Inside Money: How money thinks now

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Here's a thought I bet you never thought before: "Not all betas are created equal, or cost the same. We need to know their granularity."
You will find this here among the collective thoughts of US$25.2 trillion.

The combined wisdom of 289 money-managing entities spread across 29 countries (NZ was not consulted) has been wrapped up in the latest effort from UK-based CREATE Research.

Sponsored by investment firm Principal Global Investors (until this year the CREATE report was also supported by Citibank), the 2012 study asks the question 'Market volatility: friend or foe?' - the answer, of course, is both (with a heaving weighting to foe).

We may have become inured to the daily market oscillations but this quote from the CREATE study is a reminder that the last few years have been historically choppy for investors: "Of the 20 biggest daily upswings in the S&P 500 since 1980, 10 have occurred in the last five years. Similarly, of the 20 biggest downswings, 13 have taken place in the last five years. Rarely have the stock markets been so wild; nor is there a precedence of so many asset classes fluctuating so much and so uniformly."

So is it over yet? Not according to almost 80 per cent of survey's respondents who "anticipate prolonged turbulence". "Over 60 per cent expect two or more systemic crises before this decade is out," the CREATE report says. "Fear, more than fundamentals, will drive the markets. Price anomalies will be rife."

Volatility equals opportunity, right? Well maybe, but, according to the research, while 71 per cent of the world's most influential money people believe that is so, only 13 per cent are convinced that they can convert [volatility] into an opportunity".

The study highlights two "hurdles" blocking these professional investors from taking advantage of these historically-significant opportunities.

Firstly, the study says the asset management business has been subject to extreme "industrialisation" over the last 20 years which essentially means it's become more automated, rules-based and algorithmically-inclined while diminishing the role of human judgment.

"The second hurdle is clients' own herd instinct that often ignores the cardinal investment rule: buy low/sell high,"... nothing new there really.

If you thought the herd was rushing about a bit more than the past, then the CREATE report will back you up. Panicked investors are now constantly on the move: "Aided by technology and the 24-hour news cycle, growing globalisation will amplify investor mood swings and compress their decision spans from calendar time to real time."

What are the US$25.2 trillion people going to do about it? Opinions are divided:

5 per cent are 'adventurists' who believe in contrarian investing and market timing amid turmoil.

35 per cent are 'pragmatists' who believe in portfolio re-balancing when momentum is working.

40 per cent are 'purists' who believe in buy-and-hold investing and see volatility as a risky game.

20 per cent are 'pessimists' who lost a bundle in the last decade and can't wait to exit at an opportune moment.

I need to know their granularity before deciding who is right.