The growing dominance of the baby-boomer generation is leading to an investment industry increasingly focused on goal-oriented income investing, according to a report.
The new report, from Principal Global Investors using data from its annual Create report of investor behaviour, has found a significant shift in the industry.
Across retail and institutional areas of investing, “highly tailored, goal-oriented strategies are increasingly being adopted in the face of investor caution since the financial crisis”, it said.
The report, entitled ‘Asset Allocation: No Longer One Size Fits All’, identifies that several trends have been affecting the retail investment world recently, largely driven by baby boomers.
It said that the most prominent retail manifestation of the “goal-oriented” themes was the proliferation of “funds with an income focus”, specifically those with a “strong focus on yield and downside protection”.
The report stated that a defining characteristic of these funds is that “their risk is measured by the probability of missing the targeted outcome, instead of fluctuations around it”.
Among the universe of funds that Principal examined for its Create report, it found that the proportion of respondents invested in multi-asset funds with an “income focus” had risen by 14 percentage points in just the past two years.
In its 2012 Create report, Principal had found that 48 per cent of respondents invested in a fund that had an income focus, but that had risen to 62 per cent by the 2014 report.
The report said such funds typically invested in “a broad basket of assets, including high-yield bonds, global value securities, global real estate securities, preferred securities, commercial mortgage-based securities, emerging market debt and infrastructure”.
The number of respondents invested in a hybrid bond product, such as a strategic bond fund, had also risen substantially between 2012 and 2014, from 48 per cent to 61 per cent.
Principal puts the rapid growth of such products down to baby boomers, who are either in retirement or not far from reaching it.
The report said that in the next five years the baby-boomer generation – those born between 1945 and 1965 – would control 80 per cent of all retail assets.
“On approach to retirement, they are switching from conventional investing to income-driven investing,” it said.
“This migration is real. It is happening. It is also driven by the revival of a long-forgotten phenomenon: financial repression.”
Financial repression refers to rates being held low while inflation erodes the value of assets, and the report has found that investors are facing up to this reality by investing in “cautious options”, particularly those who experienced being invested during the financial crisis.
The report said: “Retail investors have realised that they significantly lagged behind the market. It was not unusual for them to miss the first half or two-thirds of a strong rally in stocks.
“If anything, they spent too much time chasing hot stocks – buying high and selling low – while racking up the charges. This approach cost them dearly.
“Baby boomers are now retreating from their previous risk-taking mode. Instead, they favour the high probability of certainty over the low probability of high returns.”
