Risk

ING IM survey reveals a ‘slow down’ in growth of investor appetite for risk

The appetite for investment risk amongst institutional investors has increased but the rate of growth has slowed down over the past six months, according to ING Investment Management’s latest Risk Rotation Survey.

During Q1 2004, 42% of institutional investors said that their appetite for investment risk has increased over the past six months, compared to 19% who said it had fallen.  The corresponding figures for Q4 2013 are 56% and 11%.

In terms of the reasons for this ‘slow down’, it would appear that concerns over China and ‘tail risk’ are key factors.  In Q4 2013, 14% of institutional investors said that they had ‘significant’ concerns about a hard landing in China, compared 27% who said this in Q1 2014.  The corresponding figures for tail risk are 11% rising to 27%. However, the most prominent source of risk is policy-related, with QE removal and/or a fiscal shock cited as the main worries.

However despite this, as a clear sign that appetite for investment risk is still very much on the table, 70% of institutional investors interviewed said that out of all the major asset classes, over the next three to six months they see equities as being the most attractive in terms of risk/return.  Remarkable, however, was the decline in appetite for real estate; although still second best, almost a third (30%) of respondents consider this asset class as most favoured (compared  to 45% in the previous quarter).   Also in Q4 2013, commodities saw the biggest percentage increase of any asset class in terms of  institutional investors believing it offers the best risk/return (up from  13% to 17%).

Valentijn van Nieuwenhuijzen, Head of Strategy Multi-Asset at ING Investment Management (ING IM), says: “Despite there being some considerable political, social and economic issues facing the world today, investors view many of these as known risks or they don’t perceive them to be systemic and don’t expect any surprises. Problems in Europe for example remain, but the situation has calmed down in recent months so few now expect the EU to collapse. The potential outcome around the crisis between Russia and the Ukraine is less clear, and this will add to investor nerves and adversely affect their appetite for risk.”

As another sign of continued appetite for risk, ING IM’s survey reveals that 51% of institutional investors believe the performance of emerging market assets will improve over the next three to six months, against 22% who feel that this is unlikely.

A strong appetite for risk is also reflected in the fact that the research shows that many institutional investors have taken proactive steps to better manage the risk in their portfolios.  Over the past 12 months, 67% claims to have increased diversification; 30% have reduced exposure to risky asset classes; 16% have increased their cash holdings and 15% have increased exposure to more ‘liquid’ assets.  These steps are also reflected in terms of which investment strategies they believe will deliver the best performance over the next 6 – 12 months.  56.5% said multi asset, followed by 23% who said balanced and 22% who said total return.   

In terms of geographically where investors believe the best investment opportunities are in terms of risk vs return, 30% said the US, 24% said the UK; 18% said emerging markets and 13% said Europe.

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