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UK investors maintain confidence in ability of active managers

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Actively managed strategies continue to dominate investment portfolios and confidence in active management remains strong, according to the 2016 MFS Active Management Sentiment study.

In line with global respondents, professional investors in the UK have allocated more than 70 per cent of their total assets under management to actively managed strategies, and seven in 10 UK respondents have confidence in active management.
 
The study, which was conducted by the research firm CoreData Research in August of 2016, comprises the insights from 845 financial advisors, institutional investors and professional buyers around the globe, including 50 respondents in the UK. 
 
"In recent years we have seen flows into passive accelerate, but professional investors are still showing strong support for active strategies," says Madeleine Forrester (pictured), managing director of UK institutional business with MFS. "Investors are continuing to allocate to active management today and results clearly show the role it will play in future as markets will likely become more volatile in the years ahead."
 
In line with global respondents, nine in 10 UK professional investors are at least somewhat concerned about a major drop in equity markets over the next 12 months.
 
Over three-quarters of UK respondents indicate that protecting capital in down markets is one of the most important attributes when considering an active manager. Moreover, 56 per cent maintain that active management offers superior risk management controls over passive investment options, and 48 per cent believe actively managed strategies are the best way to mitigate downside risk in a portfolio during a bear market.
 
Over the past 25 years, the top quartile of active managers managing global strategies have added 7.6 per cent in excess returns in falling markets.
 
Although investors expect active managers to help protect capital in volatile markets, short-term pressures have led to performance chasing. Almost two-thirds of UK respondents surveyed look at performance track records of five years of more when hiring external managers. However, 70 per cent say they will begin a search for a replacement manager after just three years of underperformance.
 
According to the UK respondents surveyed, a full market cycle lasts about 6.8 years on average. And 78 per cent of those surveyed agreed that longer investment periods provide a better foundation to distinguish skill from luck. However, when it comes to measuring the success of their investment portfolios, 48 per cent of respondents focus on one or three year performance.
 
Professional investors around the globe are increasingly being pressured to generate positive returns in all market environments. Six in ten UK respondents and three-quarters of global respondents surveyed say their organisation expects them to generate positive returns over either one or three years. In the UK, eight in 10 say they review the investment performance of their external investment managers on either a daily, monthly or quarterly basis.
 
"Professional investors are clearly under a lot of pressure to generate excess returns in all market environments," says James Gavin, managing director of UK & Ireland retail with MFS. "This is unrealistic and it's misaligned with the long-term investment horizons of most of their clients."
 
With global growth hindered by large amounts of debt in developed markets and lower-for-longer central bank policies, there is a strong consensus that average annual benchmark returns will be lower than their historical averages for the foreseeable future. Just over one-third of UK respondents surveyed say they are optimistic about the prospects for their home country's economy, and 80 per cent of UK professional investors are somewhat concerned about both negative interest rates and growing government deficits. As such, investors have tempered expectations of hitting historical returns on which they have based their goals. Only six in 10 professional investors surveyed in the UK are highly confident about achieving an expected return of 7.2 per cent annually over the next three years. This will put added emphasis on the ability to generate excess returns.
 
"Going forward, global growth will likely be lower and this is impacting investor's confidence in meeting their target investment returns," says Forrester. "Additionally, this will put pressure on pension schemes and individual savers. Never before has the alpha potential of active management been so critical for so many."
 
In the current environment, investors must take three times the risk they did 20 years ago to earn the same returns, according to recent research from Callan Associates. The survey found 79 per cent of UK respondents say a strong risk management process is one of the most important factors they consider when selecting an active manager.
 
"The financial markets can be unpredictable. Investors need to focus on what can be controlled. That includes asset allocation, long-term planning and manager selection," says Gavin. “Investors need to filter out market noise and allow active managers to demonstrate their value over the long term.”

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