- Study reveals limited understanding about risks of passive investing
- Investors wish to move beyond traditional approach to investment portfolios
More than three-quarters of investors agree that index funds and exchange-traded funds (ETFs) are a cheaper way to invest, but 71% also believe they are less risky, according to new research published by Natixis Global Asset Management. The findings suggest that many investors have expectations that don’t reflect a full understanding of the risks of index funds versus the benefits.
“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have”
The asset management firm commissioned an independent survey of 750 individual investors in the U.S., from the affluent to the high net worth. It found that: 64% of investors think using index funds will help minimize investment losses; 69% believe index funds offer better diversification; And 61% believe index funds provide access to the best investment opportunities in the market.
However, investors expecting lower risk may have been surprised at the start of 2016 when the Standard & Poor’s 500 had its worst opening since 1928. The index bottomed out on February 11, having fallen 10.5% since trading began in January. The market did rebound, finishing the quarter 0.7% ahead. But tracking the index would have resulted in a hair-raising ride. And while the first quarter might be seen as an anomaly, volatility in markets is not.
“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”
Professional investors see the role for passive investing differently. Recent surveys of both institutional investors and financial advisors by the asset manager showed they preferred active strategies to take advantage of market movements, generate alpha and provide risk-adjusted returns, while viewing passive investing primarily as a way to save on management fees.
Investors willing to use new investment strategies
The survey finds evidence that investors are willing to move beyond 60/40 allocation investment approaches. Nearly two-thirds (65%) say a traditional approach (equities and bonds) to portfolio allocation is no longer the best way to pursue returns and manage investments.
Further, 70% of investors want new strategies that are less tied to broad markets and 75% favor strategies that can help them better diversify their portfolio, an approach that would seem to open the door to wider ownership of alternative investments.
But just over half of investors (52%) surveyed actually own alternative assets, a grouping that includes private equity, long-short funds, hedge funds and real estate.
Investors who don’t own alternatives say the assets are too risky (56%); 34% acknowledge they don’t understand how alternatives work, and 28% don’t think they need alternatives.
Investors say learning more about investing is the number one thing that would help them better achieve their investment objectives – adding to their financial knowledge was named by 42% of respondents.
“It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions,” said Hailer. “However, it is clear the financial industry still needs to provide more education to help investors make informed decisions.”
About the survey
Natixis surveyed 750 individual investors across the United States with a minimum of $200,000 in investable assets. The online survey was conducted in February 2016 and is part of a larger global study of 7,100 investors in 21 countries from Asia, Europe, the Americas and the Middle East. The findings are published in a new whitepaper, “Help Wanted: How investor behavior is rewriting the job description for financial professionals.”