Key investment strategies for 2017
17 March 2017
Category: News, Asia, Global, USA, Europe
By Madeline Ho*
Less than two months into 2017, there is no doubt that it will be a year of dramatic change. A global wave of populism has upended conventional thinking about politics and economics. Short-term interest rates in the US appear to be poised to break free from an eight-year stalemate of accommodative monetary policy. Global growth continues to stall. And investors are left trying to make sense of it all.
But what if they didn’t have to? What if investors could stop trying to time constantly changing markets and instead start the year with a new approach that prioritises long-term risk management over short-term performance? What if investors could focus more on maximising the benefits of the investment risk they can control and less on the market volatility they cannot?
Investors can start by managing emotional volatility. Volatility is a word that strikes fear into many investors who see it endangering their financial goals. But volatility is not a negative in and of itself. In fact, it is essential to creating the dispersion needed to uncover value and opportunity in the markets. The problem lies in investors’ own perceptions. According to our [Natixis Global Asset Management] global survey, financial advisers say the number one investor mistake is emotional decision making. But when we asked investors, less than a third think they could improve their investing if they stopped making emotional decisions.
Second, remember that old strategies may not work in a new world. Markets are changing and it may be time for more investors to look beyond the classic equity/bond portfolio. Even though the global financial crisis is eight years behind us, it continues to have a profound effect on investors. Three out of four tell us they want new strategies to help them better diversify their portfolios, but they need help getting there. With markets in flux, the tools for portfolio diversification should be changing too. Institutional investors may be a useful guide. Their focus for 2017? Active management and alternative investments.
Third, embrace a new conversation around alternatives. Markets in 2017 are poised to land a one-two punch of expensive stocks and low-rate bonds. So where do investors go? In examining the options for risk reduction or return enhancement, a little research will lead to alternative investments. More then seven out of ten investors say they want new strategies that are less tied to broader markets, help insulate their portfolios from volatility, and help them to better manage risk. But they need to know more before they invest. As an industry we should be working harder to lift the veil on alternatives by dropping the jargon, increasing transparency, and talking to investors not about short-term performance but about what different types of alternatives can do in the context of their portfolio.
Fourth, stop confusing low cost with low risk. A common misperception among investors is that index funds are less risky and will protect them from market losses. They aren’t and they don’t. Index funds may provide benchmark returns when markets are up but they leave investors exposed when markets are down. Advisers have voiced their concerns as well. In our global survey, 66% of advisors say investors are unaware of the risks of passive investing and 68% say they have a false sense of security. Volatility may make individual investors uneasy, but it can bring the dispersion that truly active managers relish. Index funds don’t offer the best opportunities; they offer every opportunity, good and bad.
Lastly, align investments with values. We know that more engaged investors are more long-term investors. When boardroom scandals test that commitment, portfolios that are better aligned with investors’ personal values are more likely to keep them in the market and on track to meet their long-term goals. Among individual investors globally, 78% say it is important to invest in companies that reflect their personal values and 75% say their investment should be doing social good. Environmental, social and governance (ESG) issues also have an impact on performance. But applying portfolio screens to weed out the bad actors is only one dimension of the ESG investment discipline. There are positive opportunities created by secular trends in the economy that can add long-term growth potential to client portfolios. Sustainable infrastructure, smart utility grids, and urbanisation are all themes playing out in markets across the world. Many investors want to be a part of them.
After a year of dramatic surprises and eventful change, it would appear that we can count on more of the same in 2017. But more than eight out of ten financial advisors say investors are too focused on the short-term. This needs to change. We can help by focussing more on investment portfolios and less on investment products. Investors and advisers can adopt more goals based investing measures that don’t depend solely on market benchmarks. Because in the end the performance that really matters is making sure retirement needs are met, legacies are left for the next generation, and investors achieve a sense of security that helps them live better financial lives.
*Madeline Ho is executive managing director, head of wholesale fund distribution, Asia Pacific, at Natixis Global Asset Management
Sources: Natixis Global Asset Management, Global Survey of Financial Advisors conducted by CoreData Research, July 2016. Survey included 2,550 financial advisors in 15 countries. Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February-March 2016. Survey included 7,100 investors from 22 countries. Natixis Global Asset Management, Global Survey of Institutional Investors conducted by CoreData Research, November 2016. Survey included 500 investors from 22 countries.