Most investors increase allocations to equities even as they expect a sharp downturn, SSGA research says
Professional investors are guilty of ‘misplaced optimism’, contradictory behavior and excessive confidence as they feel pressed to perform in an increasingly volatile and risky market, according to a study by State Street Global Advisors (SSGA).
The research shows 63 percent of investors have increased their allocations to developed market equities in the past six months even while 60 percent of them expect a market correction of between 10 percent and 20 percent.
At the same time, 90 percent of the professional investors surveyed ‒ including portfolio managers, CIOs and others ‒ display a ‘high degree of possibly misplaced optimism’ with the belief their portfolios will be able to withstand a major market correction, SSGA says. Sixty-five percent of those surveyed also say traditional asset protection measures alone, such as diversification, are enough to protect them from sharp losses even though the market turmoil of 2008 hit investments across the board.
‘Pressure to secure returns is driving a significant contradiction between what investors believe and the actions they are taking,’ says Daniel Farley, chief investment officer for SSGA’s investment solutions group, in a press release. ‘This contradiction, along with the growing view that volatility is here to stay, increases the need for adequate downside protection strategies. As investors increase their exposure to riskier assets, they should be thinking about how to remove unrewarded risk from the table.’
Forty-four percent of those surveyed say the market is already overdue for a correction in light of the slowdown in emerging markets and rising geopolitical risks in several areas, SSGA says.
Funding pressures are the primary reason for investors continuing to boost allocations to assets they predict will suffer a sharp correction, according to 65 percent of the investors surveyed. Just over half (53 percent) say they would like to reduce their exposure to equities but returns are too low in other asset classes.
