The Art and Science of Investment Decision-Making: Fidelity Research InstituteSM

Data and insights from Fidelity’s 2016 Global Institutional Investor Survey

The world is consumed by information overload. Institutional investors, like all of us, are trying to take advantage of all the data that is available to make investment decisions. In order to do this successfully, their processes may need to evolve to keep up.

Why is this so important right now? The tailwinds provided by the bull market of the past few years are not likely to continue, so investors will need to rely increasingly on their ability to generate alpha for meeting their target returns. Additionally, it seems reasonable to assume that the number of investment decisions per year is going to rise as holding periods get shorter and manager turnover increases.

Today, the importance of “getting it right” is escalating. Our survey tells us that the investment decision-making process should be revisited to accommodate all the additional inputs—so that these inputs can be evaluated and synthesized effectively and so that any behavioral biases can be minimized. Ideally this would result in more repeatable, efficient, and effective portfolio outcomes.

Now in its 14th year, the Fidelity Global Institutional Investor Survey from the Fidelity Research InstituteSM is the world's largest study of its kind, examining the top-of-mind themes for institutional investors.

  • 933

    Institutions

  • 25

    Countries

  • $21T

    Investable Assets

Investment Decision-Making in 2016

23%Public SectorPension29%Private SectorPension18%Endowment/Foundation28%Insurance38%SovereignWealth Fund1 in 4respondents describestheir investmentdecision-making as highlysystematic/rules-basedAd-hoc (1-2)Blended (3-5)Systematic (6-7)29%6%65%Private SectorPensionAd-hoc (1-2)Blended (3-5)23%13%64%Public SectorPensionAd-hoc (1-2)Blended (3-5)18%6%76%Endowment/FoundationAd-hoc (1-2)Blended (3-5)28%10%62%InsuranceAd-hoc (1-2)Blended (3-5)38%8%54%SovereignWealth FundAd-hoc (1-2)Blended (3-5)
23% Public Sector Pension 29% Private Sector Pension 18% Endowment/ Foundation 28% Insurance 38% Sovereign Wealth Fund 1 in 4 respondents describes their investment decision-making as highly systematic/rules-based Ad-hoc (1-2) Blended (3-5) Systematic (6-7) 29% 6% 65% Private Sector Pension Ad-hoc (1-2) Blended (3-5) 23% 13% 64% Public Sector Pension Ad-hoc (1-2) Blended (3-5) 18% 6% 76% Endowment/ Foundation Ad-hoc (1-2) Blended (3-5) 28% 10% 62% Insurance Ad-hoc (1-2) Blended (3-5) 38% 8% 54% SovereignWealth Fund Ad-hoc (1-2) Blended (3-5)

Top Concerns for 2016

This year, institutions are expressing more worry about the capital markets than in previous years.

What is your top concern regarding your investment portfolio?

Explore Global Response:

Today’s low-returnenvironment
Ongoing marketvolatility
Managingportfolio risk
Top Segment
Private Sector Pensions 38%
Top 3 Regions
Americas 41%
Europe ex-UK 21%
UK 17%
Top Segments
Sovereign Wealth Funds 46%
Trade Associations 46%
Top 3 Regions
Asia ex-Japan 33%
UK 30%
Americas 26%
Top Segment
Endowment / Foundation 17%
Top 3 Regions
UK 19%
Asia ex-Japan 19%
Japan 18%

“Institutional investors understand that the years of strong returns and below-average volatility are over. Expectations that strengthening economies would build enough momentum to support higher interest rates and diminished volatility have not borne out, particularly in emerging Asia and developed Europe.”

Derek Young

Vice Chairman of Fidelity Institutional Asset Management®

President of Fidelity Global Asset Allocation

Top Goals

Nearly all institutional investors surveyed this year believe they can meet their primary investment objectives and generate returns that exceed their benchmarks. The two most common primary objectives across institutions are growth and preservation.

Primary Objectives across Institutions

43%41%44%40%48%54%56%57%55%60%52%46%Growth*Preservation**Private SectorPensionGlobal/OverallViewPublic SectorPensionInsuranceEndowment/FoundationSovereignWealth Fund

Optimistic Performance Expectations and Return Goals

Despite uncertainty in a number of markets around the world, institutional investors remain confident in their ability to generate returns. At the same time, they are being bombarded by more information and more investment strategies. Institutions may need to evaluate their approach and focus on disciplined investment decision-making in order to keep up with their goals.

96%

Confident they can generate +2% alpha over their benchmarks to meet their growth objectives

Estimated total excess return by source over the next 3 years

29%Individual ManagerOutperformance
25%Tactical AssetAllocation
46%Strategic AssetAllocation
1/2
Anticipated portion of total excess return that will come from shorter-term decisions.
29%Individual ManagerOutperformance
25%Tactical AssetAllocation

1/2 Anticipated portion of total excess return that will come from shorter-term decisions.

46%Strategic AssetAllocation

Conclusion

The investment decision-making process can be both art and science at the same time, with decisions for most investors involving both qualitative and quantitative inputs. In today's low-return, high-volatility environment, quantitative inputs—the "science" side of the equation—may need to take on more importance.

While it is not surprising for institutions to assess quantitative factors such as performance when making investment decisions, our global study revealed that hidden behavioral biases have crept into the process. Our survey reveals that many institutional investors may not be utilizing quantitative inputs enough. Instead, less exact qualitative inputs—often involving emotions, board dynamics, and press coverage—can have significant influence.

Institutional investors are becoming increasingly aware of the need to revisit and evolve their investment process given the rapidly changing environment. Now may be the time for institutional investors to revisit their decision-making process to ensure they build a more thorough and systematic process. This can help ensure a process that evaluates and synthesizes data and minimizes emotional biases. Ideally, the result will be an efficient and repeatable investment evaluation process that can positively impact portfolio progress toward goals.

 
 

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