The need to manage clients’ emotions in response to market events and the risks associated with them may be a challenge for financial advisers, but the way forward is clear: 81% say the current market is favourable to active management, according to a survey published today by Natixis Investment Managers.
More than eight in ten (82%) also believe that the length of the current bull market has made investors complacent about risk and 79% said clients don’t even recognize risk until it’s been realized in their investments. This trend appears to be based in large part on their passive holdings. Nearly three-quarters (74%) believe individual investors are unaware of the risks of passive investing, and 73% say individuals have a false sense of security about passive investing.
Cryptocurrencies now appear among advisers’ top concerns. After a considerable run up in 2017, nearly three-quarters (74%) see the potential for the cryptocurrency bubble to burst in 2018. They also believe asset bubbles exist within the bond market and the stock market (21%).
Natixis’ Centre for Investor Insight surveyed 2,775 financial advisers globally, of which 300 are UK based, about their market challenges and how they are positioning client portfolios as they face a variety of investment risks.
The need to manage emotional responses to investment decisions comes in to sharp focus as advisers anticipate increasingly choppy markets. To do so financial professionals are turning to active managers and deploying alternative investments.
Despite indicating in Natixis’ 2016 survey that they expected to moderate their active allocations to 63%, financial advisers around the globe have actually increased allocations to active strategies slightly over the past two years, to 69% from 68% in 2016. Respondents say that passive strategies, in contrast, are mainly used for their lower fees (73%).
“After nine years of steady growth, volatility has returned to the markets and investors have to get reacquainted with the feeling of uncertainty. Navigating through such a difficult environment requires avoiding emotional investment decisions but most importantly it requires active portfolio design approaches. Our research reveals that UK financial advisers do see the long-term value that can be generated by active management – in terms of portfolio diversification; risk management and return generation – and recommend implementing a broad range of alternatives”, comments Darren Pilbeam, Head of UK Wholesale and Retail at Natixis Investment Managers
Alternatives gaining momentum
Two thirds (66%) of UK financial advisers and almost three quarters (73%) globally recommend alternatives to enhance portfolio diversification and help mitigate risk in an increasingly volatile market environment, with a broad application of strategies across client portfolios. Multi-alternatives (48%), real estate (39%) and global tactical asset allocations strategies (38%) are most commonly cited as the best strategies for diversification, while market-neutral (28%) and long-short equity (16%) are best suited to manage volatility risk. Financial professionals looking to boost portfolio performance with alternatives say one strategy they are turning to is managed futures (21%) while real estate (22%) and option writing (15%) are the top choices for providing a stable income.