Professional institutional investors are just as prone to behavioural errors such as ‘trend following’ as the retail investors of the world, argues Vanguard.
Speaking at the 2015 Vanguard Adviser Roadshow in Sydney yesterday, Vanguard Investment Strategy Group principal Fran Kinniry said Australian investors have consistently failed to rebalance their portfolios.
Pointing to data sourced from Morningstar about Australian asset allocations since June 1997, Mr Kinniry said investors – both big and small – tend to increase their exposure to equities in bull markets and decrease when times are bad.
"Investors are following the returns of the market," he said.
Australian investors' exposure to risky assets peaked twice in the last two decades, Mr Kinniry said – in 1999 (before the internet tech bubble) and in 2007 (prior to the global financial crisis).
At both peaks investors were allocating over half of their portfolios to equities (both Australian and international).
Australian investors have now reached the same 'peak', with 54 per cent of their collective portfolios allocated to equities, Mr Kinniry said.
"When you add the equities and the property together there are only two times in the last 20 years when investors had more risk [in their portfolios].
"Why? Because a lot of investors had not rebalanced," Mr Kinniry said.
He admitted that it can be "tough" for investors to rebalance their portfolios.
"We’re talking about selling an asset that’s probably up 30 per cent over one, three and five-year periods – and buying investments that are in the negative over one, three and five years.
"That takes incredible understanding of the capital markets and incredible discipline. Many institutional investment committees don’t do it well," he said.
In the US 70 to 75 per cent of money is institutionally managed, and the same 'trend following' data is apparent, Mr Kinniry said.
"A lot of people want to blame behavioural finance on the little guy," he said.
But at the end of the day it is the big institutional players that move markets, Mr Kinniry said.
"It’s the big guys that have all the assets that drive the numbers – and they tend to be professionally managed.
"And their behaviour is as bad as the little guy," he said.
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