Fidelity Institutional Asset Management®
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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.
This year, institutions are expressing more worry about the capital markets than in previous years.
Explore Global Response:
“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.”
Vice Chairman of Fidelity Institutional Asset Management®
President of Fidelity Global Asset Allocation
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.
Other segment consists of trade unions, law firms, health and medical centers, etc.
*Growth includes capital growth and funded status growth options.
**Preservation includes capital preservation and funded status preservation.
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.
Anticipated portion of total excess return that will come from shorter-term decisions.
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.