Over the past several months, our markets have experienced both volatility and an extremely low interest rate environment. These occurrences, especially in combination, certainly present challenges to advisors and their clients.
Despite some reopening, the economy is facing a great deal of uncertainty. Unemployment is still high, having reached levels not experienced since the Great Depression. Some expect major sectors of the economy, such as restaurants, airlines, hotels and commercial real estate, to be deeply affected long term, with some major companies failing to survive. One of many challenges to investors is that the course of the economy is tied to the course of the pandemic, something that is extremely hard to predict.
In recent weeks, Greenwald Research has conducted in-depth interviews with advisors to better understand their current approach to investment and income strategies, particularly for those approaching and in retirement. Following the events of 2008, we conducted hundreds of interviews with advisors. Our experience with this research suggests that the reaction to the current crisis among advisors is fundamentally different.
In 2008, there was a widespread crash of the real estate and equity markets. The prevailing advisor focus during this time was to prevent clients from panicking and selling their investments at a loss. Because the loss was so deep, advisors did not report succeeding all the time. In the years following the crash, the market showed a steady rise and advisors reported that those who used a growth strategy were rewarded over those who attempted to blunt gain a little to provide a smoother ride or mitigate loss.
This market is has unfolded differently so far. One reason is the impact of health concerns of Americans on spending behavior. Some companies are not harmed by and may even benefit from COVID-19, such as Amazon or technology companies. Other companies have suffered from COVID-19, but are valued lower than they should be or are in an area that could bounce back quickly.
Because of this, we have seen some advisors who feel that rather than abandoning the market, this is an ideal time for active investment management among various sectors affected differently by COVID-19.
Furthermore, there has been a different reaction among the older client base. These clients have been through 9/11 and 2008 and have drawn some lessons from those experiences. On balance, advisors have seen as many or more of these clients that want to buy more equities as want to sell them.
We see this environment having several different effects on the investment climate and potential strategies and products:
- There could be further growth in target date funds and other forms of managed accounts because these accounts often use automatic rebalancing regularly. In a time of volatility, the advantage of this mechanism grows in importance.
- We could see the comeback of risk mitigation strategies, such as alternative investment funds that incorporate non-correlated assets and hedging strategies or annuities that offer income guarantees or boundaries to limit losses. Compared to the steady growth environment over the past 10 years, the case for these products that provide a smoother rise should become much stronger.
- There may be a growing interest in Smart Beta funds that adhere to a strategy that works in a COVID-19 world. For example, Smart Beta Funds reflect the beliefs of some advisors about the value of dividend weighting or weighting on earnings or book value rather than market capitalization.
- Income may also be subject to more active management as advisors need new approaches to generate enough income for clients and as some sources of income, particularly stock dividends, decline.
Clearly, not all market downturns are the same and not all market downturns require the same adaptations. This is especially true of the current economic decline, totally integrated in a health crisis. Our research suggests that neither advisors nor investors have fully thought through the issues or how to respond or even if a new response is necessary. As the health crisis unfolds, and the economic impact is resolved, investment strategies will have to adapt. It is the role of the financial industry to develop new strategies in the interim that will protect advisors’ clients and give them an opportunity for a necessary level of return: a daunting task.
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