Berlin, 30.01.2008 – Retail fund investors are facing a crisis of confidence resulting from the knock-on effects of the problems in the US subprime mortgage market, according to investment professionals in Europe.
Between October 2007 and January 2008, the European Investor Group and Metrinomics have conducted almost 900 interviews with distributors in the European retail fund industry. During these interviews, respondents from 12 countries were asked “What effect has the US subprime crisis had on the behaviour and attitudes of your clients?” Hans J. Schmolke, CEO of Metrinomics, summarises investors’ reactions: “Risk and opportunity are once again two sides of the same coin. Disappointment and damaged confidence will lead to new products and investment strategies that cope with present market challenges.”
Responses to this question in the UK show that the British are the most conscious of the dangers facing their investments. All the British distributors questioned cited an increased level of caution among their clients but there seemed to be little panic. One UK adviser summed it up as follows: “They [the clients] are more nervous and asking for more advice. Whilst there has been little rotation in portfolios yet, there is a reduction in new money.” Despite this “more cautious” approach, some clients were still diversifying their portfolios and even turning their attention to emerging markets.
In Germany and Switzerland, the effects on client behaviour were not widespread. As one Swiss distributor commented “There’s a distinction here: The clients who had invested in the affected markets are very unsettled, whereas the rest are completely uninterested”. Though, clients who were affected reacted strongly. Slumping fund sales and withdrawals from funds were most often reported by Swiss distributors. Other investors seemed to be cautiously carrying on as normal.
In Italy, where the reported effects of the US subprime market have been the least severe in Europe, tensions were still said to be running high. Several retail fund distributors blamed the Italian media for the unrest. A typical comment was “We’ve experienced a sudden turn in clients’ risk profiles: A flight to quality. The scare has been triggered above all by the media, without sufficient reason.” Distrust of the banking system in general was also most noticeable in Italy. One adviser said: “It was totally unexpected; AAA classified investments included subprime securities. There was a lack of transparency in the products.”
The common factor amongst fund investors in all countries was a heightened desire for security. As another distributor commented, “The crisis has a big influence on the market. Some clients are almost ready to panic sell, which is no longer sensible and there is a general loss of trust in the banking industry. Emotionally speaking, there is horror and disbelief combined with wariness with regards to future investments.”
On a more positive note, one of the distributors questioned cited increased zeal among investors: “Our clients have become more active. They are trying to react by buying on a downturn. This is particularly evident in the fund sector. They’ve become bargain hunters.” Bargain hunters aside, the market for low risk retail fund products is likely to grow, portfolio diversification will become more urgent and advisers will continue to seek out higher risk areas of outperformance like emerging markets.