Investors Not Acting in Their Own Best Interest
Study from State Street’s Center for Applied Research Highlights How Investor
Behavior is Reshaping Investment Management
*Most retail investors believe preparing for retirement requires aggressive
investing, yet 31 percent of their assets are in cash
*Institutional investors struggle with complexity associated with
alternative investing, yet their appetite for these strategies shows no
signs of abating
*Study calls for a new definition of performance to deliver sustainable
returns; one size no longer fits all
BOSTON -- November 12, 2012
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
*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
*Major economic trends, including a steady increase of national debt
worldwide, tighter correlations across global markets, and a rise in
*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.
State Street Corporation
Arlene Roberts, 617-664-3933
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