State Street Global Advisors (SSGA), the asset management business of State Street Corporation (NYSE:STT), today released a new report that found investors are reassessing strategic asset allocation models and turning to objective- and factor-based approaches to better achieve investment objectives in a low-return environment.

The research, which surveyed 400 global institutional investors, found that investors recognize the need for change and that increasing adoption to approaches including objective- and factor-based models such as smart beta strategies may offer better risk weighted returns. However, many stated that more education is necessary to build confidence and adoption.

Despite the lower for longer return environment, respondents shared that they are looking for a 10.9 percent return on their long-term portfolio performance, with a mere 13 percent saying that, on average, their asset classes were performing above expectations. Of those experiencing returns below their long-term expectations, 84 percent believe that portfolio under-performance will continue for at least another year and 16 percent believe it is more likely to continue for two to four years.

The research found that investors acknowledge new approaches will be required, with 97 percent of respondents expecting significant change in the industry’s investment approach over the next five years.

“The models of investing across the institutional landscape are evolving as institutions are beginning to question whether they can achieve objectives through traditional investment models in the current lower-for-longer return environment,” added Rick Lacaille, chief investment officer at State Street Global Advisors. “Not only does this challenge traditional, strategic asset allocation models by forcing greater consideration of risk – it also confronts investors with a need to focus from a top‐down perspective on the drivers of returns in their underlying asset class choices.”

Additional findings include:

  • For investors facing diminished returns, traditional approaches are still dominant, but alpha remains elusive in a low return, high fee environment and investors are looking for new perspectives. Although 59% indicated a preference to increase their allocation to active investing, 38% of respondents say smart beta would be among the approaches they would consider to address performance shortfalls.
  • While 41% of all respondents indicated that traditional asset class distinction remains the single most important way of approaching asset exposures, alternative classifications including factor-based and objective-based make up 30% and 25% respectively.
  • There is evidence of a shift however, as 39% of respondents in the Americas and 31% in EMEA have already used smart beta to address performance shortfalls, and 76% of users report a moderate-to-significant improvement in meeting long-term aims.

Although a willingness to uncover new perspectives is evident, investors still face significant barriers to the adoption of new approaches.

  • Institutions are conscious of the need to find better ways to meet long-term performance goals, however change can be slow. A few identified obstacles that still exist include slow peer group adoption (62%), difficulties obtaining board buy-in (46%) and a lack of in-house expertise (46%) all of which impede the transition to a factor based strategy approach.

“Many institutions are struggling with different investment policies that don’t meet their needs,” said Lori Heinel, chief portfolio strategist at State Street Global Advisors. “This shift certainly won’t happen overnight, but investors will need to develop the appropriate knowledge base and expertise, secure the support of key partners like boards and participants, and weigh their overall objectives before making the leap. While we are still in early stages of industry-wide adoption, investors who have adopted factor-based approaches are seeing positive results.”

The survey was conducted by FT Remark and surveyed 400 institutional investors including sovereign wealth funds, pension plans, endowments and foundations, insurance companies and asset managers in December 2015.

To read the full report, please click here.

About State Street Global Advisors

For nearly four decades, State Street Global Advisors has been committed to helping financial professionals and those who rely on them achieve their investment objectives. We partner with institutions and financial professionals to help them reach their goals through a rigorous, research-driven process spanning both active and index disciplines. We take pride in working closely with our clients to develop precise investment strategies, including our pioneering family of SPDR ETFs. With trillions* in assets under management, our scale and global footprint provide access to markets and asset classes, and allow us to deliver expert insights and investment solutions.

State Street Global Advisors is the investment management arm of State Street Corporation.

*Assets under management were $2 trillion as of March 31, 2016. Assets under management include approximately $33 billion as of March 31, 2016, for which State Street Global Markets, LLC, an affiliate of SSGA, serves as the distribution agent.

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©2016 State Street Corporation

Exp. Date- 5/31/2018