European funds: Individual investors chasing risk

Monday, October 11, 2010 Stamford, CT USA — Asset allocations reported by Europe's leading 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 (IFA), and fund-of-funds participating in Greenwich Associates' 2010 European Intermediary Distribution Study reported average equity allocations of 47% 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% ¿ a share that dropped as low as 7.3% in Germany. Within their equity portfolios, retail investors continue to show a preference for domestic or European equity products, which account for 59% of their equity allocations.

Retail investors' allocations to fixed income average 32% of total assets, compared to approximately 63% among European institutional investors. Retail fixed-income allocations are focused on government bonds (accounting for 36% of fixed-income allocations) and corporate bonds (33%), while money market funds account for 24%. Alternative allocations averaged 10% of total assets, with hedge funds attracting most of these assets.

Distributors Predict Continued Strong Demand for High-Risk Equities
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% making that prediction in 2009), 56% predicted an uptick in demand for Asian equities and 50% predicted an increase in demand for North American equities (up from just 28%). Meanwhile, roughly half of distributors predicted falling demand among retail investors for government bonds, 39% predicted sagging demand for money market funds and 22% 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% 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," notes 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."

An Expected Boom in New Style Balanced Funds
Retail allocations to balanced funds averaged 11% of total assets across all channels and 23% 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 realization that they are probably not qualified to make informed investment decisions," says Marc Haynes. "Distributors realize 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."

Fees Vary for European Distributors
The results of Greenwich Associates' 2010 European Intermediary Distribution Study reveal wide divergences in fees paid by different types of fund distributors for similar investment products. Fees for core active equity funds range from a low of 92 basis points paid by insurance companies to a high of 130 basis points paid by private banks. Even for index funds, fee levels vary by as much as 23 basis points for fixed-income products and by 59 basis points for equity products. "To the extent that information asymmetry from channel to channel might contribute to these differentials, we hope our research partners will benefit from the industry-wide benchmarks presented here," says Greenwich Associates consultant Tobias Miarka.

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