Investors are taking more risks in their portfolios coming out of the Covid pandemic, Schroders’ Global Investor Study for 2021 has found.
A combination of heightened market volatility during the pandemic and traditional assets offering less attractive returns in lower interest rate conditions has meant riskier options have become a more desirable way to generate returns.
Analysts at Schroders said: “This period – from lockdown to economic recovery – has been defined by extreme investment decisions, the rise of the meme stock and a general eagerness for rapid returns. Some are after the largest return possible.”
The study examined investors’ behaviours and attitudes, surveying 23,950 people from 33 countries.
It found that 37% of those surveyed planned to allocate ‘more’ or ‘much more’ to higher risk investments; this increased to 44% for the 18-37 age group. This age group also expected a higher level of returns from their higher-risk strategies over the next five years, with 56% expecting returns exceeding 10%. In contrast, just 38% of the 71+ group expected the same level of returns.
Source: Schroders Asset Management
Despite this, investors said they would allocate more to savings or low-risk investments overall, 46% each. But the proportion of investors willing to take on higher risk was “sizeable” analysts said.
Source: Schroders Asset Management
Lesley-Ann Morgan, head of multi-asset strategy at Schroders, said the results showed how investors felt compelled to take on greater risks to compensate for Covid uncertainty and the “challenging economic conditions”, something that is more pronounced among younger investors.
The study found that there were four ‘topical/emergent’ sectors that higher-risk investors had held for the first time this year: electric vehicles, biotech/pharma, internet and tech and cryptocurrencies.
In the report, analysts wrote that even in “unsettled economic circumstances” investors appeared to enter positions which were “unfamiliar to them”, taking on more risk than they were previously comfortable with.
“As we know, volatile market conditions provide more opportunities for people to make sizable gains, mainly in higher-risk assets,” they noted.
Internet and tech stocks were the most popular assets among high-risk investors, with 67% holding a tech-only stock or fund. Cryptocurrencies were third at 55%. The analysts said: “Given the extreme volatility of crypto assets, it’s of no surprise that it’s highly represented.”
Gold, silver and precious metal stocks were also high on the list at 54%. The report noted that this was an interesting result because this type of asset is typically bought in times of uncertainty as a hedge against inflation and volatility.
The analysts said that this meant “the outlook for these [high] risk investors is not necessarily bullish, despite their desire to take on more risk,” because investors know they have more to gain and more to lose in volatile conditions.
The increase in investors taking on more risk is not purely a product of Covid uncertainty, the study said, the low-interest rate environment was also an influential factor.
Global interest rates have been low since the 2008 global financial crisis, but “official policy rates have doubled down; zero across the eurozone and the lowest since records began in the UK,” Schroders’ analysts said.
These monetary policies combined with ultra-loose quantitative easing led to a decade-long bull run in equities post-financial crisis, which the analysts said also contributed to the “rise of the risk investor”, because other traditional assets such as bonds generally offered poorer returns versus equities – which are higher risk.
This environment may change going forward as central banks have faced mounting pressure to increase interest rates in order to try and tackle rising inflation.
Source: Schroders Asset Management
But when asked how they would allocate if interest rates stayed at 0% or lower, 53% of investors said they would make higher-risk investments in pursuit of returns. Around 33% said that they would invest in cryptocurrencies while just 22% said they would be “more likely to spend and less likely to save” in that scenario.