SSGA survey - Shifts in investor thinking

Investors know that the total return environment will be more challenging in the coming few years. The investment question is what can be done to minimize this decline on portfolio performance. The recent SSGA survey, "Building Bridges  -Are investors ready for lower growth longer? How are they working to bridge the performance gap?" tries to identify what investors are doing to adapt and adjust to the current environment.

Two major themes jump out of this institutional investor survey:

• Investors are thinking outside the basic construct of asset class;
• Investors are using constructs outside asset classes to generate return.

In the old world, most investors thought in terms of asset class. How much equity or fixed income exposure do I have in the portfolio? The latest survey shows that only 41% of investors use asset class as the primary method for classification within the portfolio. Now, 30% of investors use factor/exposure and 25% employ other objectives such as growth or income as the primary drivers. The focus on risk and objectives may allow for better management of the portfolio over the traditional asset class construct. There is a clear sense of measurable risks tied to fundamentals. 

The declining returns associated with asset class and the focus on risks and objectives has lead to changes in the construction of portfolios. The three biggest alterations to portfolios are: increased allocations to alternative investments, increased use of objective-based investing, and increased use of active investing. Coming in fourth is the use of smart beta as an enhancement technique. The premise is that active investing will offset the return shortfall.

While there has been an explosion of demand for ETF's and passive investing, it seems as though pensions are concluding that hitting investment targets can only be achieved through active managing of the portfolio. Sitting on fixed or passive allocations will not get investors to their return targets.

In spite of the underperformance of active management, the decline in hedge fund alpha, and the changing impact of value or growth strategies, investors are relying on these methods to make up for what they cannot receive in beta. The old-fashioned approach of better funding pensions is only the last resort.