Spotlight on investors’ views for 2016: Risk protection, Alpha and Multi-asset

Taking the market’s pulse and understanding customer needs are important for all companies, all the time. However, when big changes are afoot it becomes paramount.

2015 marked an important turning point for financial markets, after years of liquidity-driven bull markets. Investor expectations, fears and needs were just some of the areas Pioneer Investments investigated in a survey[1] conducted amongst clients and prospects in the second half of 2015.

The first focus of the survey was regarding investors’ primary goals. Although the demand for capital appreciation has remained important, in an era of low yield and phases of extreme spikes in volatility, other objectives have become more prominent in investors’ minds. While professional investors continued to search for alpha, capital preservation moved to the fore in 2015. This is a trend that we believe will continue to accelerate in 2016, primarily as a result of high market volatility in the aftermath of Brexit.

2015 spikes in volatility made downside protection paramount for investors[2]

pioneer_volatility

Source: Pioneer Investments 2015 Professional Investors’ Survey

Capital protection and alpha top priorities for professional investors

Downside protection was, predictably, the main objective for professional investors in 2015: 73% of those surveyed stated that effectively safeguarding a client’s underlying capital is extremely or very important, and just 2% defined the goal as irrelevant. This is not surprising considering the peak in volatility recorded between the summer and year-end 2015.

Alpha[3] generation through active strategies, i.e. the ability to provide consistent outperformance with respect to a benchmark market index, was the most sought after feature, following capital preservation. Thus, in spite of the proliferation of passive strategies, professional investors still see value in the ability of skillful managers to pursue outperformance – potentially as a result of declining expectations for high overall returns from market indices, or “beta.”

Wholesale and European institutional investors, in particular, prioritised the search for alpha through careful screening of the best performing active managers, whereas IFAs and private bankers were much more concerned with minimising volatility. This is probably related to the psychology of end investors, whom studies have shown tend to track portfolios quite closely and react emotionally to markets, fretting more about the short-term deviation in prices than long-term return prospects. Fluctuation in asset prices was less of a big deal for institutional investors, who tend to exhibit less behavioral biases and have a more long-term horizon.

Investors search for income through unconventional investments

The focus on the search for income is no longer limited to individual savers looking for a regular income stream, but has extended to professional buyers of asset management products and services. Rock-bottom interest rates have made investors hungry for consistent sources of yield, and wholesalers, IFAs and European institutional investors have all started to look outside the investment grade fixed income space.

Concerns over slowing global growth, combined with a weak commodity cycle and financial markets increasingly dependent on the activism of monetary authorities, have led investors to expect more volatility in the future,  and to seek new ways to reduce risk through unconventional, uncorrelated asset classes, instead of pure beta exposure.

There was a strong consensus across all the different distribution channels on the need to look for non-correlated asset classes. The search for effective diversification[4] has become particularly relevant in the aftermath of the global financial crisis. Since then, investors’ attention has moved to finding new ways to broaden the investment universe, through additional assets or investment strategies that could exhibit lower correlation[5].

This confirmed the crucial role held by active managers, with professional investors even more convinced of the value in relying on skillful portfolio managers and their ability to actively deploy a broad range of investment capabilities and strategies.

[1] Survey conducted between August and December 2015 interviewing 570 professional investors and intermediaries in Europe and Asia.

[2] Investors were asked about their main objectives for the portfolio they managed. Options were: extremely; very; fairly; not very; not at all. Data does not add up to 100% as those deeming the objectives just fairly relevant were not included in the chart. Question administered to wholesaler and institutional investors in Italy, France and Germany, to licensed intermediaries in Singapore, Hong Kong and Taiwan and to Italian IFAs and private bankers.

[3] Alpha — Measures risk-adjusted performance, representing excess return relative to the return of the benchmark. A positive alpha suggests risk-adjusted value added by the money manager versus the index. Beta — A statistical measurement of an investment’s sensitivity to market movements in relation to an index. A beta of 1 indicates that the security’s price will move with the market. Betas of less than 1 or greater than 1 indicate that the security will be less volatile or more volatile than the market, respectively.

[4] Diversification does not guarantee a profit or protect against loss.

[5] Correlation: The degree of association between two or more variables; in finance, it is the degree to which assets or asset class prices have moved in relation to one another. Correlation is expressed by a correlation coefficient that ranges from -1 (move in opposite directions) through 0 (absolutely independent) to 1 (always move together).

 

Gabriel Altbach is head of Global strategy and marketing at Pioneer Investments

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