Advisers expect an uptick in volatility over the next six months, with geopolitical issues and the US political environment cited as the two biggest potential catalysts, according to the Q4 2017 Eaton Vance Advisor Top-of-Mind Index (ATOMIX) survey.
Although 69 per cent of the 1,000 advisers surveyed anticipate increased volatility in the next six months, anxiety levels appear to be declining. Twenty-one per cent described themselves as anxious, down from 46 per cent last quarter. When asked to describe broad investor sentiment, advisors reported mixed views among clients: Forty two per cent categorised clients as wary and 39 per cent said their clients are optimistic.
Despite a lower level of anxiety, advisors’ concerns about managing volatility, generating income, growing capital and taxes all rose on the ATOMIX this quarter, with volatility ranking first at 118.9, followed closely by income at 117.9.
“Advisors are reacting to the market’s slow grind higher, which has many sceptics wondering if a cliff lies ahead,” says John Moninger, managing director of retail sales. “Prolonged uncertainty around policy implementation, tax reform and future interest-rate hikes has created a sense of uneasiness even during a period of steady economic growth.”
Advisor age appeared to be a distinguishing factor. Forty seven per cent of millennial advisors said they felt confident about the market, but only 37 per cent of all other advisors felt the same. Millennial advisors were also more likely to believe their clients share their positive outlook: Forty per cent said their clients feel confident, while only 26 per cent from other generations reported confident clients.
Most advisors (59 per cent) have a bullish outlook for US equities, but are less confident when looking ahead 12 months: Only 36 per cent have a bullish stance for the year ahead. Advisors have a bearish-to-neutral outlook for the US bond markets for the quarter and for the next 12 months.
Non-US equities appeared to be more appealing for advisors. Seventy-five per cent of advisors predict we will see growth opportunities in emerging-market equities and 60 per cent favour international (non-US) equities for growth over the next 6-12 months.
“Many advisors believe US markets are fully valued,” says Moninger. “Looking outside the US is an attractive option as advisors work with clients to build diversified portfolios to meet their investment objectives.
“Politics have increasingly dominated client conversations, and many advisors are using the opportunity to discuss and better understand their clients’ motivations. Advisors are working with clients to prepare for tax reform in addition to adjusting allocations in anticipation of tighter monetary policy.”
Advisors are poised for higher interest rates and are certain 2018 will bring more than one hike. Two thirds (65 per cent) predict there will be two rate hikes and another 20 per cent expect three or more hikes next year. Their most popular strategies for generating income in a rising rate environment are multistrategy bond funds, floating-rate loan funds and high-yield bond funds.
Responsible Investing continues to gain traction with advisors and their clients. Eighty four per cent of advisors reported their clients have at least some interest in responsible investing options. However, 82 per cent also believe Responsible Investing has a long way to go before it becomes mainstream.
Education may be the solution. One third (33 per cent) of advisors said they are not adequately informed about Responsible Investing strategies and another 38 per cent said while somewhat informed, they are looking for further education. Only 21 per cent reported feeling very well informed.
Accessing environmental, social and governance (ESG) data is a challenge for advisors. Sixty nine per cent said corporate sustainability data is hard for investors to obtain. Thirty-seven per cent worry about achieving diversification with a responsibly invested fund.
“The lack of understanding about ESG principals prompted us to create Calvert’s Responsible Investing framework,” says Anthony Eames (pictured), director of responsible investing strategy, Calvert Research and Management. “Our investment strategies follow the Four Pillars of Responsible Investing – performance, research, engagement and impact – which empower investors to seek competitive returns and access the full capital structure with portfolios that reflect their values.”
Client priorities for Responsible Investing continue to be environmentally focused, with clean energy (53 per cent), sustainability (45 per cent) and climate change (41 per cent) emerging as the dominant reasons for selecting responsible investments.
“Clients are pursuing investment opportunities that align with their personal values,” says Eames. “The demand for Responsible Investing strategies continues to rise, and advisors who deliver those strategies will emerge as sought-after experts in the field.”