Cautious approach breeds fear among investors

Investors are more focused on risk and risk reduction than returns in the current economic climate, but are fearful of missing out when the smoke clears, according to Principal Global Investors chief executive Grant Forster.

 Principal Global Investors CREATE report for 2012 showed investors burnt by the global financial crisis still approached the market with caution, although they were fearful about missing the rally when the market recovered.

"What's clear from this survey is that investors don't want to miss the boat. They don't want to be so nervous that they miss the big upswing," he said.

Forster said market volatility and poor returns had led investors to demand something different from fund managers, who were expected to move away from asset classes to focus on "risk buckets".

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"They're looking for managers to produce investment opportunities that are not correlated together, which may be different to what they've had in the past, and when they're managing equities they're looking for investors to be more unconstrained and less like each other," he said.

Investor trends included more barbelling and less focus on tracking error information ratio than absolute risk measured by volatility, he said.

Forster said objective-based investing was gaining traction and leading to demand for lifecycle or target date investment options in superannuation which were more disciplined and allowed managers to target numbers without fear.

"If you're left to your own devices, then fear is going to kick in at that point and perhaps not make you be as aggressive as you should be when markets fall," he said.

Other factors driving investor wariness, Forster said, were financial regulatory changes and a fear that banks would begin off-loading a lot of securities, especially credit.

While distressed debt, high-yield bonds and equities were in demand, Forster said he expected credit to gain traction. 

But he said equities are not going away because investors were wary of missing out.

"It's very easy to envisage a point when the sovereign debt crisis clears, and that might be two or three years away, when you could easily see a 15-20 per cent bounce on the back of that," he said.