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European retail investors regaining appetite for risk

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Intermediary distributors of investment funds in Europe say their retail clients have rediscovered an appetite for risk and are looking to boost returns with new investments in high risk equity products and fixed income credit products.

Conspicuously absent from this resurgent demand among retail clients, however, are hedge funds, which remain strongly in favour among institutional investors.

More than one-third of the 196 intermediary distributors interviewed by Greenwich Associates for its 2009 Intermediary Distribution Research Program say they expect to see significant asset growth in products such as emerging market equities, Asian equities and international equities in the coming year. Only two to three per cent of distributors predict significant declines in these products.

“Our research shows how quickly investors have regained their risk appetite” says Greenwich Associates consultant Tobias Miarka. “Distributors of investment funds are indicating that, after a period of extreme risk aversion, their retail clients are looking to take advantage of what they see as a market bottom.”

On the fixed-income side, 31 per cent of fund distributors expect to see significant asset growth in corporate bonds in the coming 12 months (with only six per cent predicting significant declines) and 24 per cent expect comparable growth in emerging market debt (with four per cent expecting significant declines in assets).

The same trends appear in distributors’ expectations for specialist funds. Thirty-one per cent of European distributors expect to see a significant increase in assets invested in commodities funds, more than a quarter (26 per cent) expect an increase in infrastructure funds and 22 to 23 per cent expect significant increases in assets invested in agriculture, sustainable/SRI, or ecological/green funds.

The share of distributors predicting significant asset declines for these products ranges from two to five per cent.

“It should be noted that even if these growth rates materialise, absolute levels of investments in these funds will remain modest relative to larger equity and fixed-income products,” says Greenwich Associates consultant Chris McNickle.

Meanwhile, a sizable share of the European intermediary distributors participating in the study expect to see significant asset declines in more conservative investment products. Almost a third (32 per cent) predicts significant asset declines in money market funds and 27 per cent expect significant reductions in government bonds.

While intermediary fund distributors in Europe are in agreement that retail investors will be shifting assets into higher-risk equity and fixed-income funds next year, distributors are divided in their predictions regarding alternative asset classes and balanced funds.

For example, while 23 per cent of distributors predict significant asset gains for “new style” balanced (i.e., multi-asset funds), 19 per cent predict significant declines, and the research results show a similar split in expectations for traditional balanced funds, which typically offer fairly stable proportions of stocks and bonds. Balanced funds are most popular among French distributors, about a quarter of which expect to see significant asset growth in both traditional and new style balanced funds.

Distributors are also divided in their outlook on alternative investments, including hedge funds, private equity and real estate, both Reits and direct investments.

“Despite these mixed signals, there has been a clear shift in investor attitude toward hedge funds,” says Greenwich Associates consultant Marc Haynes. “In 2008, 27 per cent of European third-party fund distributors predicted significant asset growth in hedge funds for the coming year; 12 months later, only 11 per cent predict such growth and 15 per cent expect to see significant asset declines. This differs from institutional investors who expect hedge fund investments to continue to grow.”

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