Managing market volatility continues to be advisors’ top concern, according to the Q3 2016 Eaton Vance Advisor Top-of-Mind Index (ATOMIX).
According to the quarterly survey of 1,000 U.S. financial advisors, volatility scored 129.7 on the ATOMIX, the highest ranking of any concern since inception and the top concern for financial advisors for the fourth consecutive quarter.
According to the survey, 56% of advisors said their concerns about volatility have increased in the last 12 months. Investor concerns about the markets also remained elevated with four out of five advisors (82%) reporting their clients are motivated by fear when making investment decisions, the highest percentage to date.
“What’s odd about it is, here, you’ve got advisors saying I’m worried about the future. But that’s certainly not what’s being priced in the market, at least currently,” John Moninger, managing director of retail sales at Eaton Vance, told ThinkAdvisor. Adding, “If you follow the markets, the VIX, the Volatility Index, right now it’s not at an all-time low but it’s the lowest it’s been in a while.”
When Eaton Vance released its ATOMIX results on Tuesday morning, the VIX was priced around 11.57. It ticked up slightly and returned to about 11.64 in midday trading Thursday.
(Read Exploring Volatility With the Inventor of the VIX on ThinkAdvisor.)
Moninger attributes some of this disconnect between the VIX and the ATOMIX to the fact that the VIX measures shorter-term expectations, looking 30 days out in the S&P 500.
“We’re still in the summer, not a lot of trading, volumes low – for all intents and purposes there’s a trading view of the world which right now is saying there’s not a lot in the next 30 days people are worried about,” Moninger said. “If you look out over by November, December, January – that window of time – or even three to four months out, things start to get a little murkier.”
The concerns that advisors in the ATOMIX survey cite as driving their fear of volatility include the surprise Brexit outcome, ongoing political uncertainty and the possibility of more rate hikes from the Federal Reserve.
According to the survey, 33% of advisors believe instability in the European Union will be the biggest driver of volatility for the second half of 2016, followed by 24% who believe the U.S. presidential election will be the biggest factor. The Fed, while decreased as a main driver of volatility, is still on advisors’ list of concerns. Almost half of (46%) advisors surveyed believe there will be a single rate hike later in 2016, while another 42% say there will not be any rate hikes until 2017 or later.
“To me, that’s what’s driving the disconnect,” Moninger told ThinkAdvisor. “That you’ve got these bigger macro issues that are bigger than the market’s pricing in today.”
So, what are advisors doing about volatility? The survey finds that advisors are opting for asset allocation, balanced and dividend equity strategies when trying to minimize volatility.
“When you’re not sure what’s going to happen moving forward we see this greater move to furthering diversification,” Moninger said. “You’ll see at the top of the list were asset allocation strategies, balanced strategies.”
According to the survey, the most preferred strategies for taking advantage of volatility are value equity, multi-sector income and flexible “go-anywhere” strategies.
“Not maybe unique ideas but I would say we saw higher preponderance of increasing diversification in the face of uncertainties,” Moninger said.
He added that Eaton Vance is also seeing this trend in its activity, which supports the survey’s findings.
“A lot of the things that we at Eaton Vance are seeing in terms of activity are diversifying strategies to a total portfolio,” he said. “Thinks like: high yield, floating rate, asset classes where we do see some dividend activity picking up … The big one for us we typically see when people are worried about volatility, they buy what we call ‘global macro,’ an absolute return-type strategy.”
— Related on ThinkAdvisor: