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While investors and financial advisers now seem matter-of-fact about the volatility seen during the financial crisis, it has had a long-term impact on how they view the risk level of different asset classes and how they think about and manage risk, the Economist Intelligence Unit said in a new survey.
The report, Assessing and explaining risk: Investors’ expectations after the financial crisis, commissioned by Goldman Sachs Asset Management, was based on a survey of 289 private and corporate investors and financial advisers across Europe, and examined how investors assess their own risk level, what constitutes low and high risk and the extent to which investors appreciate the connection between risk and return.
The majority of financial advisers say their clients have become more risk adverse and are now more likely to ask about the risk involved with different investment strategies and products. Corporate investors have taken the step of using a wider range of asset classes than they did ten years ago in order to diversify risk. However private investors still seem torn between accepting that investing is a long-term activity, even if they see losses, and wanting to avoid asset classes in which they have lost money in the past.
Key conclusions of the report include:
* A minority think the recent financial crisis was as bad as it can get: Despite the wild swings in financial markets at the peak of the crisis, just 14% of respondents said the volatility was ‘beyond anything I could have imagined’ while 28% said it was ‘within expected volatility’. Nearly half believe that market volatility was merely ‘unusual’ compared with their ‘worst-case scenario’ expectations.
* There is no such thing as a ‘safe haven’: Perceived risk in all asset classes has gone up and the `safe haven' status of asset classes such as cash and fixed income has been challenged. Over half of respondents say they view investing in stocks, bonds, property, private equity and hedge funds as slightly or much riskier than before, with commodities being the slight exception: just 35% of respondents believe investing in commodities is riskier than it used to be.
* The crisis affected clients more than the clients themselves believe: Nine out of ten of continental advisers believe the financial crisis and subsequent recession mean either some personal goals will not be achievable by their typical client or those personal goals will be somewhat more difficult to achieve, while only 64% of European private investors and 67% of corporate advisers say so. There is more correspondence between UK advisers and their private and corporate clients, with roughly six out of 10 of each saying that the crisis means that all or some goals will not be achieved or that they will be somewhat more difficult to achieve.
* British investors are more open to taking risk: Over a quarter (27%) of investors in the UK describe themselves as adventurous or somewhat adventurous, compared to just 9% of continental investors. Also, 64% of British investors agree or strongly agree that they are willing to choose high-risk investments in order to achieve high returns, compared to just 32% of European investors. Financial advisers concur that Europeans have become more risk adverse due to the crisis, with 88% of continental advisers agreeing or strongly agreeing, compared to 61% of British advisers.
This may also affect views on the world economy, with 61% of UK respondents expecting a mix of strong growth in emerging markets and low growth in developed markets, compared to just 37% of mainland Europeans. Almost half (46%) of Europeans expect low growth overall.
* British investors believe they were less affected: Less than a quarter of private investors in the UK (23%) say their investments suffered more or significantly more than expected during the financial crisis, compared to 43% of mainland European investors. No investors in the UK and just 5% in continental Europe say that all personal goals have been put at risk and 18% and 14% respectively say that some will not be achievable, but 46% of UK investors say the crisis had very little or no impact on their goals, compared to 36% of continental Europeans.
* Corporate investors have further diversified their asset mix: Over three quarters of corporate investors on both sides of the Channel made their asset allocation more cautious due to the financial crisis, and this trend has been more marked in the UK than mainland Europe. Even so, three-fifths of continental corporate investors, compared with two-fifths in the UK, now use a wider range of asset classes than they did 10 years ago to spread their risk. Over half of corporate investors have made long-term policy changes regarding their investments due to the financial crisis.
* Investment risk needs to be redefined: The financial crisis and subsequent market volatility has left investors in little doubt that investing and risk go hand in hand. But many financial advisers believe their clients still have unrealistic expectations, with a third overall and over half of continental advisers saying their clients continue to expect complete protection from risk. More than half (69%) the advisers surveyed believe that the designation of investment strategies and products as low or high risk needs to be reviewed in light of the financial crisis.
