Returning to risk

Returning to risk looks at the reasons why clients may be choosing to re-risk their investment portfolios, and the strategies being employed by their investment managers to manage the risk in their portfolios. It also looks at the effect of a turbulent market on attitudes towards investment risk.



Report Highlights
A lack of understanding among investors about what risk is, can lead them to conclude that stock market losses in certain areas means they should reduce their risk tolerance. However, many investment managers take the view that a time of unrest in the markets is one of the better times to explore new areas of investment and a new approach to risk. Contacting clients is vital at times of uncertainty. Giving them an understanding of how current volatility is affecting the value of their own portfolio, and what defensive measures can be taken to mitigate any future losses that might yet result from it, helps to retain client confidence. Going forward, wealth managers are becoming more aware of the need to introduce more complex processes into the risk management aspect of their businesses, however many are still developing a more holistic approach to wealth management that is better suited to incorporating a proper approach to risk, as outlined in the previous chapter.


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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
THE RISK LEVEL AN INVESTOR IS COMFORTABLE WITH OFTEN REFLECTS EXTERNAL CIRCUMSTANCES 2
Many investors do not equate greater rewards with greater risk 2
THE 2002 BEAR MARKET LED TO A SWATHE OF DERISKING AMONGST HIGH NET WORTH CLIENTS 3
Investors are regularly "spooked" by well-publicized signs of stock market volatility or potential economic problems 3
Investors began to question their existing risk profile and demand more control over their investments 3
The rise of diversification and low risk products signaled a desire among investors to modulate risk and exposure to a single market 4
WITHIN THE INDUSTRY A RETURN TO RISK WAS NOTED AT THE BEGINNING OF 2007 5
Highly-leveraged, high-performance investments have spurred clients away from "fear" and into "greed" 5
Investors' perception of what is high risk often differs from reality 6
In some quarters clients have been returning to risk for longer 6
THE CURRENT MARKET TURBULENCE HIGHLIGHTS THE DANGERS OF A HIGH RISK PROFILE 7
Times of crisis have a significant effect on the market for certain asset classes 7
Investment managers must take steps to ensure that the effect of future market shocks is mitigated 11
A MODERN APPROACH TO INCREASED RISK NEED NOT PUT INVESTORS AT THE MERCY OF THE MARKETS 13
Active management focused on risk can be used both to take advantage of high risk and reduce exposure when necessary 13
Higher risk tolerance in uncertain times can be made to benefit clients in the longer term 14
Diversifying risk, or investing in different types of risk, offer sophisticated versions of a high risk profile 14
RISK MANAGEMENT FOR PRIVATE CLIENTS REQUIRES A SOPHISTICATED INVESTMENT MANAGEMENT PROCESS 15
Many private banks are improving their processes already 15
APPENDIX 16
Definitions 16
Investor 16
Investment manager 16
Methodology 16
Further reading 16
Ask the analyst 16
Datamonitor consulting 16
Disclaimer 16

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Table 1: Worldwide Mutual Fund Net Sales, 2005 - Q1 2007 8
Table 2: Cumulative European Equity Fund Sales and Net Sales, 2005-2007, EURm 8
Table 3: Annual European Equity Fund Sales Growth Rates (Projected for 2007) EURm 9
Table 4: Net Assets of European Guaranteed Funds, Q4 2006-Q4 2007, EURm 11


Figure 1: Sales and Redemptions of Equity Funds in Europe, 2005 - 2007e 9
Figure 2: Net Assets of European Guaranteed Funds, Q4 2006-Q4 2007, EURm 10
Figure 3: The key components of a smart risk strategy all work to ensure risk is appropriately controlled 13

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