Market Overview

Market Volatility and Rising Interest Rates Concern Financial Advisors, But Clients' Emotions May Be the Greatest Challenge, Natixis Investment Managers Survey Finds

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  • Survey of Canadian financial advisors tracks emerging risks, preferred
    strategies in choppy markets
  • Believe rising rates will have a negative effect on investment
    performance, increase market volatility and portfolio risk
  • Current market environment favors active management, according to 86%,
    who continue to allocate the bulk of their assets to active strategies
  • Just over half of respondents say investors understand the risks of
    the present market; 57% do not believe investors are prepared for a
    market downturn

Following lackluster returns in the Canadian stock market in 2017,
financial advisors are concerned that higher levels of market
volatility, interest rate hikes, and possible asset bubbles threaten
investment returns for 2018. This environment can also lead investors to
make costly mistakes – and managing the emotional reactions of clients
could be advisors' greatest challenge in 2018.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20180614005898/en/

Impact of Rising Interest Rates (Graphic: Business Wire)

Impact of Rising Interest Rates (Graphic: Business Wire)

Those are some of the most important findings of a survey released by
Natixis Investment Managers. The company's Center for Investor Insight
surveyed 150 Canadian financial and investment advisors about their
market challenges and how they are positioning client portfolios.
According to the findings, 94% of respondents said that preventing
clients from making investment decisions based on their feelings is
important to their success. In addition, 34% of advisors reported that
their clients reacted emotionally to recent market movements, and just
43% believe investors are prepared for a market downturn.

Financial advisors also have their work cut out as they navigate through
the market's choppy waters. As survey respondents strive to grow assets
under management by an average of 14% over the next 12 months, they see
several potential roadblocks. Among the survey's findings:

  • Threats to investment performance: Advisors see rising
    volatility as the biggest potential threat to the markets.
    Seventy-three percent say it would negatively affect overall
    investment performance; trailing as perils are asset bubbles (63%),
    geopolitical events (57%) unwinding of quantitative easing (57%),
    interest rate increases (56%), the low yield environment (55%),
    regulation (43%) and currency fluctuations (41%).
  • Impact of short-term rate increase: Advisors say an increase in
    central bank short-term interest rates is expected to adversely affect
    the housing market (75%), credit market (71%), bond volatility (68%),
    overall market volatility (65%) consumer spending (62%) and economic
    growth (53%).
  • Portfolio risks: Advisors' top risk concerns are interest rate
    hikes (51%), asset price volatility spikes (45%), and low yields
    (38%). (Notably, advisors already are acting in response to the
    biggest perceived threat – rising rates – by managing bond durations.)
  • Concerns about bubbles: Advisors believe there are asset
    bubbles in the real estate market (49%), the tech sector (23%), the
    stock market (23%), and bond market (22%). They show the most concern
    for crypto-currencies. After those currencies experienced a
    considerable run up in 2017, 69% of respondents see them as a
    potential bubble that could burst in 2018.

"Whether it is buying indiscriminately when markets are rising or
selling in a panic when they are declining, investors often make their
worst decisions when driven by their emotions," said Abe Goenka, Chief
Executive Officer of Natixis Investment Managers Canada. "Advisors have
an important role to play in all markets, helping investors to be aware
of the harm emotionally driven investing can cause and assisting them in
dispassionately examining their goals, risk tolerance and timeframe. Our
research shows they are increasingly turning to active managers for the
tools and flexibility to diversify their clients' portfolios and reduce
risk."

Active Management: Front and Center in 2018

According to the survey, advisors are turning to active managers and
deploying alternative investments to manage new and numerous risks
facing their clients.

Nearly nine in 10 (86%) advisors say the risks in the market add up to
an environment that favors active management. These professionals
demonstrate a clear preference for actively managed investments and
continue to allocate the majority of assets to these strategies.
Advisors who responded to Natixis' 20161 survey reported that
68% of the assets they manage were allocated to active strategies and
32% to passive. They projected that within three years they would
moderate their active allocations to 62% and increase passive
allocations to 38%. Instead, allocations to active actually have
increased in the past two years. Respondents in this year's survey now
say they have 72% allocated to active management.

Greater sentiment toward active management could generate a further
shift to active strategies, which have become essential in recent years
as advisors seek opportunities to generate alpha. Advisors say that
passive strategies, in contrast, are used mainly for their lower fees
(56%). Notably, 75% of advisors believe individual investors are unaware
of the risks of passive investing, and the same number has a false sense
of security about this type of investing.

Alternatives Regaining Momentum

Financial advisors also believe it is important to invest in
alternatives to obtain benefits such as moderating volatility, producing
alpha and generating stable income. Survey results show that 66% of
advisors recommend alternative investments to clients today. Their
strategies include real estate/REITS (35%), infrastructure (33%), real
assets (29%), commodities (19%), hedge fund strategies (17%), and
private equity (15%). Nearly half (47%) give an alternative strategy
more than three years to prove itself.

Among those who recommend alternative investments, advisors see a number
of liquid alternative strategies playing distinct roles in their
portfolios:

  • Diversification: Advisors most commonly cite global tactical
    asset allocation (40%) and multi alternatives (37%) as best for
    diversification.
  • Fixed-income replacement: Top choices for providing a source of
    stable income include option writing (34%) and real estate (17%).
  • Volatility management: Advisors cite market-neutral (48%) and
    long-short equity (24%) as best suited to manage volatility risk.
  • Enhance returns: One quarter (25%) cite global tactical asset
    allocation as their top choice for enhancing returns. They also see
    long-short equity (20%) as useful in meeting this objective.
  • Inflation hedge: Advisors view real estate (18%) as best for
    inflation hedging strategies.
  • Reduce risk: Top choices for risk mitigation include long-short
    equity (25%), long-short credit (21%), and market neutral (18%).

Clients Need Practical Education in Today's Choppy Markets

Investors need to know themselves and the markets in order to make sound
decisions, especially during growing volatility. Yet, just over half
(53%) of advisors in the Natixis survey believe investors understand the
risks of the current market environment, and an even smaller number
(43%) believe that investors are prepared for a market downturn.
Eighty-one percent say the extended period of higher markets has made
investors complacent about risk, and 82% say risk awareness often comes
too late, with investors not recognizing risk until bad outcomes have
occurred.

Based on advisors' views for markets for the next 12 months, their
skills will be in high demand. According to the survey, other than
giving investment advice, financial advisors describe their role with
clients as:

1. Guiding clients through "emotional" decisions (86%)
2. Providing
ongoing financial education (71%)
3. Help in navigating life events
(70%)
4. Providing guidance on identifying and achieving life goals
(65%)
5. Help with mediating family financial affairs (42%)

"Financial advisors see a world in flux in the coming year, and their
ability to serve their clients will require a unique pairing of skills,"
said David Goodsell, Executive Director of Natixis Investment Managers'
Center for Investor Insight. "On one hand, they will need a firm
analytical grasp of the forces driving the market in order to adjust
investment strategy. On the other, they will need to understand the
motivations of investors to avoid emotional decisions that could disrupt
long-term plans. To be successful, advisors will need to be in close
communication with their clients, and their advice will need to come
from both the right side and the left side of the brain."

Methodology
Natixis Investment Managers 2018 Global
Financial Professionals Survey was conducted by CoreData Research March
2018. Survey included 2,775 financial professionals, including wirehouse
advisors, registered investment advisors and independent brokers and
dealers, with $113.7 billion in assets, in 16 countries and territories
in Asia, Continental Europe, Latin America, the United Kingdom and the
Americas. In Canada, CoreData surveyed 150 financial professionals.
These findings are also published in a new whitepaper titled "Meeting of
the Mind." For more information, visit im.natixis.com/us/research/financial-professional-survey-2018.

About the Natixis Center for Investor Insight
As part of the
Natixis Investment Institute, the Center for Investor Insight is
dedicated to the analysis and reporting of issues and trends important
to investors, financial professionals, money managers, employers,
governments and policymakers globally. The Center and its team of
independent and affiliated researchers track major developments across
the markets, economy, and investing spectrum to understand the attitudes
and perceptions influencing the decisions of individual investors,
financial professionals, and institutional decision makers. The Center's
annual research program began in 2010, and now offers insights into the
perceptions and motivations of over 59,000 investors from 31 countries
around the globe.

About Natixis Investment Managers
Natixis Investment
Managers serves financial professionals with more insightful ways to
construct portfolios. Powered by the expertise of 26 specialized
investment managers globally, we apply Active ThinkingSM to deliver
proactive solutions that help clients pursue better outcomes in all
markets. Natixis ranks among the world's largest asset management firms2
with more than $1 trillion assets under management3 (€818.1
billion AUM).

Headquartered in Paris and Boston, Natixis Investment Managers is a
subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a
subsidiary of BPCE, the second-largest banking group in France. Natixis
Investment Managers' affiliated investment management firms and
distribution and service groups include Active Index Advisors®;4
AEW; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA
Investments;5 Dorval Asset Management;6 Gateway
Investment Advisers; H2O Asset Management;6 Harris
Associates; Investors Mutual Limited; Loomis, Sayles & Company; Managed
Portfolio Advisors®;4 McDonnell Investment Management; Mirova;7
Ossiam; Ostrum Asset Management; Seeyond;7 Vaughan Nelson
Investment Management; Vega Investment Managers; and Natixis Private
Equity Division, which includes Seventure Partners, Naxicap Partners,
Alliance Entreprendre, Euro Private Equity, Caspian Private Equity;8
and Eagle Asia Partners. Not all offerings available in all
jurisdictions. For additional information, please visit the company's
website at im.natixis.com
| LinkedIn: linkedin.com/company/natixis-investment-managers.

Natixis Investment Managers includes all of the investment management
and distribution entities affiliated with Natixis Distribution, L.P. and
Natixis Investment Managers S.A.

In Canada: This material is provided by Natixis Investment
Managers Canada LP.

1 Natixis Investment Managers 2016 Global Survey of 2,550
Financial Advisors conducted by CoreData Research in July 2016.
2
Cerulli Quantitative Update: Global Markets 2017 ranked Natixis
Investment Managers (formerly Natixis Global Asset Management) as the
15th largest asset manager in the world based on assets under management
as of December 31, 2016.
3 Net asset value as of March
31, 2018 is $1.008 trillion. Assets under management ("AUM"), as
reported, may include notional assets, assets serviced, gross assets and
other types of non-regulatory AUM.
4 A division of
Natixis Advisors, L.P.
5 A brand of DNCA Finance.
6
A subsidiary of Ostrum Asset Management.
7 Operated in
the U.S. through Ostrum Asset Management U.S., LLC.
8 Caspian
Private Equity is a joint venture between Natixis Investment Managers,
L.P. and Caspian Management Holdings, LLC.

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