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Individual investors in the UK remain cautious of alternative investments, says survey

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Chastened by the financial crisis in 2008 and uncertain about the economy in 2012, individual investors in the United Kingdom are unwilling to sacrifice security for return; yet they are well attuned to risk, with 86 per cent saying they understood the risk in their portfolios at some level. Those are some of the results of a survey of 795 individual investors in the UK with at least GBP100,000 of investable assets; the survey was conducted by Natixis Global Asset Management.

The survey results highlight increasing uncertainty amongst individual investors as 2011 draws to a close. With Europe teetering on an economic slowdown, nearly one third are very concerned about the prospects of slow economic growth and a double-dip recession in the UK. That concern has obscured the basic risk-reward tradeoff of any investment, with 84 per cent agreeing with the statement, “the more risk I take, the more I could lose.”

And while more than half, or 53 per cent, of all respondents say the most important thing is for their investments to stay stable in volatile times, only four per cent are “very interested” in alternative investment products that were uncorrelated to the broader markets, while 24 per cent say they are “not at all interested” in such products.

“The financial crisis has left an indelible mark on investors, and many are now more actively monitoring, managing and seeking to mitigate risk in their portfolios,” said John Hailer, president and chief executive officer of Natixis Global Asset Management, US and Asia. “But the pendulum may have swung too far in terms of risk aversion, causing individual investors to shun investment options that are designed to grow portfolios while minimising risk in volatile environments.

“More education is clearly needed on alternatives. The lack of knowledge about risk-mitigating solutions amongst individual investors creates a tremendous opportunity for wealth managers to explain how alternative investments can complement traditional holdings, help to hedge portfolios against market volatility in 2012 and contribute to more robust, durable portfolios.”

Indeed, the survey shows that individual investors are reluctant to adjust their portfolio to provide new sources of diversification in these turbulent times. While more than 70 per cent of respondents said they understood that diversification lowered risks, slightly more than half of all invested assets were held in just three asset categories, with 21 per cent in relatively passive investments, 15 per cent in real estate properties and 15 per cent in money market products or savings accounts.
The survey results also throw into sharp relief the lack of knowledge about, and reticence to invest in, alternative investments that can minimise risk and provide less correlated returns.

Most individual investors (66 per cent) have little, if any, knowledge of alternatives and 43 per cent said they “have no idea of what alternatives are.”

Even though alternative investments are playing a growing role in sophisticated portfolios, less than one in five respondents (18 per cent) with more than GBP1 million of investable assets said they understood alternative investments “very well,” while more than half (53 per cent) of those with GBP1 million or more of investable assets conceded they had very little, if any, understanding of alternatives.

Insufficient information is the biggest barrier to considering alternative investments, with more than one-third (37 per cent) saying they don’t know enough about them. Risk is another big factor, with 28 per cent conceding they are “too risky.” Concerns about performance and high fees are also significant hurdles, with 28 and 19 per cent of individual investors, respectively, identifying them as barriers.

Notwithstanding these obstacles, a significant number of individual investors indicated they were willing to use alternatives, with 22 per cent saying alternatives can replace traditional investments. More than 29 per cent say they would be willing to allocate between one and ten per cent of their portfolios to alternative investments.

The Natixis Global Asset Management UK. Investor Insights Survey was conducted by CoreData Research and surveyed 795 adults to better understand their attitudes, behaviour and sentiment in today’s investment environment. The survey was conducted in June and November of 2011.

 

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