Complacency among investors is over-reported, according to an industry insider, who believes wounds from the 2008 financial crash still run deep.
David Polak, equity investment specialist at Capital Group, said that having spoken to a number of advisors and their clients, he gets no sense of people pouring money into equities and getting their “animal spirits” up.
He said: “It has felt all the time that people are very cautious about this particular market rise since the financial crisis. We have recovered so our view of the event gets coloured by it but at the time it felt like financial Armageddon; it felt like the end of capitalism and that scars folks.
“A market that goes down nearly 50% will impact somebody’s ability to stomach equity volatility going forward.”
Polak said that the bigger issue going forward will be the balance between passive and active investing. He stressed that Capital Group has no problem with passive per se, citing compound global returns of somewhere in the 7-8% range.
He added that it does a good job of getting people exposed to the market rather than putting them in cash but questioned its ability to mitigate the downside and, therefore, keep clients on board.
He said: “The problem with passive investing – the two I think of in an uncertain market - is you really don’t mitigate against the downside through simple index investing; you are exposed to the index good and bad.
“The other issue that’s yet to be explored is, what does price discovery look like in exchange traded funds where you can sell them at any time of the day? It means there are going to be a bid-ask spread that in volatile times might be quite wide. We’ve seen a couple of incidences of this when the market has been stressed.”
Polak added that active management, if done correctly, means more time is spent focusing on a company’s fundamentals; the balance sheets, credit quality and sustainability of an enterprise. He said this taps into a vital end game: keeping investors on your side during a market drop.
He said: “Certainly at Capital Group, we have focused on mitigating the downside risk. We have found that in order to gain that long-term compounding, the most important thing is to keep the investor with you during downswings.
“With human nature, most investors want to get out when the pain is too much. So if you can mitigate that downswing, then the chances are much higher that the investor will enjoy the long-term compounding. Active, if done properly by focusing on fundamentals, can achieve that.”
Steering clients away from recency bias
Late cycle: don't be a 'deer in the headlights'
More market talk: