Investors need better education about index funds and alternative investments, according to a Natixis survey.
Natixis surveyed 750 individual investors across the United States with a minimum of $100,000 in investable assets. The group included 223 millennials (age 21 to 36); 251 Generation Xers (age 37 to 52); and 236 baby boomers (age 53 to 72), as well as 85 retirees.
The online survey was conducted in February 2017 and is part of a larger global study of 8,300 investors in 22 countries and regions from Asia, Europe, the Americas and the Middle East.
“Through our research, investors tell us loud and clear they want a better connection to their investments, they’re confused about passive investing, and they want transparency and value for their money,” David Giunta, CEO for the U.S. and Canada at Natixis Global Asset Management, said in a statement.
According to Natixis, some of the blame for this investor confusion can be traced to closet indexers. Natixis defines “closet indexers” as firms that claim to actively manage their funds and charge commensurate fees but deliver portfolios that mimic benchmarks.
According to the survey, 64% of investors say they expect their mutual funds to have portfolios that differ substantially from their benchmarks, but 71% believe many active managers charge high fees while really just tracking an index.
The survey also found continued misperceptions about index investments.
According to the survey, 66% think index funds are less risky and 61% say they help to minimize losses — even though, as Natixis points out, index funds track both the ups and the downs of the markets they follow and provide no built-in risk management.
In addition, only 72% of investors agreed that index funds give them returns comparable to the market — the definition of index funds — which suggests investors would benefit from additional education.
Another area where investors may need more education is alternative investments, according to the survey.
While 6 in 10 investors (63%) surveyed by Natixis say their investment knowledge was strong, the results show investors would benefit from additional education and guidance on alternative investments.
The survey found that 77% of investors say they are willing to invest in assets other than stocks and bonds, 62% think it is essential to invest in alternatives to reduce investment risk and 66% think alternative investments would give them higher returns than traditional stocks and bonds.
However, a majority of investors also say alternatives were too complicated (63%) and risky (71%).
In addition, 11% don’t know if their investment holdings include alternatives, the survey finds. Natixis says this is likely because of the broad range of investments bucketed in this investment class and the wide range of pricing options.
In its report on the survey, Natixis suggests that investors may be confusing the broad “alternatives” term with a smaller subset of complex, higher-risk strategies.
“In truth, this isn’t the case for all alternatives,” the report states. “While some are higher-octane strategies, many are designed to provide noncorrelated returns and minimize volatility and may ultimately strive to help reduce overall portfolio risk.”
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