Q&A: End of the 'cautious investor?'


Q: What were the most interesting takeaways from the 2013 Investor Mindset Survey? Of many interesting findings, the one that stood out the most for me was that high-net-worth investors plan to add equities to their portfolios primarily because they consider equities to be a better source of income than bonds. Nearly two-thirds of investors told us they see owning stock as a great way to earn income. That is huge.

Q: So, are the days of the cautious investor waning? Investors are certainly coming out of their shells. We’ve seen substantial flows out of bond funds and strong flows into domestic equity funds in recent months, according to Investment Company Institute data, a trend the survey suggests is likely to accelerate. Twenty-four percent of high-net-worth investors said they plan to invest more in equities over the next year while only 10 percent plan to add to their bond holdings.   

Q: What do financial advisors currently think about equity investing? While market volatility, slow economic growth and low interest rates remain concerns, advisors are very bullish on equities—92 percent of those surveyed said they are confident or very confident equities would provide solid results for their clients. 

Q: Does this mean the long-anticipated “Great Rotation” from bonds to equities has begun? I don’t think there is any doubt that a shift is underway, but it’s not “gung-ho’’ stocks. For example, the surveyed investors showed a willingness to shift not only to equity but also to balanced products—a mix of stocks and bonds—and even to higher-yielding bond strategies. This suggests investors continue to see uncertainties in the marketplace but also understand lower-yielding government bonds are not going to provide adequate retirement income.

From our perspective, this is good news because investors need to consider longevity and inflation risks associated with what has been this prolonged low-rate environment.  And let’s not forget that there are still lots of geopolitical and policy risks out there (tapering, a new Fed chair, the debt ceiling, Obamacare, Syria and the Middle East, a weak labor market, a slowing Chinese economy, to name a few).

So there’s plenty of worry for our beautiful wall of worry. This is why we think investors are favoring a more conservative income-oriented approach to equities. They view income as a central component of their portfolios—in addition to the nearly two-thirds who view stock ownership as a great way to earn income, 31 percent cited dividends as an important aspect of income. 

Q: Was there any area where investors and advisors didn’t seem to be on the same page? It was surprising to see advisors viewed investors as being much more conservative than their clients say they are. When asked to describe their high-net-worth clients’ investment style, a third of advisors described their clients as being “secure” or “cautious” in their risk appetite—the fiscally conservative end of the risk-reward spectrum.  But only 9 percent of high-net-worth individuals described themselves this way.  In fact, an overwhelming 84 percent of investors described themselves as having a “balanced” or “progressive” risk appetite—a considerably more moderate view approve  risk.

Thank you, Linda. 

The 2013 Investor Mindset Survey was fielded online nationally between June 20 and July 5, 2013. Interviews were conducted with 1,013 high-net-worth investors, who were U.S. adults, age 18 and older, with at least $500,000 in investable assets, excluding primary residence and employer-based retirement funds. The 301 financial advisors interviewed were primarily Certified Financial Planners, Chartered Financial Analysts, Registered Investment Advisors and Personal Financial Planners.

KRC Research, an independent third-party research firm, designed and conducted the survey on behalf of Federated Investors.

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
High-yield, lower-rated securities generally entail greater market, credit, and liquidity risk than investment-grade securities and may include higher volatility and higher risk of default.
While stocks offer the potential for greater returns than bonds, they tend to be more volatile. There is no guarantee that any investment approach will be successful.
Federated Equity Management Co. of Pennsylvania
Copyright © 2014 Federated Investors, Inc.

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