Why individual investors and professionals aren't aligned on returns

Natixis research suggests fund selectors and clients have different views of risk and market performance

Why individual investors and professionals aren't aligned on returns

For the average person, inflation and interest rates may be a problem only to the extent that they impact someone’s ability to buy things or borrow money. But to professional investors, those two economic forces also carry other risks.

“Just from a US perspective, we've not had this kind of inflation in 40 years,” Dave Goodsell, Executive Director at the Natixis Center for Investor Insight, told Wealth Professional. “It's something that people may not fully appreciate, and they may not understand how to manage around it. It's been so long.”

According to Goodsell, interest rates and inflation are the two most significant risks that investment professionals around the world are currently most mindful of. In a recent global survey of 436 fund selectors conducted by Natixis, 70% cited interest rates as a top portfolio risk, and 68% cited inflation.

Interest rates in particular, he says, are a point of concern as they consider what could happen to economies and stock markets as interest rates rise – but that’s not all.

“Professional fund selectors also see interest rates as really distorting valuations,” he says. “That’s something that people in general don’t see, so they are perhaps looking at stocks with maybe more optimistic eyes than fund selectors think they should.”

Among 166 North American fund selectors who participated in the survey, 86% were of the view that high valuations were being distorted by extreme low interest rates. Another 66% believed valuations don’t reflect company fundamentals. And seven tenths (71%) thought that the stock market has grown at an unsustainable rate.

As investment professionals, fund selectors have a more comprehensive view of the market, and are able to regard it from a broader context than the majority of individuals. That difference in perspective, Goodsell suggests, could account for a gap in market return expectations between professionals and individual investors.

In a 2021 survey, Natixis found that globally, individual investors expect long-term returns of 14.5% above inflation. But when asked to estimate realistic long-term returns for clients, financial professionals’ answers averaged 5.3% above inflation, which amounted to a 174% gap in expectations between the two groups.

“Canadian investors’ return expectations were a bit more muted. We found that they expect 11.2% returns above inflation,” Goodsell says. “But when we asked financial professionals in Canada what they think is a realistic forecast, they told us it’s 5.1%, which is an expectation gap of 120%.”

The reality is that to get outsized returns, especially at the levels individual investors seem to expect, one has to take on higher levels of risk. The investors in Natixis’ survey say they’re aware of this; 58% said they’re comfortable with taking risks to get ahead, and 68% said it’s normal for markets to move 10% in either direction, up or down.

But there could be some dissonance at play. Three quarters of the investors in the global poll also said they prefer safety over investment performance, and 58% agreed that volatility undermines their savings and investment goals.

“We see many times, individuals may think they can take on risk. But if they’re looking at those types of return expectations, they have to be prepared for the risks that come with them,” Goodsell says. “I think that’s one of the reasons professional money management and advice is so valuable to investors, so you have someone who’s looking at the big picture.”