The UAE Investor Research report, released earlier this week, also found that only one in three investors surveyed had lowered their expectations for returns in the current year, while 42% expected to receive over 8% in returns for 2016.
These forecasts come as low oil prices, sluggish global growth, negative interest rates on good quality bonds and increased volatility in share markets make the prospect of a pick up in returns for 2016 less likely.
High expectations
A recent survey by Natixis Global Asset Management for example found that in the UK, financial advisers were expecting annual returns (above inflation) to be around 3.8%, down from 6.8% in 2015.
The Natixis survey also identified similar high return expectations in the UAE, finding that among 150 IFA’s it surveyed, most were expecting around a 6.5% return over the 12 months to June 2017 while their clients were looking for returns of 10%.
Brendan Dolan, regional director for Old Mutual International, Middle East and Africa said his firm’s research had shown that attitudes of investors based in the UAE were changing as a result of the increased volatility in global markets and the fluctuating oil price but the performance expectations remained very high.
“Performance expectations still remain high among investors, suggesting that many see the current market situation as an opportunity rather than a threat,” Dolan said.
Risk aware
Old Mutual International’s survey found that despite these high return expectations, investors were becoming more aware of market risks and had become more engaged in managing their finances.
“This volatility and deeper understanding of long-term investments has resulted in a more informed approach to risk and reward that has seen many investors adopting more conservative approaches to their portfolios, with many investors focusing on protection against loss rather than growth,” Dolan said.
The OMI survey showed that in the UAE, UK expats were far more risk averse than other expats and locals. Its found 48% of UK expats in the UAE believe they are ‘risk averse’ compared to an overall average of 32%.
For the UAE generally, the majority of investors consider themselves ‘risk neutral’ which means they are neither risk takers nor risk averse. While across the across the Gulf Cooperation Council (GCC) region, 43% of investors believe they are ‘risk takers, compared with an overall average of 28%.
Active NRIs
In terms of engagement, non-resident Indian (NRI) population more were involved in their investments compared to other nationalities. Around 92% of NRIs review their investment portfolio either monthly or quarterly with their adviser, the survey found. This compares to 66% for other expats and 29% for GCC nationals.
This is the nationality with the greatest knowledge of their investments as well, with 75% of NRIs aware of most or all of what they are invested in, above the average for the survey of 63%.
OMI said using a discretionary fund manager to provide bespoke portfolio management is growing in popularity among high net worth investors who require a tailored approach to their investments.
“The research shows investors value this solution – especially when it comes to matching investment risk and controlling losses,” it said.
The investment research for the report took place in May 2016 and was aimed specifically at investors based in the UAE (mainly Dubai and Abu Dhabi) who use the services of a professional to invest in the stock market (e.g. financial adviser, bank adviser, or discretionary fund manager). Investors also needed to have a minimum of (USD) $50,000 invested.
The survey received 130 responses from 40 UK expats, 19 European expats (ex UK), 19 North America expats, 12 Indian expats (NRIs), 33 other expats and seven Gulf Cooperation Council (GCC) nationals.
Non-Resident Indians (NRI) are more involved in their investments compared to other nationalities.
92% of NRIs review their investment portfolio either monthly or quarterly with their adviser. This compares to 66% for other expats and 29% for GCC nationals.
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Investors now more concerned with protecting risk than making gains
The average return in 2015 was just 3.5%, but investors still expecting an average of 7.3% this year
Only 55% believe oil prices remaining low is the greatest threat to their investments in 2016
This is marginally more than investors expected in 2015, at 7.2% – this is despite investors only receiving an average return of 4.7% in 2015.
UK expats in the UAE are far more risk averse than other expats and locals
48% of UK expats in the UAE believe they are ‘risk averse’. This compares to an overall average of 32%. UK expats are the biggest proportion of risk averse investor by far compared to all other nationalities surveyed.
In the UAE, the majority of investors consider themselves ‘risk neutral’ which means they are neither risk takers nor risk averse, and across the Gulf region Gulf Cooperation Council (GCC), USE investors are the biggest risk takers.
The study found 43% of GCC investors believe they are ‘risk takers’. This compares to an overall average of 28%. GCC investors are the biggest proportion of risk takers compared to all other nationalities surveyed.
Non-Resident Indians (NRI) are more involved in their investments compared to other nationalities.
92% of NRIs review their investment portfolio either monthly or quarterly with their adviser. This compares to 66% for other expats and 29% for GCC nationals.
Investors who have now lowered their expectations of returns are those who received poorer returns in 2015: 14% of them lost money in 2015 and stated negative returns, the average return was just 3.5%, and just one in 10 received gains over 8%.
Investors who said their expectations had not lowered did better in 2015: just 3% lost money in 2015, the average return was 5.3%, and a quarter received gains over 8%.
Not all investors have become more pessimistic, some have become increasingly bullish.
Investors based in the UAE now expect to receive average investment returns of 7.3% in 2016.
This is marginally more than investors expected in 2015, at 7.2% – this is despite investors only receiving an average return of 4.7% in 2015.
Conclusion: It has long been the understanding in behavioural finance that investors suffer from loss-aversion, disliking losses more than they like equivalent gains. This research supports that theory, with investors generally placing greater importance on protection against losses than on investment gains.
Whatever their risk level, investors overwhelmingly agree that it is important their investment portfolio matches their individual level of risk.
For those giving financial advice, this is a real call to action. Understanding a client’s risk profile is imperative and can help when building a suitable investment portfolio. By ensuring investments are matched to their client’s risk level, advisers will help limit the client’s exposure to market movements when aligning to levels within their comfort zone.
We have seen ‘risk-targeted’ investment solutions – which ensure risk is actively managed on an ongoing basis – growing in popularity in recent years. While the concept of risk-targeting is still in its infancy in the international market, we are seeing demand for such solutions rise as investors increasingly focus on managing risk in the face of mounting volatility.
This report also shows that investors are engaged when it comes to their finances and their expectations are high. We expect to see this level of investor understanding grow further and that this will result in an increase in the number of financial advisers utilising outsourced investment solutions to provide their clients with the returns they are looking for – within a risk-controlled way.
As part of Old Mutual Wealth, we are focused on ensuring we provide financial advisers with a range of investment solutions to help them meet the demands and expectations of their clients. Delivering investment return within pre-defined risk parameters is something we are renowned for, as well as delivering industry leading discretionary portfolio management. We hope you find this report useful. Please get in touch with us if you wish to find out more.
Brendan Dolan, Regional Director for Old Mutual International, Middle East and Africa said: “Attitudes of investors based in the UAE are changing. The increased volatility in global markets and a fluctuating oil price has directly affected attitudes and habits, with investors now having an increased level of understanding of investment risk and more specific requirements than ever.
“This volatility and deeper understanding of long-term investments has resulted in a more informed approach to risk and reward that has seen many investors adopting more conservative approaches to their portfolios, with many investors focusing on protection against loss rather than growth.
“However, performance expectations still remain high among investors, suggesting that many see the current market situation as an opportunity rather than a threat.”
