Darren Pilbeam, head of UK retail sales, Natixis Global Asset Management
In our 2015 Global Survey of Individual Investors, 69% said they believe that a traditional stock and bond portfolio is no longer enough to pursue returns and preserve capital. 1
There is little doubt that the market turbulence of the past decade has changed how investors approach the allocation of capital. They have reservations about investing in alternative strategies and asset classes, and need help understanding how alternatives may fit in their portfolios.
We believe there is an education gap when it comes to alternative investment strategies.
50% of investors believe they do not have access to alternatives.1
Many investors believe alternative strategies are out of their reach, but the advent of UCITs-compliant alternative funds has greatly improved the accessibility of non-traditional asset allocation options. Today, many model portfolios allocate across equities, fixed income, money markets, allocation and alternatives in varying degrees, depending on the desired risk-return profile.
67% say they believe alternatives are riskier than traditional asset classes.1
Common misperceptions about alternatives and risk may be causing some investors to ignore the capacity for such strategies to provide growth opportunities. In our recent analysis of model portfolios in the UK2, we discovered an interesting phenomenon: alternatives are not widely used in aggressive portfolios.
We found conservative portfolios to be the most diversified and with the highest allocation to alternatives, at 24%. By contrast, aggressive portfolios appear heavily weighted to equities - at 85% - with only a 6% allocation to alternatives. This data runs counter to the belief of many individual investors that alternatives are riskier than traditional asset classes.
80% would invest in them if they understood them better.1
In the past, alternative strategies were considered by many to be the preserve of institutional investors. However, as the market unrest of the late 2000s caused correlations between traditional asset classes to increase, other professional investors started to view alternatives as an opportunity to provide attractive risk-adjusted returns.
On the other hand, many individual investors have been put off by the infrequent, though much publicised, scandals involving hedge funds that utilise alternative approaches. These do not represent the norm however, and this is something that investors need help understanding.
At Natixis Global Asset Management, we believe that alternative investments can be an essential component of a durable portfolio. Depending on how they are combined with other assets in a portfolio, they are capable of reducing risk or providing new sources of potential return.
Alternatives also have the capacity to increase diversification - many such strategies have historically demonstrated lower correlations with traditional stock and bond investments.
Alternatives have varying levels of risk, with some taking higher levels to pursue returns, while others seek to avoid performance extremes using risk management tools to pursue specific volatility targets.
The bottom line? Asset managers and advisers alike should do more to inform individual investors about the potential benefits of alternative investment strategies.
1. 7,000 individual investors in 17 countries, 750 of whom were in the UK, were polled in February 2015.
2. 126 model risk-rated portfolios from 37 firms across the UK were analysed by Natixis Global Asset Management from October to December 2014.
