Study: Prolonged Market Volatility Triggering Innovation In Investing

A new study released today by CREATE-Research and commissioned by Principal Global Investors finds continued market volatility has sidelined conventional investment wisdom. Therefore, innovation is essential in exploring new ways of investing and managing assets through this extended period of economic uncertainty.

The report, titled Innovation in the Age of Volatility, is a follow-up to Market Volatility: Friend or Foe?, the global report released June 25, 2012. It surveys 289 respondents including asset managers, pension plans, pension consultants and fund distributors from 29 countries with combined assets under management totaling more than $25 trillion. The survey was followed by 100 interviews.

“In the wake of the 2008 credit crisis, prolonged volatility has enjoined investors and their managers alike to explore new ways of investing and managing the asset business to cope with the new reality,” said Prof. Amin Rajan, CEO of CREATE-Research and the report’s author. “The conventional wisdom has been severely tested and a new approach is duly emerging. Now, success is about understanding the dynamics of price dislocations and devising appropriate strategies for different volatility regimes.”

Major findings of the report include:

• Market volatility will persist and be driven by politics and policy decisions more so than economic fundamentals.
• Smart investing is no longer about diversification across style boxes or indices. Opportunism trumps diversification.
• Investment choices will blend opportunism with caution, and professional asset allocation skills will be in demand. Investors recognize they do not have the skills necessary to capitalize on opportunities created by volatility in the markets. These trends will fuel flows into target-date and target-risk funds.
• Income in retirement products will focus on replacement of income earned in employment as fewer and fewer individuals receive defined-benefit-style pensions. Target-date funds especially will see significant innovation, as they will have a retirement income benchmark similar to liabilities in defined-benefit plans. And innovation in portfolio risk management is abundant and moving away from diversification across style boxes as a focus.
• Innovation in the business models for asset managers will center around the need to become a trusted advisor to clients as products are increasingly outcome-oriented and customized.

“These are exciting—but challenging—times for asset managers as the landscape continues to change rapidly. As markets remain volatile, investors no longer care about benchmarks and instead want to focus on particular outcomes,” said Barb McKenzie, chief operating officer of Principal Global Investors. “Asset management talent who can opportunistically allocate across sectors, regions and assets classes are in high demand, as are sales people who can partner with clients and investment professionals to design suitable portfolios to meet client needs. The industry hasn’t seen change of this magnitude in decades.”

The full report, along with an executive summary and video of key findings, is available at create.principalglobal.com.

About Principal Global Investors

Principal Global Investors is a diversified asset management organization and a member of the Principal Financial Group ^®, with expertise in equities, fixed income and real estate investments, as well as specialized overlay and advisory services. Principal Global Investors manages $259.8 billion in assets ¹ primarily for retirement plans and other institutional clients ².

About the Principal Financial Group

The Principal Financial Group ^® (The Principal ^®) ³ is a global investment management leader including retirement services, insurance solutions and asset management. The Principal offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, asset management and insurance through its diverse family of financial services companies. Founded in 1879 and a member of the FORTUNE 500 ^®, the Principal Financial Group has $367.1 billion in assets under management ⁴ and serves some 18.2 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG. For more information, visit www.principal.com.

¹ As of June 30, 2012.

² Principal Global Investors is the asset management arm of the Principal Financial Group ® (The Principal ®)¹ and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Principal Enterprise Capital, LLC; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Edge Asset Management, Inc.; Morley Financial Services Inc.; Finisterre Capital, LLP; Origin Asset Management, LLP; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; Principal Global Investors (Japan) Ltd.; Principal Global Investors (Hong Kong) Ltd.; CIMB-Principal Islamic Asset Management Sdn. Bhd.; and the majority owned affiliates of Principal International, Inc. Assets under management includes assets managed by investment professionals of Principal Global Investors under dual employee arrangements with other subsidiaries of The Principal and assets managed in accordance with investment advice provided by Principal Global Investors through the delivery of a model.

³ “The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.

⁴ As of June 30, 2012.

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