Are the retail investors embracing more diversity than ever before?
The analysis of retail investor trends done by IMA, UK for the year 2009 reveals some interesting facts.
Investors in UK are diversifying their portfolio more than ever before to include asset classes like bonds, properties and commodities rather than just equities alone(Fig-1).
Even within the equities asset, investors are diversifying to include equities from different geographical locations (Fig-2). It's seen that the proportion of equity investments for Asia has been increasing while that for UK and Europe has been reducing. Investors are now more willing to invest outside of UK and Europe. In a period of ten years the investments for Asia has increased by whopping three folds.
In line with the trend, the fund management companies are coming up with new breed of multi-asset, multi-location portfolio investments. For instance HSBC, which brands itself as world’s local bank valuing diversity, has come up with a series of World selection portfolio with investments spread across 15 asset classes in 11 different countries. The company is also offering choices in the investment styles. Based on the risk appetite, the investors can choose to invest from any one of Cautious, Balanced or Dynamic portfolios.
The fund management style for these investments is also different and is diversified as well. Instead of traditional single fund manager managing the portfolio, the multi-asset portfolio is managed by a team of investment professionals who are located in different countries. The World selection portfolio fund of HSBC is managed by a multi-manager team with 40 investment professionals based in 11 different countries.
Why multi-asset portfolios?
It follows from the rule that risks can be reduced by putting eggs across many baskets instead of putting all of them in just one basket. The multi-asset portfolios reduce the risk by spreading investments across different Asset baskets, Geographical baskets and Investment style baskets. The multi-asset portfolios are hence perceived as risk-averse investments which can also produce better returns than the cash-only or bond-only investments. The diversified portfolio very well suits the moods of the investors who have been hit by the recent financial crisis. Risk averse investors can see these investments as as a very safe bet.
It's not very likely that the investor's trend towards diversification would continue at the same pace. In an ailing market, the multi-asset portfolios have distinct advantages of being less risky and producing better returns. However in a bull market the diversified portfolios would not be able to produce better returns than the equities-only funds.
As the economy recovers and starts performing well, the investors' confidence will be increased and even the most risk-averse investors would be willing to take some risks. There would be a shift in the investors' sentiments towards investing in riskier investments like focused equity funds which are capable of producing better returns than diversified funds. The trend towards asset diversification may as well reverse if the stock market performs fairly well in the coming days.
