The Gap Has Closed - But How Can We Earn Investors' Trust Again?

Byline: Jeff Masom, CFA

Senior Managing Director & Head of U.S. Sales at Legg Mason

Even after nine years of roaring bull markets, our industry is still working to restore many investors’ trust. The 2018 CFA Institute Trust barometer shows we have succeeded far more with institutional than retail investors: 44 percent of retail investors trust financial services providers, compared to 70 percent of institutions.

It does not help that equity markets have grown expensive and growth and income are getting harder to deliver, but better understanding and meeting the needs of retail investors remains crucial. Like it or not, “Main Street” wants more from us before they will move forward with us.

To that end, Legg Mason brought together a group of our distribution partners who collectively manage more than $675 billion for clients. We asked them about the major issues investors bring to them, and the top challenges they face in helping clients achieve their investment goals.

The financial advisers reported their clients’ two top priorities as: managing downside risk; and achieving growth. That seems contradictory, since conventional wisdom holds that risk-taking is necessary to achieving growth. Yet it leads to two important questions for investors:

Are the risks they take the right ones? And are they thinking enough about the long-term?

Advisers reported being most worried about U.S. equities: more than half are overweight to them, and nearly 80 percent believe their clients should reduce U.S. stock exposure.

The stocks that led the market’s historic rise are now highly weighted in the major indices. Some (particularly the FAANGs[1]) are not only very richly valued, but they could face high-profile challenges from consumers and regulators.

Most of the financial advisers suggested that U.S. investors should consider investing outside their home markets. There may be more room for growth in other countries, both developed and emerging markets. Clients may not be familiar with those markets, however, so we must help them understand where the best opportunities may be – and the pitfalls to avoid.

More than two-thirds of the advisers also reported that, over the next 12 months, they expect to face significant challenges from volatility, and rising interest rates. Both surged in relevance in 1Q2018 after years of substantial dormancy, signaling potential returns to historic norms. That could lead to an environment in which solid active management can once again prove its merits.

Volatility may not feel great to investors, but it can present opportunities. Hedge funds and private debt strategies seek inefficiencies across markets and frequently find their best opportunities during moments of greatest turmoil.

To achieve meaningful long-term growth, it is important to avoid steep paper losses. Portfolios can be designed that seek to manage volatility and minimize downside risk, while still achieving growth. Options include simple low-volatility or dividend-paying equity strategies, or more esoteric alternative strategies such as global macro, equity market neutral, hedge fund and private debt, as well as private real estate and infrastructure. All can provide unique return streams with potentially lower equity beta.

In a rising rate environment, investors are right to worry about fixed income returns. Core-plus funds can offer enhanced flexibility by maintaining core bond exposure while hedging certain risks, and taking advantage of opportunities in additional fixed income sectors.

Bond investors also may be wise to consider strategies with even greater flexibility, such as global macro focused funds. Many of these funds utilize negative duration strategies that can increase in value as interest rates rise. Generally, they can also invest across sectors and geographies to find rich potential opportunities, such as emerging market local currency bonds or structured products.

One message resounds from our small but substantive survey: financial advisers are recommending that their clients diversify. With global markets more and more roiled, helping investors balance their portfolios may be the best way to earn the fullest measure of their trust.


[1] Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) are the five technology giants trading publicly in the market today, as of 2017. Investopedia.


About Legg Mason, Inc,

Guided by a mission of Investing to Improve Lives,TM  Legg Mason helps investors globally achieve better financial outcomes by expanding choice across investment strategies, vehicles and investor access through independent investment managers with diverse expertise in equity, fixed income, alternative and liquidity investments.  Legg Mason’s assets under management are $752 billion as of April 30, 2018.  To learn more, visit our web site, our newsroom, or follow us on LinkedInTwitter, or Facebook

Jeffrey Masom is the Head of U.S. Sales at Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.

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