Between 2013 and 2015, the number of investors indicating they would use multi-asset class funds in the subsequent three years increased significantly across multiple investor types. This according to the findings detailed in a paper released today by CREATE-Research and commissioned by the Principal Financial Group.
The paper “Asset Allocation: Survival of the Fleetest,” analyzes data from the 2013-2015 CREATE-Research surveys, with a focus on asset allocation investment trends in the defined benefit, defined contribution, retail, and high net worth investor classes. While the search for yield is nothing new, it has intensified significantly in the two years analyzed. Investors are abandoning their asset class preference for a multi-asset approach that chases short-term opportunities in the face of valuation-distorting quantitative easing programs in the United States, Europe and Japan.
“Investors have had to wrestle with three conundrums since the financial crisis. First, global growth has been sub-par and uneven. Second, the global debt mountain has grown from $142 trillion in 2008 to an all-time high of $199 trillion in 2014. Third, the forthcoming rate-hike cycle has raised alarm bells across the globe, as markets have become addicted to cheap credit,” said Professor Amin Rajan, CEO of CREATE-Research and the author of the report. “Faced with these conundrums, investors are responding in two main ways: they have become asset-class agnostic and they are displaying a preference for unconstrained multi-asset class funds.”
Findings by investor type show:
- Defined benefit plans have increasingly favored infrastructure and real estate (for capital growth, inflation protection and regular income), traditional passive funds, global equities, low-variance equities and alternative credit (for high yield). During the same time, bonds and emerging market equities and bonds have fallen out of favor.
- Defined contribution plans have moved toward advice-embedded products and increasingly favor diversified income and diversified growth funds; target-income, target-date and target-risk retirement funds, and passive equity/bond funds; while actively managed equities and bonds showed a decline.
- Retail investors are transitioning to solutions-driven investing and have increasingly favored multi-asset class funds and passive equity/bond funds; while capital protection funds, actively managed equities/bonds and mutual funds have lost favor.
- High net worth investors are seeking uncorrelated absolute returns, and during the 2013-2015 period, increasingly favored private equity, real estate, hedge funds and capital protection funds, while interest in commodity funds and actively managed equities/bonds have fallen slightly out of favor.
“Asset allocation, with a focus on outcome-oriented investing, has taken on a new importance for investors as they seek to manage market volatility and ultra-low interest rates,” said Julia Lawler, senior executive director of Principal Portfolio Strategies, an asset allocation boutique of Principal Global Investors. “With an eye toward retirement, they seek a wide range of investment strategies using a blend of bond and conservative equity exposure to provide diversification designed to deliver an income stream and capital appreciation, while reducing volatility risk. More than ever, asset allocation is an important strategy across all investor groups.”