As volatility erodes investor confidence in the markets, advisors are increasingly in the best position to help their clients juggle retirement worries with a better understanding of how alternatives can help them build risk into their portfolios, says a Natixis survey released on Wednesday.
Half of investors, 51%, said they would consider alternative investments for their portfolios if their advisors recommended them, yet only 35% said they had discussed alternatives with their advisors, according to the online survey of 702 individual investors conducted in May and June for Natixis by CoreData Research.
Cash Is Still King to Many
At the same time that investors are hungry to learn more about alternatives, a surprisingly large number of the people surveyed, 57%, said they were not reducing the proporation of cash investments in their portfolios. That majority included less affluent households as well as younger investors with a longer time horizon.
“Individual investors are very concerned about having enough assets to live in retirement and meet their overall financial goals, but they’re only willing to take on minimal investment risk, so a lot of them are still in cash or on the sidelines,” said David Giunta, president and CEO of Natixis Global Asset Management—U.S. Distribution, in a phone interview on Monday.
At the same time, investors surveyed said they were willing to consider new asset allocation and diversification strategies to address their fears. Because of the complexity of alternatives, advisors are best positioned to educate their clients about them, Giunta (left) said.
“What we’ve been talking about with our advisor clients is durable portfolio construction, which involves targeting a certain amount of risk that would make clients more comfortable riding through the ups and downs of the marketplace,” he said. “The survey results were very consistent with what we’ve been hearing from advisors.”
Durable portfolio construction involves adding alternatives to the traditional mix of equity and fixed-income asset classes in order to provide upside potential but limit downside risk.
2008 Crisis Transformed Alternatives Image
In an “Alternatives Go Mainstream” column for the October issue of Investment Advisor magazine, Altegris Investments President and CEO Jon Sundt noted that the 2008 financial crisis accomplished in 12 months what he has been trying to do for most of his 26-year career: namely, educate investors about the benefits of allocating some of their portfolio to alternative investments.
“One of the great truisms of investing—‘If you lose 50%, you need to make 100% just to get back to even’—goes a long way toward explaining why 2008 was so effective in stirring up interest in alternative investments,” Sundt wrote. “The events of 2008 sharpened investors’ understanding of the importance of liquid, non-correlated returns. In the process, it transformed the image of alternatives from shadowy, swing-for-the-fences vehicles for the one-percent into powerful risk management tools for conservative investors.”
To be sure, the stark results of the Natixis survey highlight advisors’ challenge in the face of client worry:
- 7 in 10 investors surveyed said volatility has eroded their confidence in the markets and reduced their expectations for future investment returns.
- 8 in 10 are worried about a wide range of other economic and policy issues, including consumer confidence (89%), higher taxes on investment (88%) and earned income (85%), the European debt crisis (87%) and political uncertainty due to this year’s elections (85%).
- Just 28% say they are “highly confident” in their portfolios’ ability to manage volatility, and 53% agree that stability in volatile times is their top investing priority.
Natixis, a Paris- and Boston- based asset manager with $711 billion in assets under management as of June 30, conducted the U.S. study as part of a wider survey of 5,319 individual investors in 14 countries in Asia, Europe, South America and the Middle East, as well as Australia, South Africa and the U.K.
Globally, individual investors share Americans’ fear of losing money, with the majority, 56%, saying the fear of losing money due to market volatility is the main influence limiting their levels of investing and saving.
Read Natixis Acquires McDonnell to Broaden Fixed-Income Offerings at AdvisorOne.