“The Investor Who Cried Risk” could be the title of today’s investor sentiment.
A new report from Allianz Global Investors examines investor attitudes toward risk and identifies investor’s current sensitivity to risk as “investor hypochondria.”
While retail investors suffering from investor hypochondria (or risk anxiety) may become immobile or inert because the fear of loss becomes so overwhelming that people freeze and do nothing, institutional investors tend to foresee an even broader array of threats and potential tail-risk events than the average person because of their greater levels of investment knowledge.
“Memories of the financial crisis may be fading but the long-term scars remain — this is reflected by institutional investor heightened sensitivity to a variety of potential looming risks on the horizon,” according to AllianzGI’s third annual Global RiskMonitor survey.
The survey states that “institutional investors see risks on the horizon regardless of the direction they face.”
AllianzGI also used the survey — which is based on interviews with 735 institutional investors across North America, Europe and Asia-Pacific during the first quarter of 2015 — to find out what are perceived threats to portfolios.
Equity market risk stands out as the greatest perceived threat globally by institutional investors, with 80% of respondents globally identifying it as a threat. Additionally, 76% of institutional investors deem interest rate risk the most significant threat to their portfolios over the next 12 months.
According to the findings of AllianzGI’s third annual Global RiskMonitor survey, other perceived threats to portfolios over the next year include foreign exchange (FX) risk (68%), credit risk (67%), commodity risk (64%), counterparty risk (61%), liquidity risk (60%), inflation risk (53%) and event risk (53%).
“[E]ven the lesser perceived threats are still deemed a threat by more than half of investors globally,” the report states. “More than half claim inflation risk and event risk are a threat.”
What’s also interesting is how institutional investors in different regions have varying perceptions as to the threats they face.
According to the report, those in the Americas are less concerned about inflation risk, foreign exchange risk and credit risk than their counterparts in Asia-Pacific and Europe and the Middle East. For investors in Asia, liquidity risk is perceived as a much bigger threat compared to institutional investors elsewhere.
Don’t hit the panic button just yet, though. The report identifies some solutions for these weary investors.
“Correct, the industry has little influence on macro events such as GDP, inflation, currency, interest rate and credit risk but it can support investors better in terms of understanding, classifying, measuring, diversifying and ultimately diluting the downside impact from these various events and potentially providing opportunities on the upside,” the report states.
First and foremost, institutional investors need risk management support.
As Arun Ratra, head of global solutions at AllianzGI, said in a statement, “risk management isn’t a choice. It isn’t something you do periodically.”
Despite the fact that the survey finds that institutional investors globally believe tail-risk events — such as oil price shocks, new asset bubbles or geopolitical tensions — are becoming increasingly frequent due to the interconnectedness of global financial markets, only 27% of investors use strategies to hedge against tail risk.
Institutional investors continue to rely on traditional risk management strategies.
Relying solely on traditional risk management “could leave investors exposed to macroeconomic and market shocks,” according to the report.
“Investors are left unprepared and vulnerable to a plethora of threats when they utilize traditional risk management strategies,” Ratra said in a statement. “In today’s volatile market environment, investors need tools and solutions that will protect them from the threats we can see coming and the unknown threats yet to peek their heads.”
Less conventional approaches that can protect against downside risk, such as direct hedging and risk budgeting, are used by just over a third of investors (35% each).
Meanwhile liability-driven investment (26%) and managed volatility strategies (24%) are employed by an even smaller percentage of investors.
Tail-risk management, which the report says can be “extremely challenging” for many investors globally, is viewed as too expensive by many investors (56% of respondents). The report also found that institutional investors believe that tail risks themselves (35%) and alternative products developed to manage them (36%) are not understood well enough.