Global economic themes mean investors must personalise risk, says survey
19 June 2013
News, Asia, Global
By Toby Garrod
Investors are increasingly forced to take on the burden of risk, due to significant changes in the global economic environment, says an annual, independent study released on Tuesday (June 18) by CREATE-Research and commissioned by Principal Global Investors.
The report addresses the global balancing act that has taken place as a result of the ultra-low interest rate environment in the West, the emergence of the Asian middle class, and the gradual demise of defined-benefit pension plans.
“The overall shift means that investors now really need to personalise risk, taking ownership of their retirement, and this has major implications for the global asset management arena,” Andrea Muller, CEO of Principal Global Investors Asia, tells Asia Asset Management.
The study, now in its fifth consecutive year, also identifies an expectation that financial repression – caused when interest rates are kept low for a long duration – will drive asset allocation decisions.
Entitled ‘Investing In a Debt-Fuelled World’, the report discusses the challenges facing global financial markets that incorporate ultra-low interest rates, heavy uncertainty and investors who lack direction. The study seeks to document the force of this undercurrent and its impact on investing in this decade.
The report surveyed over 700 asset managers, pension plans, pension consultants, fund distributors, and fund administrators from 29 countries with combined assets under management of US$27.4 trillion and was followed by 100 interviews.
Key findings include:
Over two-thirds of investors wanted asset managers to prioritise a deeper understanding of the debt dynamic and its hidden risks and opportunities as deleveraging continues.
49% of those interviewed said they would prefer an integrated solution for asset allocation, manager selection and investment options.
Asset managers are expected to play the role of trusted advisor offering “alpha solutions” to their clients. Investors increasingly want asset managers to embrace solutions that will meet their needs and add value in three areas, namely investment capabilities, client engagement and alignment of interests.
Loss aversion in the West and search for yield in the East will influence investment decisions. Caution will likely prevail in the West due to aging populations resulting in a growing demand for income-focused products. In the East, the hunt for yield will intensify as investors remain more bullish than their Western counterparts about their own economies.
The current round of financial reforms has the potential to transform China’s equity market. However, in China, funds are sold and not bought. Initiatives are being implemented to raise the level of financial education to persuade citizens to invest for the long term.
Risk will return to the table in the high net worth segment. Uncorrelated absolute returns, capital protection, capital growth, inflation protection and regular capital will be emphasised. Investment strategies will blend caution with opportunism.
“Politics, more than economics, will drive the markets,” says Professor Amin Rajan, CEO of CREATE-Research and the report author. “Rather than try and beat the markets, investors will target specific solutions that will meet their unique needs. Alpha will be in the eye of the beholder. Asset managers will need to manage expectations of what can be delivered: 61% of survey respondents want asset managers to avoid unrealistic claims about returns and 55% agree that expectations could be managed more effectively.”
Ms. Muller believes that over the next decade, the fallout from repeated rounds of unprecedented quantitative easing will continue to change the investment landscape.
“Investors in Asia are particularly concerned with deleveraging in the West and how it will impact them,” she says. “As a result, many have shifted their investments from developed to emerging markets. Meanwhile, Asian investors are also closely monitoring a number of forces including a gradual end of the Fed’s quantitative easing program, the slowdown in China and Japan’s Abenomics policies to better understand the impact these will have on Asian economies.
“Taking these factors into account, the asset management industry will need to redefine how it works. New, forward-looking products need to be developed. Innovations will be more solutions-based, with alpha being a question of exceeding clients’ needs rather than the market.”
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