Investors Not Acting in Their Own Best Interest
November 12 2012 - 8:00AM
Business Wire
In an investment environment of heightened uncertainty, retail
and institutional investors are exhibiting behavior that appears to
be at odds with their investment goals, according to the inaugural
global investor study by the State Street Center for Applied
Research, entitled: The Influential Investor: How Investor Behavior
is Redefining Performance.
The study, conducted by the Center for Applied Research, an
independent think tank residing at State Street Corporation (NYSE:
STT), was based on 12 months of research and input from more than
3,300 investment management industry participants. Among the
study’s primary findings is that, investors aren’t acting in their
best interests as they are becoming more aware of economic
instability and misaligned interests amongst investment providers,
government and markets. As a result, their investment decisions
don’t always align with their stated goals and there is ample
aggregate evidence of this behavior. For example:
- Institutional investors are faced with
challenges in navigating the complexity of certain asset classes.
Low-yield markets have increased institutional investors’ appetite
for alternative strategies. Yet, the majority admits their greatest
challenge is not having a deep enough understanding of these
assets.
- Retail investors’ conservative
strategies are cracking their retirement nest eggs. When retail
investors were asked what steps needed to be taken over the next
ten years to retire, the majority said to invest more aggressively,
yet cash is their number one allocation now and is expected to
remain number one over the next decade.
Commenting on the drivers of behavior and goals of both investor
groups, Kelly McKenna, global head of the State Street Center for
Applied Research said: “While investors have never been as aware of
their micro and macro environments, they are exhibiting behaviors
that are divorced from their stated investment objectives.”
Against this backdrop of investor disconnect between behavior
and goals, the study found that investors identified performance as
the most important metric for determining the value of their
investment providers as well as the greatest weakness of their
investment providers.
Accordingly, the study revealed that when it comes to
performance, one size no longer fits all. “Current monolithic
benchmarks based on relative performance to peer groups or indices
serve the provider,” said Suzanne Duncan, global head of research
for the Center for Applied Research. “The investor’s view of value
is now more complex and reflects his/her own personal blend of
strategies and objectives. In today’s investment reality, the
investor is the benchmark when it comes to defining
performance.”
Based on these findings, the Center for Applied Research
advocates for fully transparent performance models that focus on
long-term sustainability of returns, defined in terms of value to
the investor. Over time, this new model for success will help to
reduce barriers to healthy decision-making and will lead to
improved performance.
The study also found that investors’ seemingly irrational
behavior is actually a rational response to a number of factors
impacting the current global investment environment:
- Major economic trends, including a
steady increase of national debt worldwide, tighter correlations
across global markets, and a rise in systemic risk;
- Mistrust of their primary investment
provider to act in their best interest, stemming in part from lack
of value delivered versus fees charged. Only one-third of investors
believe their primary investment provider is acting in their best
interest; and
- Impediments from politics as well as
new financial regulation that most investors believe will be
ineffective and expensive. Sixty-four percent of investors believe
that regulation won’t help address current problems and sixty-two
percent believe the cost will be passed on to them.
The Center for Applied Research proposes a four-component
performance model in which key value drivers become the building
blocks for “personal” performance. Two components - alpha
seeking/beta generation and downside protection - are related to
market forces and are common to most investors. The other two
components – liability management and income management – are risk
exposures unique to each investor.
McKenna concluded, “While the future of the industry will be
determined by the actions investors take, the investment community
has clear opportunities to work together to create better solutions
for this new economy.”
About The Study
The Influential Investor: How Investor Behavior is Redefining
Performance is based on input from more than 3,300 investment
management industry participants across 68 countries. The State
Street Center for Applied Research obtained this input through
surveys of 2,725 investors, and 403 investment providers and
government officials. Surveys were conducted through an online
platform in collaboration with the Economist Intelligence Unit,
Scorpio Partnership and TNS Finance Amsterdam. In addition, the
Center for Applied Research conducted face-to-face interviews with
200 executives and government officials from around the world to
gain qualitative insights for our research. The study is available
at http://statestreet.com/centerforappliedresearch.
About The Center for Applied Research
The Center for Applied Research (CAR) is an independent think
tank comprising a global team of researchers located across the
Americas, Europe/Middle East/Africa and Asia Pacific. CAR conducts
targeted research designed to provide clients with strategic
insights into issues that will shape the future of the investment
industry. Building on the success of State Street Corporation’s
established Vision thought leadership program, CAR brings together
resources within the industry and across State Street to produce
timely research on the topics that are most important to investors
worldwide.
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's
leading providers of financial services to institutional investors
including investment servicing, investment management and
investment research and trading. With $23.4 trillion in assets
under custody and administration and $2.1 trillion in assets under
management* at September 30, 2012, State Street operates in 29
countries and more than 100 geographic markets. For more
information, visit State Street’s web site at
www.statestreet.com.
*This AUM includes the assets of the SPDR Gold Trust (approx.
$75.3 billion as of September 30, 2012), for which State Street
Global Markets, LLC, an affiliate of State Street Global Advisors,
serves as the marketing agent.
The views expressed in this material are the views of the State
Street Center for Applied Research through the period ended 31
October 2012, and are subject to change based on market and other
conditions.
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