Showing a fundamental shift in the mind-set of investors, their priority is now focused on adopting goal-oriented approaches that mitigate unrewarded risk, rather than chasing the highest potential returns, according to an independent survey by CREATE-Research, commissioned by Principal Global Investors.

 

As markets continue to defy previously held investment logic, investors understandably remain cautious. This has led to an increased demand for strategies tailored to take account of investor concerns and minimize unrewarded risk exposure.

 

The shift, a by-product of a sustained low rate environment, marks a fundamental change in investor attitudes rather than a short-term trend.

 

Andrea Muller, CEO of Principal Global Investors Asia, commented: “The financial crisis taught investors a number of lessons, but a key takeaway for all was greater caution. Investors have become more risk-aware and more agile than ever before. In 2013, the quest for yield was evident. In 2014, as caution has become more embedded in the investor psyche, investors have recalibrated their return expectations.

 

“While the debate around active versus passive has been resurgent, the real focus of the industry should be on adapting investment solutions to the new goal-oriented and risk-adverse mind-set of investors worldwide. Customization is the name of the game.”

 

This fundamental change in attitudes can be seen in the behaviour of all four different investor groups:

•         Retail investors are displaying a general acceptance of lower yield with solutions alpha gaining importance over product alpha and a move towards greater customization.

•         High net worth investors have moved away from a blanket focus on alpha to an emphasis on risk mitigation. They have become particularly cautious in developed markets and especially demanding in emerging markets in order to manage unrewarded risk. A preference for active management remains.

•         DB (defined benefit) investors are turning to real assets and alternative credit because inflation protection and regular income have gained importance over high returns, and phased diversification is preferred over asset maximization.

•         DC (defined contribution) investors continue to favour life-cycle funds thanks to their time-based, tailored approach. These funds support the goal of downside protection as they adjust to varying market conditions and the risk-appetite of investors at different times during the market and life cycle.

 

Professor Amin Rajan, CEO of CREATE-Research and the author of the CREATE series, added: “While the investment environment remains challenging, investors want two things: low-cost options to meet their perceived needs and assets that can deliver specific goals. The latter includes capital growth, regular income, inflation protection and capital conservation. This is the age of goal-oriented investing.”

 

Key global trends in asset allocation and investor preference for certain asset classes that have developed between 2012 and 2014, include:

Retail investors

•         Funds with an income focus have become the most popular choice over the last two years with an increase in investor interest of 14%, from 48% in 2012 to 62% in 2014.

High net worth investors

•         Real estate has become notably popular, showing an increase of nearly 25% in investor interest, from 37% in 2012 to 61% in 2014.

•         Investors continue to prefer active management with an increase of 25%, from 29% in 2012 to 54% in 2014.

DB investors

•         The popularity of real estate has increased by 26%, from 40% in 2012 to 66% in 2014 while infrastructure has experienced an equally significant increase of 23%, from 43% to 66%.

•         The popularity of alternative credit has increased by nearly 20%, from 38% to 56%.

DC investors

•         Target-income funds recorded the largest increase in investor interest of 22%, from 34% in 2012 to 56% in 2014.

•         Target-risk funds saw an increase of 14%, from 36% to 50%.