Asset allocations reported by Europe’s fund distributors reveal that retail investors continue to demonstrate significantly more appetite for risk than their institutional counterparts.
The insurance companies, private banks, retail banks, independent financial advisors and fund of funds participating in Greenwich Associates’ 2010 European Intermediary Distribution Study reported average equity allocations of 47 per cent of total investment assets among their retail clients in the second quarter of 2010.
By comparison, the average equity allocation among European institutional investors in Q2 2010 was less than 20 per cent — a share that dropped as low as 7.3 per cent in Germany.
Within their equity portfolios, retail investors continue to show a preference for domestic or European equity products, which account for 59 per cent of their equity allocations.
Retail investors’ allocations to fixed income average 32 per cent of total assets, compared to approximately 63 per cent among European institutional investors. Retail fixed income allocations are focused on government bonds (accounting for 36 per cent of fixed income allocations) and corporate bonds (33 per cent), while money market funds account for 24 per cent. Alternative allocations averaged ten per cent of total assets, with hedge funds attracting most of these assets.
Greenwich says it is important to bear in mind that the market effect has had a significant impact on retail portfolios due to the lack of consistency in retail rebalancing practices. In light of the strong rebound in global equity markets in 2009, it is wise to refrain from drawing overly precise conclusions about retail investment strategies from year-to-year fluctuations in allocation.
However, European fund distributors interviewed in Q2 2010 predicted that their retail customers will continue to demonstrate increasing demand for high-risk equity products while spurning more conservative fixed-income products. Two-thirds of distributors predicted that retail demand for emerging market equities will increase in the coming 12 months (up from 35 per cent making that prediction in 2009), 56 per cent predicted an uptick in demand for Asian equities and 50 per cent predicted an increase in demand for North American equities (up from just 28 per cent).
Meanwhile, roughly half of distributors predicted falling demand among retail investors for government bonds, 39 per cent predicted sagging demand for money market funds and 22 per cent predicted reduced demand for corporate bonds.
Within equity portfolios, distributors indicated that retail investors will be hunting returns for the remainder of 2010.
“While 46 per cent predicted growth in demand for international/global equities over the next 12 months, predictions for domestic or European equities are much closer to being balanced between distributors predicting an increase or decrease in demand,” says Greenwich Associates consultant Marc Haynes.
Also tagged by distributors for increased retail demand for the remainder of 2010 are hedge funds, commodity funds, infrastructure funds, agricultural funds and other alternative funds.
“In the institutional marketplace, new regulations and risk management mandates are still driving investment decisions,” says Greenwich Associates consultant Chris McNickle. “Retail investors have been quicker to get past the volatility and take on risk.”
Retail allocations to balanced funds averaged 11 per cent of total assets across all channels and 23 per cent among insurance company distributors. However, approximately half of European fund distributors interviewed in Q2 2010 predicted significant growth in retail demand for multi-asset or “new style” balanced funds in the coming year.
“There is a large number of retail investors whose main take-away from the global crisis was the realisation that they are probably not qualified to make informed investment decisions,” says Haynes. “Distributors realise that new style balanced funds represent the perfect tool for retail investors who, for lack of interest or lack of expertise, do not want to be bothered with the day-to-day details of managing their retirement funds.”