Investors turning to active investments to better navigate market risk

Survey findings suggest volatility is undermining confidence, and a majority of investors worry market volatility undermines their ability to reach their investment goals

More than 77% of Hong Kong investors believe market volatility is undermining their ability to reach their savings and retirement goals – notably higher than the global average of 62% – according to a global survey from Natixis Investment Managers of 9,100 individual investors worldwide (400 of whom were from Hong Kong).

Not giving up so much on their return expectations, this concern among investors is nevertheless driving them to take a more cautious approach to investing. This sentiment is felt strongly in Hong Kong, where 94% of investors (versus 89% globally) said that protecting assets in a period of market volatility is important. The findings suggest that investors seem predisposed to active investment strategies, but with fees also being a focus, they still have misconceptions about what passive investments can deliver.

Investors predisposed to favour active strategies to stay on track

In this environment of increased market volatility, global investors – but even more Hong Kong investors are expressing a more defensive approach to portfolio construction, with 95% (versus 90% globally) saying it is important to be protected from volatility. Despite this, investors are not willing to forgo investment returns, with Hong Kong investors saying they need real annual returns of 11.2% above inflation to reach their investment goals, compared to 10.4% globally.

The survey also revealed that individual investors in Hong Kong and around the world do recognize the need to look beyond current market noise, with an overwhelming majority of both Hong Kong investors (93%) and global investors (87%) highlighting the importance of long-term returns over short-term goals. When it comes to investing, more Hong Kong investors (83% compared with 75% of global investors) believe it is important to beat the benchmark, while 78% of Hong Kong investors (versus 74% globally) say it is important to take advantage of short-term market movements.

According to those who responded to our last three surveys of institutional investors, professional fund buyers, and financial advisors, active investments are best suited to pursuing each of these investment objectives.

Appetite for ESG investments continues to grow

Environmental, social and governance (ESG) issues have been a hot topic for market participants in recent years, with the survey results showing that, in line with investors globally, Hong Kong investors are starting to value the impact of their investments. When asked, 68% of the city's investors (versus 70% globally) agreed that it is important to make a positive social impact through their investments, with 57% (the same number as globally) putting words into action by agreeing that they invest with the purpose of having a positive social and/or environmental impact. Despite these positive signs, investors globally said they would not align their investments with personal values at the cost of lower investment returns, with Hong Kong investors less inclined than their global counterparts (58% versus 50% globally) to forgo investment returns.

The desire for investments to better match personal convictions is difficult to rationalize for investors who rely solely on traditional passive index funds, as hundreds of companies are included in many popular indexes regardless of their corporate behaviour or ethics. Hong Kong investors appear acutely more aware of this than their global counterparts, with 71% of Hong Kong investors (versus 60% globally) saying index funds do not contain companies that reflect their personal values.

The perception of ESG is at an inflection point. If individual investors say they want their investments to align with their values, institutions go even further and start seeing ESG as much an alpha benefit as risk management. Natixis's last survey of institutional investors revealed that, for the first time, the number of institutions focused on ESG to deliver alpha (59%) now outweighs those focused more on risk mitigation (56%). Their convictions are strong. Six in 10 say ESG will be standard practice by 2022.

Fabrice Chemouny, head of Asia Pacific, comments: "The volatility seen over the course of the year has spurred a more defensive approach, with investors rebalancing their portfolios to prepare for a perceived market downturn. They are battling multiple considerations – risk management, higher return expectations, as well as the desire to integrate ESG into their investments. Investors need to focus on the best route to reaching their investment goals. Capturing the best opportunities and reconciling risk and return expectations while pursuing alpha require a long-term view and a highly active approach to investing."

Investors may have only heard part of the active vs passive story

While a higher percentage of Hong Kong investors (71%) compared with their global peers (66%) claim to know the difference between active and passive investing, the findings suggest some may be hearing only part of the ongoing active-passive dialogue that focuses on fees. The survey reveals that fewer – but still a sizeable number of – Hong Kong investors (57%) compared with global investors (63%) believe index funds are less risky than other investment vehicles, but Hong Kong and global investors (56% and 58% globally) both similarly trust that index funds can help them access the best opportunities in the market.

"Our findings reveal that when investors see a lower fee, they tend to extrapolate much greater advantages for passive investments than they actually can deliver, explains Dave Goodsell, executive director of the Natixis Center for Investor Insight.

There is a myth among investors that index funds are less risky than other investments. They're not. Passive funds have no built-in risk management and investors' assets are exposed to the same level of risk that's presented by the markets at large. We encourage investors to realise that with any investment vehicle they can potentially enjoy the gains when markets are up, but can also experience a loss when markets are down."

The Hong Kong survey findings of 400 investors also revealed:

* Fear of closet trackers shows no sign of abating: Hong Kong investors are wary of closet bench-markers, or those asset managers who charge an active management fee but build portfolios that closely resemble their benchmark. Roughly a similar number of Hong Kong investors (74%) and global investors (72%) worry that a lot of fund managers charge high fees even if they are just tracking an index.

* Interest rate outlook on portfolios: After 10 years at historic lows, interest rates have slowly inched up. Compared with the rest of the world, more Hong Kong investors (71%) are worried about the negative effects that rising interest rates could have on their investments compared with 62% of global respondents.

* Clear financial goals: Compared with 70% of their global peers, 75% of Hong Kong investors have clear financial goals when it comes to making investments. Hong Kong investors also place strong faith in financial advisors, with 77% (compared with 70% globally) believing that those who have a professional financial advisor are more likely to reach their goals than those who do not.

* Funding own retirement: Eighty-five percent of Hong Kong investors feel that funding their retirement is increasingly their responsibility, compared with 82% of global investors. Hong Kong people also expect to live 25 years after they plan to retire (at 62 years old) similar to the global average of 24 years, and save 12% of their annual income for retirement (compared to 13% globally).