Financial Advisors Face More Volatile Environment, but Startled Clients May Be the Biggest Challenge, Natixis Survey Finds

Highlights

Extended bull market has led to complacency among investors, as 64% of advisors do not believe investors are prepared for a market downturn.
Current market environment favors active management, according to 83%, who continue to allocate the bulk of their assets to active strategies.
Financial professionals believe rising rates will have a negative effect on investment performance, increase market volatility and portfolio risk.
Nearly half of respondents say that clients reacted emotionally to recent volatility, a dangerous omen if markets experience a severe decline.

BOSTON, May 23, 2018 – After another banner year in the markets, volatility is now creating a tumultuous environment in which investors can make costly mistakes. Financial professionals are exposed to numerous risks to their investment performance in 2018, from growing geopolitical uncertainty to rising interest rates to inflation. However, managing the emotional reactions of clients could be their greatest challenge, according to research released by Natixis Investment Managers.

Natixis’ Center for Investor Insight surveyed 300 US financial professionals, including wirehouse advisors, registered investment advisors and independent brokers and dealers, about their market challenges and how they are positioning client portfolios as they face a variety of investment risks. According to the findings, few respondents believe that investors are ready for a return to more normal market ebbs and flows. Many believe investors may make what advisors foresee to be their biggest mistake: emotional investment decisions. Indeed, nearly half (46%) of professionals reported that their clients reacted emotionally to recent market movements. Moreover, eight in ten (82%) believe the prolonged bull market has made investors complacent about risk, and they fear this could translate into moves driven by emotion and panic once volatility strikes again.

Financial advisors also have their work cut out as they navigate through the market’s choppy waters. As survey respondents strive to grow assets under management by an average of 14% over the next 12 months, they see several potential roadblocks. Among the survey’s findings:

Threats to investment performance: Financial advisors see geopolitical events as the biggest potential threat to the markets. Sixty-eight percent say it would negatively affect overall investment performance, followed by interest rate increases (66%), rising volatility (57%), asset bubbles (54%), the low yield environment (47%), unwinding of quantitative easing (46%) and regulation (43%).
Impact of short-term rate increase: Advisors say an increase in central bank short-term interest rates is expected to adversely affect bond volatility (74%), the housing market (74%), the credit market (65%), overall market volatility (61%) and stock values (52%).
Portfolio risks: Top risk concerns include interest rate hikes (59%), asset-price volatility spikes (55%) and inflation (40%). Notably, financial advisors already are acting in response to rising rates, with half saying they are positioning client portfolios for rising rates by managing bond durations.
Concerns about bubbles: Advisors show the most concern for crypto-currencies, and after a considerable run up in 2017, nearly three-quarters (74%) see the potential for this bubble to burst in 2018. They also believe asset bubbles exist within the bond market (25%), real estate (24%), the tech sector (21%) and the stock market (18%).

“After nine years of steady growth, volatility has returned to the markets, and investors are having to get reacquainted with the feeling of uncertainty,” said David Giunta, CEO for the US and Canada at Natixis Investment Managers. “Our research shows investors often make decisions based on emotions, so it’s more important than ever for advisors to fortify close relationships with their clients to help them stick to their plans, and consider active portfolio design approaches that could be better suited to today’s markets.”

Active Management: Front and Center in 2018

According to the survey, financial professionals are turning to active managers and are deploying alternative investments to help manage new and numerous risks facing their clients on the horizon.

More than eight in ten (83%) say the risks in the market add up to an environment that favors active management, demonstrating a clear preference for actively managed investments. They continue to allocate the majority of assets to these strategies. Financial advisors who responded to Natixis’ 2016 survey¹ reported that 66% of the assets they manage were allocated to active strategies and 34% to passive. They projected that within three years they would moderate their active allocations to 57% and increase passive allocations to 43%. Yet, allocations to active have actually increased in the past two years, with respondents in this year’s survey indicating they have 67% of their assets allocated to active management.

Greater sentiment towards active management could generate a further shift to active strategies, which have become essential in recent years as financial professionals seek potential opportunities to generate alpha. Respondents say that passive strategies, in contrast, are mainly used for their lower fees (73%). Notably, nearly three-quarters (74%) believe individual investors are unaware of the risks of passive investing, and 73% say individuals have a false sense of security about passive investing.

Alternatives Regaining Momentum

Financial advisors also believe it is important to invest in alternatives to obtain benefits such as moderating volatility, producing alpha and generating stable income. Survey results show that 80% of respondents recommend alternative investments to clients today. The strategies they are putting to work include real estate/REITs (50%), real assets (29%), commodities (28%), infrastructure (27%) and hedge fund strategies (24%). Nearly half (48%) give an alternative strategy more than three years to prove itself.

Among those who recommend alternative investments, advisors see a number of liquid alternative strategies playing distinct roles in their portfolios:

Diversification: Respondents most commonly cite multi-alternative (47%) and global tactical asset allocation (46%) as best for diversification.
Fixed-income replacement: Top choices for providing a source of stable income include option writing (29%) and real estate (20%).
Volatility management: Advisors say market-neutral (32%) and long-short equity (25%) are best suited to manage volatility risk.
Enhance returns: Survey respondents cite option writing as their top choice for enhancing returns (25%). They also see global tactical asset allocation (15%) as useful in meeting this objective.
Inflation hedge: Advisors equally view real estate and managed futures (12%) as best for inflation hedging strategies.
Reduce risk: Top choices for risk mitigation include market-neutral (32%), long-short equity (20%) and long-short credit (19%).

Clients Need Practical Education in Today’s Choppy Markets

Investors need to know themselves and the markets in order to make sound decisions, especially in a period of growing volatility. Yet, just 38% of financial professionals believe investors understand the risks of the current market environment, and a slightly smaller number (36%) believe that investors are prepared for a market downturn. Ninety percent say risk awareness often comes too late, with investors not recognizing risk until it has been realized.

Based on advisors’ views on what markets have in store for the next 12 months, their skills will be in high demand as clients could get caught in the crossfire of a market shift. According to the survey, other than giving investment advice, financial professionals describe their role with clients as:

Guiding clients through “emotional” decisions (88%)
Providing ongoing financial education (71%)
Providing guidance on identifying and achieving life goals (70%)
Help in navigating life events (66%)
Help with mediating family financial affairs (41%)

“Financial professionals see a world in flux in the coming year, and their ability to serve their clients will require a unique pairing of skills,” said David Goodsell, Executive Director of Natixis Investment Managers’ Center for Investor Insight. “On one hand, they will need a strong analytical grasp of the forces driving the market in order to adjust investment strategy. On the other, they will need to understand the motivations of investors in order to avoid emotional decisions that could disrupt their long-term goals. Advisors will need to be in close communication with their clients, and their advice will need to come from both the right side and the left side of the brain.”

¹ Natixis Investment Managers 2016 Global Survey of 2,550 Financial Advisors conducted by CoreData Research in July 2016.

Methodology

Natixis Investment Managers 2018 Global Financial Professionals Survey conducted by CoreData Research March 2018. Survey included 2,775 financial professionals, including wirehouse advisors, registered investment advisors and independent brokers and dealers, with $113.7 billion in assets, in 16 countries and territories in Asia, Continental Europe, Latin America, the United Kingdom and the Americas. In the US, CoreData surveyed 300 financial professionals with a total of $24.7 billion in assets. These findings are also published in a new whitepaper titled “Meeting of the Mind.” For more information, visit im.natixis.com/us/research/financial-professional-survey-2018.

About the Natixis Center for Investor Insight

As part of the Natixis Investment Institute, the Center for Investor Insight is dedicated to the analysis and reporting of issues and trends important to investors, financial professionals, money managers, employers, governments and policymakers globally. The Center and its team of independent and affiliated researchers track major developments across the markets, economy, and investing spectrum to understand the attitudes and perceptions influencing the decisions of individual investors, financial professionals, and institutional decision makers. The Center’s annual research program began in 2010, and now offers insights into the perceptions and motivations of over 59,000 investors from 31 countries around the globe.

About Natixis Investment Managers

Natixis Investment Managers serves financial professionals with more insightful ways to construct portfolios. Powered by the expertise of 26 specialized investment managers globally, we apply Active Thinking^SM to deliver proactive solutions that help clients pursue better outcomes in all markets. Natixis ranks among the world’s largest asset management firms² with more than $1 trillion assets under management³ (€818.1 billion AUM).

Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Investment Managers’ affiliated investment management firms and distribution and service groups include Active Index Advisors^®;⁴ AEW; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;5 Dorval Asset Management;6 Gateway Investment Advisers; H2O Asset Management;⁶ Harris Associates; Investors Mutual Limited; Loomis, Sayles & Company; Managed Portfolio Advisors^®;⁴ McDonnell Investment Management; Mirova;⁷ Ossiam; Ostrum Asset Management; Seeyond;⁷ Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Private Equity Division, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity;⁸ and Eagle Asia Partners. Not all offerings available in all jurisdictions. For additional information, please visit the company’s website at im.natixis.com | LinkedIn: linkedin.com/company/natixis-investment-managers.

² Cerulli Quantitative Update: Global Markets 2017 ranked Natixis Investment Managers (formerly Natixis Global Asset Management) as the 15th largest asset manager in the world based on assets under management as of December 31, 2016.
³ Net asset value as of March 31, 2018 is $1.008 trillion. Assets under management (“AUM”), as reported, may include notional assets, assets serviced, gross assets and other types of non-regulatory AUM.
⁴ A division of Natixis Advisors, L.P.
⁵ A brand of DNCA Finance.
⁶ A subsidiary of Ostrum Asset Management.
⁷ Operated in the US through Ostrum Asset Management U.S., LLC.
⁸ Caspian Private Equity is a joint venture between Natixis Investment Managers, L.P. and Caspian Management Holdings, LLC.

Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. This release does not constitute investment advice and should not be construed as a recommendation for investment action. The views and opinions expressed may change based on market and other conditions.

Alpha: A measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.

Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.

Risks

Alternative investments involve unique risks that may be different from those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing. Commodity-related investments, including derivatives, may be affected by a number of factors including commodity prices, world events, import controls, and economic conditions and therefore may involve substantial risk of loss. Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity. Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Options may be used for hedging purposes, but also entail risks related to liquidity, market conditions and credit that may increase volatility. The value of the fund's positions in options may fluctuate in response to changes in the value of the underlying asset. Selling call options may limit returns in a rising market. Duration measures a bond's price sensitivity to interest rate changes. Bond funds and individual bonds with a longer duration (a measure of the expected life of a security) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations.

Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs. Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.

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