Retail and institutional investors are not acting in their own interests, according to first global investor study by the State Street Center for Applied Research.
Amidst an environment of heightened uncertainty, the CAR study found that investors are exhibiting behavior that appears to be at odds with their stated investment goals. The study, entitled: "The Influential Investor: How Investor Behavior is Redefining Performance," was conducted by CAR, an independent think tank residing at State Street Corporation, and is based on 12 months of research and input from more than 3,300 investment management industry participants.
Among the study's key findings are that investors are not acting in their own best interests as they become aware of economic instability and misaligned interests amongst investment providers, government and markets.
There is ample aggregate evidence of this behavior, according to the study:
--Institutional investors struggle with 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 said they want to invest more aggressively over the next 10 years to meet their retirement goals. Yet, cash is their number one allocations and is expected to remain number on over the next decade.
Commenting on the diverse behaviors of investors, 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."
Despite the disconnect that exists between behavior and goals, 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.
When it comes to performance, the study found that one size no longer fits all. "Current monolithic benchmarks based on relative performance to peer groups or indices serve the provider," stated Suzanne Duncan, global head of research for the Center for Applied Research in the release. "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 finds, the think tank recommends fully transparent performance models that focus on long-term sustainability of returns, defined in terms of value to the investor.
However, investor's seemingly irrational behavior is actually a rational response to a number of factors impacting the current global investment environment, the study said.
--Major economic trends including a steady increase of national debt worldwide, tighter correlations across global markets and a rise in systems risk;
--Mistrust of their primary investment provides to act in their best interest, stemming in part from lack of value delivered versus feeds charged. Only one third of investors believed their primary investment provider is acting in their best interest.
--Impediments from politics and financial regulation as well that most investors believe will be ineffective and expensive. Sixty-four percent of investors believe that regulation won't help address current problems and 62% believe the cost will be passed onto them.