Investor attitudes on markets and the business of investing
After a decade of extremes, a majority of investors across the globe report they feel financially secure and focused on achieving long-term financial goals, but a deeper look at sentiment reveals that the scars of the global financial crisis may still run deep and many don’t know who to trust.
Some see that passive investments like index funds can offer market exposure at a lower fee and assume greater risk management and diversification benefits than these products can actually deliver. Others may see closet trackers in the market who charge an active management fee for what is essentially a benchmark-hugging portfolio and make erroneous assumptions about all active managers. And many struggle to balance overly optimistic expectations for investment returns with a strong aversion to risk and come to an understanding of the wide array of investments available to them.
Asset managers have an opportunity to win the trust of investors by lifting the fog that surrounds their investment views. Helping investors achieve greater clarity means not only delivering truly active management for fee, but also helping to raise the knowledge level among investors, and it means listening to client needs and providing strategies that address specific client goals. Meeting these objectives will lay the foundation for building a stronger level of trust.
About The Survey
Natixis Global Asset Management surveyed 8,300 investors globally in February and March of 2017, with the goal of understanding their views on the markets, investing and measuring progress toward their financial goals. Investors from 26 countries are represented in this, the eighth annual survey of individual investors.
An online quantitative survey of 41 questions was developed and hosted by CoreData Research. Each of the 8,300 individual investors had minimum net investable assets of US $100,000 (or Purchase Price Parity [PPP] equivalent).
Doubts lurking under optimism
Since the initial signs in 2007 of an impending financial crisis that would put markets across the globe on the brink of collapse, investors have experienced extreme market volatility, witnessed central banks intervene with unprecedented measures to steady markets, and weathered a torrent of bad financial news. From the depths of the crisis, though, investors have experienced a tremendous turnaround.
The same accommodative monetary policies designed to free up credit for the lending needed to shore up economies in the short term have buoyed equity markets over the long term, fueling an eight-year bull market in which all boats have been lifted by the rising tide. Volatility has hovered near all-time lows over the long term despite brief spikes after what would normally be seen as serious market events such as Brexit and the Trump upset in the US presidential election. And key market indexes have achieved one record high after another, as exemplified by the Dow Jones Industrial Average, which reached 22,000 on August 2, 2017.
Given this reversal of fortune, it’s no wonder that among the 8,300 individual investors we surveyed across 26 countries, two-thirds (68%) report that they feel financially secure. As if to confirm investor confidence, we saw that the number of individuals reporting that they had clear financial goals (64%) and a financial plan (59%) had flipped from what we had seen over the preceding years. But based on other trends identified in our survey, this confidence may only run skin deep. In broader sentiment, we see what may be the lingering effects of the turmoil experienced by investors over the past ten years manifested in mixed emotions in how investors view risk, return, and their portfolios:
- Despite a record run of low numbers for the VIX,1 investors are still concerned about the threat of volatility, with most believing it undermines their ability to achieve savings and retirement goals.
- Despite an extended bull market globally, investors define risk as losing assets rather than losing out on investment opportunity.
- Despite high hopes for investment returns, most say they will take safety over investment performance.
Misconceptions and distortions
In the wake of this experience, it would appear that investors may leave themselves open to confirmation bias. With markets heading ever upward and little dispersion in returns, many have turned to passive investments and reaped rewards. But unfettered growth over the past decade may have masked the inherent risks of passive investments and obscured the potential value actively managed investments may add to a portfolio.
Overestimating the virtues of passive
Many investors may have been lulled into a false sense of security and demonstrate unfounded beliefs in the virtues of passive investments. As a result, we see that many extrapolate the passive value proposition of market returns at a lower fee into much greater benefits than these products can deliver.
Many investors understand the basic premise of passive investments: Two-thirds recognize that passive strategies are supposed to offer market returns, and slightly less than six in ten (58%) know that they are supposed to deliver these returns at a lower fee. But investors may be confused about the other side of the passive bargain. More than six in ten have the misconception that passive investments are less risky when the truth is that they aren’t. By their very nature, passive investments have no built in risk management.
Just over six in ten also believe these investments will protect them from a loss, even though they can’t. It appears that while investors may recognize that index investments deliver market returns, less fees, when indexes are up, they apparently fail to understand that they also deliver commensurate losses when markets are down. More than half (57%) also assume that passive offers access to the best opportunities in the market. These investors are missing one key point: Passive investments focus on the most liquid securities, which is an unlikely place to find new “opportunities.”
Investors may need to rethink strategy if they are to generate the returns of 9.9% above inflation they say they need to meet their goals. That is well above the returns many forecasters expect in coming years for market indexes tracked by the most popular passive investment funds, and 85% higher than the 5.3% financial professionals think is achievable.2
Professionals recognize the limitations of passive
The views on passive investments by individuals contrast starkly with those of professional investors. In comparing the strengths and weaknesses of active and passive management, investment professionals see clear advantages for active managers in terms of generating riskadjusted returns (66%). They also give the nod to active for taking advantage of short-term market movements (73%), as well as providing exposure to both non-correlated asset classes (73%) and emerging market opportunities (75%). Institutional investors see similar advantages, adding views that active management is the choice for environmental, social and governance (ESG) (75%).2
Professional investors also see that individuals may have a blind spot with passive investments. Three-fourths of institutional decision makers believe individuals are unaware of the risks of passive investing, while almost the same number (76%) believe individuals are also too shortterm focused.
WHO INVESTORS TRUST WHEN MAKING INVESTMENT DECISIONS
In today’s complex and uncertain world, trust may be the most valuable of all investor assets. Every day, individuals