewarded risk from the table.”

The survey revealed that a lack of in-depth understanding of downside protection strategies, combined with the negative experiences investors had with traditional approaches during previous market downturns, are leaving investors exposed to potential market volatility.

  • The trauma of the global financial crisis is evident by the 84% of respondents that have deployed some form of downside protection strategy, often dynamic asset allocation
  • However, despite the convergence of correlations during the global financial crisis, many still place a great deal of confidence in traditional diversification with 65% believing that it alone is enough to protect their portfolios
  • In general, there was a high degree of possibly misplaced optimism with nine out of ten investors being confident in their portfolio’s ability to weather a major market correction

“Our survey shows that asset managers need to help investors better understand their options when it comes to downside protection, and work collaboratively with their clients to develop solutions that offer the right levels of security,” continued Farley.

The SSGA research, conducted in collaboration with an independent research agency in January 2015, canvassed 420 investors, including CEOs, CIOs, portfolio managers and directors across 13 countries, including Europe, Asia and the US.

For more information and to read the full research report, please click here.

About State Street Global Advisors

For nearly four decades, State Street Global Advisors has been committed to helping our clients, and the millions who rely on them, achieve financial security. We partner with many of the world’s largest, most sophisticated investors and financial intermediaries to help them reach their goals through a rigorous, research-driven investment process spanning both indexing and active disciplines. With trillions* in assets, our scale and global reach offer clients unrivaled access to markets, geographies and asset classes, and allow us to deliver thoughtful insights and innovative solutions.

State Street Global Advisors is the investment management arm of State Street Corporation.

*Assets under management were $2.4 trillion as of March 31, 2015. This AUM includes assets (approximately $28 billion as of March 31, 2015) for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the marketing agent.

Investing involves risk including the risk of loss of principal.

The views expressed in this material are the views of the individuals and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

CORP-1411

1 Conducted in collaboration with Longitude Research in January 2015

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