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Are you ready for a post-pandemic surge in investor confidence?______

Research report

FOREWORD BY ANDREW TOMLINSON, CHIEF MARKETING OFFICER, CALASTONE

During the early days of Covid-19 we witnessed significant turbulence in the financial markets. Many retail investors saw the value of their pension and investment portfolios crash almost overnight, potentially impacting their longer term confidence in investing. In a market where interest rates continue to sit at all-time lows, how will the retail investor adapt and where will they go to find inflation beating returns?

This led us to commission this global study, looking at how investor behaviours and attitudes were changing during the initial pandemic and in the immediate aftermath. We repeated this same study earlier in 2021, over a year into the pandemic, as the world settled into this new normal.

In the initial 2020 study, we saw that the greatest changes were particularly marked amongst the younger generations, who increasingly looked to digital and low-cost channels to manage their investments. Since then, the markets have picked up and in our 2021 analysis, the changes we saw last year have become pervasive across all generations. The appetite to invest in new ways and through non-traditional providers has seen significant growth, from Millennials to Gen X to Baby Boomers, alongside a much more bullish view of the markets.

The asset management industry has adapted well so far to the upheaval Covid caused, with investors finding the investment process easier and more efficient than ever before. But our 2021 research shows that there is still work to be done if the industry is to retain its competitive edge.

I hope that you enjoy this latest research report from Calastone.

Retail investors have signalled their increased confidence and growing appetite for investment solutions in a new behavioural survey conducted by Calastone across six key markets. The survey, which builds on research conducted at the start of the pandemic, shows strong and broad demand, with Generation X investors now as keen as Millennials to use digital channels to manage and grow their investments.

With light emerging at the end of the lockdown tunnel, fund providers face the challenge and the opportunity of building on a largely positive customer experience during 2020, as the pandemic accelerated the digitalisation of financial services.

Strengthening investor appetite

It is well-established that uncertainty about the future increases our propensity to save for a rainy day. Calastone’s 2020 survey, conducted in the early stages of the pandemic, reflected its impact on job prospects in younger generations, revealing the stronger likelihood of Millennials to actively invest in light of Covd-19.

After a further year of economic damage inflicted by the pandemic, the picture has changed. Calastone’s 2021 survey found a steep increase in the proportion of Generation X and Baby Boomer respondents actively investing in response to Covid-19, making the former cohort almost as likely as Millennials to be making active investments (Figure 1). Increases in willingness to invest were particularly notable in the US, Australia and New Zealand (Figure 2 & 3).

The precise nature of the investment action being taken or considered in Q1 2021 differed across cohorts. The proportion of Generation X respondents investing more money and making new investments in response to the pandemic rose sharply, while Baby Boomers were more interested in swapping between existing investments and withdrawing money from funds (Figure 4).

Responses to the Q1 2021 survey also highlight a positive shift in financial planning, albeit uneven across markets. Levels of confidence and concern about respondents’ ability to manage finances were relatively similar in both surveys (Figure 6). But the UK and US samples experienced notable rises in those having “a clear plan for managing their money longer term”, offset by slight dips in other markets.

Overall, comparison of the 2021 and 2020 results reveals a clear increase in the willingness of existing investors to invest further, with Covid-19 being a stimulus across many markets and cohorts, especially among Generation X (Figure 7). Whether increasing investments – or swapping around as many Millennials appear to be doing – the increase in activity is unmistakable, as is greater comfort with digital channels (Figure 8).

Calastone’s Fund Flow Index has provided further evidence of strengthening investor appetite, reporting record monthly inflows from UK investors in 2021, with ESG-focused vehicles benefiting most with billions of pounds in new capital committed to equity funds. Analysis of activity across Calastone’s global network throughout 2020 revealed a 45% increase in flows into equity funds to US$477 billion, as an end-of-year surge wiped out earlier outflows.

Confidence, comfort, trust

A good deal of this shift in investor behaviour reflects a mix of pent-up demand, growing confidence in the economic outlook and an increased appreciation of financial security. Investors across age groups and geographic markets are also increasingly comfortable with investment products and digital channels; they are also more trusting of financial service providers.

Calastone’s 2020 Survey reflected issues around engagement and confidence, with Millennials in particular unsure whether they had the expertise or resources to secure their financial future through investments.

The survey identified a need for greater flexibility and innovation from fund providers through digital technologies. Almost 90% of Millennials and three-quarters of Generation X respondents, for example, indicated interest in investing in smaller amounts (Figure 9). With digital intermediation growing exponentially in all markets – and robo-advisors and micro-investment services gaining ground, especially across Asia – the traditional investment industry was off the pace and under threat.

Disruption, dislocation and adjustment caused by Covid-19 has reshaped the 2021 landscape. Although many drivers of higher levels of investment have strengthened across the board – including satisfaction, trust, confidence, ease of use – it is worth noting the greater comfort and confidence of Generation X with digital intermediation.

Generation X embraces technology

The experience of remote working and perhaps greater familiarity with digital platforms has shifted Generation X much more closely to Millennials than Baby Boomers in their investment behaviours, including trust in technology.

This is undoubtedly encouraging news for fund providers, suggesting their efforts to adopt more remote models over the past 12 months have helped to engage and reassure investors. Unsurprisingly perhaps, views of the financial services sector (Figure 10) were more positive overall in the 2021 survey, propelled partly by a notable increase in positive sentiment in the US.

But it is far from clear that traditional providers of investment services will be the sole or even main beneficiaries of these trends. Ecommerce and technology firms have also benefitted from the acceleration of digital interaction, and many are very strongly positioned to increase their presence. Fund providers must have a clear strategy for positioning themselves for long-term growth in this digitised investment market.

All surveyed cohorts were more likely to buy investment products from non-traditional providers (Figure 11), having coped with an extended period of lockdown during 2020. Generation X, however, experienced the biggest surge of enthusiasm, with a marked increase in those willing to buy from technology firms such as Google, Apple or Facebook (rising to 51%) and a similar rise in those prepared to buy from online retailers such as Amazon (Figure 12).

Although baby boomers also warmed to non-traditional providers of investment products during the pandemic, the behaviours of Generation X are now more synchronised Millennials. Further, those that had already invested in Q1 2021 were twice as likely as non-investors to register an increased willingness to purchase from online retailers or technology firms.

Positive customer experiences 

At least some of these upticks in investor confidence and trust can be attributed to positive customer experiences during the lockdown, although regional trends vary, with the US and Australia witnessing the strongest improvements.

The proportion of US respondents finding investing ‘easy’ rose significantly (Figure 14), while those feeling ‘very knowledgeable’ about their investments soared even higher. Australian respondents registered slightly lower increases, but with broadly similar increases in net satisfaction. In both samples, there was a nine percentage-point increase in respondent satisfaction with fee levels, for example.

The positive experiences described above combined to fuel a net rise of five percentage points in those expecting to invest (or invest more) in the future. Overwhelmingly, the increase was powered by existing investors, seven in ten of which said they were likely to invest in Q1 2021.

And while all geographic cohorts were more likely to invest in Q1 2021, the most distinct surge was seen among Generation X. Encouraged perhaps by their greater confidence and familiarity with digital investment channels, the proportion of Generation X respondents expecting to invest more in the future saw a notable upturn.

Geographically, both non-investors and active investors drove a substantial increase in UK respondents planning to invest in the future (coinciding with reduced concerns of Brexit’s economic impact), while those who had previously already invested drove a smaller nine percentage-point rise in the US.

The pandemic experience has been one of adaption for both the investment industry and its clients. These lessons will not be forgotten as we look to the future collectively. The digitization of the investment sector, from the front to the back office, is in the process of being accelerated; innovation has moved at a much faster pace than anticipated.

It also seems clear that when individuals are comfortable with a simple, transparent and cost-effective investment processes, they are more likely to engage, especially in a time of uncertainty. Fund managers with clear but flexible strategies for the digitized investment market will be best placed to meet their needs.

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