Australians continue to take a cautious approach to their investments, writes Legg Mason's Matt Schiffman, but is it because there is a lack of understanding about certain asset classes?
The 2016 Legg Mason Global Investment Survey* shows that Australian investors are worriers. Among the core high net worth investors we surveyed aged 40 or over (“core investors”), 56 per cent are concerned they do not understand the investments that they have.
And the percentage is even higher for Australian Millennials, aged between 18 and 39, at 85 per cent. Put another way, less than one fifth of the younger investors whom we surveyed are confident that they know what they are doing.
Australian core investors continue to stick to the asset classes that they know the best.
Their asset allocation is dominated by cash (27 per cent), investment real estate (25 per cent) and equities (22 per cent). Conversely, asset classes which Australian investors tend to avoid include fixed income (5 per cent), non-traditional investments (3 per cent) and gold/precious metals (2 per cent).
Interest rates, and the Australian stock market, to rise?
With so much of their portfolios invested in cash, the level and future direction of interest rates is an important issue for many Australian investors. Nearly half of all investors think that interest rates will rise in the next six to 12 months, and are bullish about income-producing investments.
However, views diverge between older and younger investors. The 88 per cent of Australian millennial investors who are very optimistic about their income-producing investments greatly outnumber the 69 per cent of older, core investors who feel the same way.
Both groups agree that the prospects are good for domestic equities. Some 63 per cent of Millennials and 65 per cent of older investors think that the Australian stock market represents a good investment opportunity for the next year or so.
Suspicion of what is foreign
As a group, Australian investors have a cautious view of international investing. Nearly three quarters of older investors say that concerns about global uncertainty weigh on their investment decisions, while about half fret about currency risk.
Meanwhile, some 42 per cent of millennial investors are concerned about global uncertainty, while a similar percentage fear currency risk. It is perhaps unsurprising that Millennials have more of their portfolios invested outside Australia (25 per cent) than older investors (13 per cent).
Many of the older investors – 68 per cent – consider that they need greater exposure to foreign assets, and will be increasing their weightings over the coming year. Conversely, this is true of only 28 per cent of millennial investors.
And both groups have similar views about where in the world the most attractive foreign investment destinations lie. China, the USA and Singapore rank first, third and fourth. Hong Kong is in second place for Millennials; India, for older investors.
Millennials are also more adventurous than older investors when it comes to exchange-traded funds (ETFs) and passively invested products. Millennials have more than twice as much invested in ETFs/passives (33 per cent of their portfolios) than do older investors (14 per cent).
The implication of all of this is that more education is needed. At a time when Australians are in retirement for longer, and in a world where interest rates will likely rise only slowly, they need to take a less cautious approach to investment.
Our survey suggests there is scope to realign portfolios away from cash and investment real estate, and towards equities and foreign investments.
That is unlikely to happen while most Australian investors feel that they do not understand what they are doing.
*Legg Mason’s Global Investment Survey included 4,103 HNW investors between the ages of 40-75 (“core investors”) and 1,267 investors aged 18-39 (“Millennials”) across 19 markets during 3 December 2015 and 8 January 2016.
Matt Schiffman is head of global marketing at Legg Mason.