A new report, Building Bridges, published by State Street Global Advisors (SSGA) found investors are favouring objective- and factor-based approaches to investments, but there are some impediments to faster change to improve outcomes.
The research covered 400 global institutional investors, with a quarter in the Asia-Pacific region.
- Investors are recognising a need for change
- Objectives- and factor-based models are increasing in popularity
- Many believe that more education is necessary to build confidence and adoption
- Respondents are looking for a 10.9 per cent return on long-term investments, but just 13 per cent said their investments were performing above expectations.
- Those with returns below expectations, 84 per cent (90 per cent in APAC) believe that under-performance is set to continue for at least another year, but 16 per cent (10 per cent in APAC) believe this trend will continue for between two and four years.
- Investors understand that new approaches will be required going forward, with 97 per cent expecting 'significant change' in investment approaches across the next five years.
- Investors who are looking down the barrel of lowering returns, traditional approaches reign supreme, with alpha remaining elusive in a low-return high-fee environment.
- Despite 59 per cent indicating their preference to increase allocation to active investing, 38 per cent said they planned to increase use of smart beta strategies to make up for performance gaps.
- When it came to APAC, 22 per cent of those investors said they were planning to up their use of smart beta strategies to hit out at underperformance, but 78 per cent said they would increase alternative investments, and 72 per cent would increase objective-based investing.
- About 40 per cent said traditional asset class distinctions remain the single most important manner to approach asset exposures.
- Alternative classifications (including factor-based and objective-based) make up 30 per cent and 25 per cent respectively.
- Some in the Americas and EMEA have shifted slightly to start using smart beta for performance shortfalls, with 75 per cent reporting a moderate-to-significant improvement in long-term aim fulfillment.
- APAC members reported 17 per cent already using smart beta strategy, but 35 per cent were planning to use them in future.
The challenges are deep, however, with institutions at the point where they need to find new/better ways to meet their goals. Obstacles to performance and change include slow peer group adoption (62 per cent), board buy-in being hard to obtain (46 per cent), and in-house talent deficits.
Lori Heinel, chief portfolio strategist at SSGA, said: 'Many institutions are struggling with different investment policies that don’t meet their needs. This shift certainly won’t happen overnight, but investors will need to develop the appropriate knowledge base and expertise, secure the support of key partners like boards and participants, and weigh their overall objectives before making the leap. While we are still in early stages of industry-wide adoption, investors who have adopted factor-based approaches are seeing positive results.'