Advisers increasingly blending ETFs with active mutual funds, says Invesco.

Nov 17th, 2011 | By | Category: Equities

According to a study by investment giant Invesco, advisers are increasingly blending active mutual funds with ETFs to minimize risk in client portfolios.

Fifty-nine percent of independent investment advisers say market volatility has made clients more risk averse in the past 12 months and only 15 percent believe clients will be more risk tolerant a year from now, according to results of an Invesco survey of US-based advisers.

Ongoing market volatility has prompted more advisers to seek additional support and guidance on investment trends, risk management, practice management, and other benchmarks to more effectively grow and manage their business.

Advisers increasingly blending ETFs with active mutual funds, says Invesco.

Core/satellite portfolio construction combines the most effective characteristics of index and alpha-generating strategies. (Image copyright iShares)

Seventy percent of advisers cited market volatility as the top concern of their clients, with 99 percent of advisers citing it among their clients’ top three concerns. By comparison, only 6 percent of advisers said wealth accumulation was their clients’ top concern.

Given their clients’ current mindset, 45 percent of advisers say managing risk is now their top priority in terms of portfolio construction, ahead of wealth preservation (24%), exceeding a performance benchmark (12%) and delivering absolute return (10%).

“This new investment environment and the resulting change in investors’ risk tolerance is prompting advisors to re-evaluate how they manage client assets and which methods are most effective in mitigating risk,” said Andrew J. Scherer, Managing Director of Invesco’s Registered Investment Advisers Division.

Many advisers say they can add value by managing portfolios that use a combination of active mutual funds and ETFs, in a so-called core/satellite approach. However, advisers are seeking support and guidance on how to utilise these two complementary investment vehicles in their attempt to manage risk in client portfolios.

When it comes to portfolio construction, advisers are increasingly blending actively managed products and ETFs not only to help clients meet their long-term financial needs, but also as a means of managing risk.

In fact, advisers indicate ETFs will represent 22 percent of client portfolios, on average, over the next year and 30 percent of client portfolios by 2014, a significant 36 percent increase.

“Our research shows that our industry has a long way to go to educate advisers on the pros and cons of ETFs, in general, and on which specific ETFs are best at meeting client needs,” Scherer said.

“Thirty-nine percent of advisers say they don’t have an above average understanding of ETFs and 53 percent say don’t have a high knowledge level of existing ETF products,” reflecting the ongoing proliferation of new ETF options.

Useful link: Core/Satellite Portfolio Construction (iShares)

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