Legg Mason Survey Finds Investor Expectations For Income Disconnected From Market Realities, Creating Income Gap

NEW YORK, March 26, 2013 /PRNewswire/ -- According to a new survey of 500 affluent U.S. investors by Legg Mason, almost three-quarters (74%) said "now is a good time to be invested in equities" with 52% adding that they are more inclined to use equities to generate investment income.

Combining this optimism with the fact that fully 66% reported that income investing was a "top priority," 40% of respondents reported they were invested in equity income mutual funds, and 25% of those who use income generating investments said they planned to increase their allocation to equity income funds over the next 12 months.

Just 9% said they intend to decrease their equity exposure over the next 12 months; and even less (5%) plan to reduce their fixed income positions. Interestingly, 60% also believed it was a good time to be invested in real estate for income, and 15% intended to increase their allocation to this asset class.

Income Expectation Disconnect Creates Income Divide

Though they place an increasingly higher priority on income investing, almost half (48%) said they were generating less income than they had hoped from their portfolios. Perhaps this is less a function of the market and more a result of their expectations:

On average U.S. investors who use income generating products said their desired return was 8.5% and they are receiving on average 5.9%: a difference of 2.6%.

"Income-oriented investors need to consider strategies that are focused on outcomes.  Start by establishing a realistic rate of return based on long-term goals or the need to satisfy liabilities with income," said Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management.  "Our survey is telling us that income-oriented investors in the U.S. are coming up well short of their goals – almost 3% short – and that number could be significant especially for retired investors who need to live on the income their portfolios generate."

Mr. Schiffman continued: "Investors have to recognize the trade-off: if they want higher income, they need to increase their exposure to risk in both fixed income and equities; if they prefer a low-risk approach to investing, they may have to reduce their income goals and expectations."

Willing to Take the Risk for the Income Reward?

The most significant challenge investors said they faced to income investing was "having to accept risk to obtain good yields" – ranked as the leading challenge among 16 challenges evaluated.

Investors also cited a number of specific factors that gave them anxiety when it came to meeting their income producing needs. More specifically they cited market volatility (59%) and higher taxes (56%) as the leading producers of anxiety; followed by inflation (55%) and the low interest rate environment (52%).

Yet in spite of their trepidation, more than half (51%) said they were willing to take on more risk to achieve greater investment income.

The Search for Income Is Local…for Now

U.S. investors said they have just 11% on average of their income producing assets invested internationally.  As measured against investors from 12 other countries surveyed by Legg Mason, the U.S. investor has the least amount invested internationally.

According to the survey, 64% of U.S. investors said that "global uncertainty" was their major barrier to international investing for income, followed by "too much risk" (50%), "currency risk" (45%) and "not enough transparency" (44%).

That said, fully 60% of all U.S. investors said they would be open to considering international for equities and 53% said for fixed income; while 34% of investors who are investing internationally said they were focusing more on international opportunities compared to five years ago.

"If investors recognize the need to take more risk, and are prepared to do so, then they need to expand their horizons and consider allocating to different fixed income and equity styles in markets outside of the U.S.," Mr. Schiffman added. "The key will be to manage portfolio risk through careful portfolio construction and diversification across actively-managed, income-producing global asset classes. A thoughtful approach to taking more risk will help close the income gap that investors say currently exists."

Where would they invest? Those U.S. investors inclined to consider international markets are most likely to look for equity or fixed income opportunities in the United Kingdom and Japan, followed by Europe (excluding UK), Brazil, China, and other Emerging Market countries.  They are least likely to consider Russia.

In terms of international investment vehicles, 65% of U.S. investors who use income generating products prefer multi-country mutual funds; just 10% said they would prefer to invest in a single-country mutual fund.

U.S. vs. the World

How do U.S. investors stack up against the rest of the world? 

• U.S. investors are second only to Hong Kong investors when it comes to optimism: 82% of Hong Kong investors and 74% of U.S. investors believe that "now is a good time to be in the equity markets"
• Germany is most optimistic when it comes to real estate where 75% believe this is a good time to be invested followed by Australia, Italy and U.S. (60%)
• Fully 76% of investors in China believe it's a good time to be in fixed income followed by Hong Kong, Singapore and the U.S. (69%)
• U.S. investors on average have the largest allocations to equities (39%) followed by Canada (35%)
• U.S. investors are well behind investors in China (71%) and Italy (55%) when it comes to likelihood of investing internationally for income
• The U.S. market was the number one choice to consider for international income investing by investors in Canada, UK, China and Japan.

About the Legg Mason Global Income survey
The Legg Mason Global Income Survey was conducted among 3,028 affluent investors from 13 countries: Australia, Canada, China, France, Germany, Hong Kong, Italy, Japan, Singapore, Spain, Taiwan, United Kingdom and the United States. The online survey was conducted by Northstar Research Partners over the fourth quarter of 2012 and first quarter of 2013. The U.S. survey findings are from among 500 affluent investors with at least $200,000 of investable assets.

About Legg Mason
Legg Mason is a global asset management firm with $661 billion in assets under management as of February 28, 2013. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).      

SOURCE Legg Mason

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