Pressure to Perform

Global Research reveals investors are struggling to reconcile objectives with the pressures of the market

State Street Global Advisors (SSGA) released global research today that highlights significant contradictions in investor behavior.
The pressure to perform is resulting in distinct investor contradictions in three key areas: asset allocation, market expectations, and downside risk protection strategies. The research reveals:

• A continued push into equities with 63% of global investors having increased their holdings of developed market equities, and one in two investors (48%) having raised their allocation to emerging market equities in the last six months
• However, a majority of the same sample (60%) expect a negative equity market correction of between 10-20% in both developed and emerging equity markets in the near term
• Furthermore, almost half (44%) believe the market is overvalued and a correction is already overdue, citing the slowdown in emerging markets and rising geopolitical risk as principle reasons
• 65% of the survey respondents cite funding pressures as the primary reason for increased allocation to equities in the last six months. 53% of respondents also say they would like to reduce allocations to equities, but do not feel that there is a viable alternative given the low yields in other asset classes

“Pressure to secure returns is driving a significant contradiction in what investors believe and the actions that they are taking. Sixty five percent cite funding pressure as a reason for increased allocation to equities in the last six months, but allocations are being made in spite of a strong belief that a market correction is due or overdue,” said Daniel Farley, chief investment officer for SSGA’s Investment Solutions Group. “This contradiction, along with the growing view that volatility is here to stay, increases the need for adequate downside protection strategies. As investors increase their exposure to riskier assets, they should be thinking about how to remove unrewarded risk from the table.”
The survey revealed that a lack of in-depth understanding of downside protection strategies, combined with the negative experiences investors had with traditional approaches during previous market downturns, are leaving investors exposed to potential market volatility.

• The trauma of the global financial crisis is evident by the 84% of respondents that have deployed some form of downside protection strategy, often dynamic asset allocation
• However, despite the convergence of correlations during the global financial crisis, many still place a great deal of confidence in traditional diversification with 65% believing that it alone is enough to protect their portfolios
• In general, there was a high degree of possibly misplaced optimism with nine out of ten investors being confident in their portfolio’s ability to weather a major market correction

“Our survey shows that asset managers need to help investors better understand their options when it comes to downside protection, and work collaboratively with their clients to develop solutions that offer the right levels of security,” continued Farley.
The SSGA research, conducted in collaboration with an independent research agency in January 2015, canvassed 420 investors, including CEOs, CIOs, portfolio managers and directors across 13 countries, including Europe, Asia and the US.
For more information and to read the full research report, please click here.