Affluent investors are turning away from traditional investment products and toward alternative investments as they grow less and less confident about the economic recovery.
A quarterly index released Monday by McDonald Financial Group showed a 21% decline in economic confidence among affluent investors since July. It was the first decline in the McDonald Financial Group Affluent Consumer Confidence Index since April 2003.
David D. Legeay, a senior vice president and the director of portfolio management at McDonald, the investment unit of KeyCorp in Cleveland, said affluent investors are pulling their assets from equity products and putting them in cash or other more stable investments.
Once-stable investment products like money market funds and fixed-income products have fallen out of favor because of their low returns, he said, and this has made alternative products such as hedge funds, preferred stocks, convertible bonds, and options more attractive.
Mr. Legeay said 42% of affluent Americans in McDonald’s latest survey said they believe the economy is headed in the wrong direction, compared with 23% who said that in July. In July, 53% of affluent investors thought the economy was headed in the right direction.
This decline in confidence has advisers concerned that investment sales will continue to slow, Mr. Legeay said. The survey indicated that 43% of respondents believe the S&P 500 market index will rise in the current quarter, down from 60% in July. As a result, the number of affluent investors who are investing more in the stock market this year compared with last declined to a six-quarter low of 17%, from 24% in July. Thirty-six percent said they will invest less in the stock market, compared with 26% in July.
“The affluent plan to invest less in the next three months because they are not confident that things will improve until at least the beginning of next year,” Mr. Legeay said. “Affluent investors have shifted from wealth accumulation to wealth preservation, and they are bracing themselves as the market continues to decline.”
“Investors want to find alternative means for returns because they are not getting the appreciation from traditional stocks and bonds,” he said. “They are more willing to consider less traditional means.”
McDonald Financial’s data indicated that concerns about the election, energy prices, terrorism, and the conflict in Iraq have made people with more than $500,000 of investable assets uneasy.
David Chalupnik, the head of equities at U.S. Bancorp Asset Management, agreed last week that investors are very wary about what is going to happen in the next few months.
“We need to get this election over with; I don’t care about the outcome,” Mr. Chalupnik said. “There is a lot of money on the sidelines that is waiting for this election to be decided.”
Mr. Legeay said that, even when the election is over, he does not expect markets to rebound immediately. McDonald Financial, which has $30 billion of assets under management, expects a slow holiday investing season, he said. The spending pattern for affluent people has changed, and this has most advisers concerned.
“It is going to continue to be a struggle for most financial firms,” he said. “They’d like to get volume higher, but most investors are staying on the sideline. They are staying with their current strategy. No one wants to make the wrong adjustment in their portfolio.”
Mr. Legeay said that in order to continue developing assets in a market like this advisers must be willing to make use of many alternatives. There will be a slow adjustment, he said, as most affluent investors remain wary about alternative products they have never invested in before.
“The tide is going to turn once we get through the election,” he said. “If energy prices fall off, people will feel better about the economy. But in the meantime, this is a market that requires some creativity.”
