What You Need to Know
- Forty percent of respondents said their challenge is yield generation, taking on more risk for the same level of return.
- Fidelity found that investors who considered themselves ahead of the innovation curve had a more optimistic outlook than those who considered themselves laggards.
- Most investors said they would either boost their allocation to actively managed assets or keep it the same.
Institutional investors in a recent survey said they anticipate downward pressure on their ability to outperform against their return targets, Fidelity Institutional reported Tuesday.
Although respondents nearly doubled their expected required rate of return, on average, in 2020 — 12.3% actual, compared with 6.3% required — only 54% expressed confidence that they would meet their expected target rate of return over the next three years.
When institutional investors were asked about challenges they are experiencing, 40% said it is yield generation, being forced to take on more risk for the same level of return. Thirty-nine percent confirmed that they are taking on more total risk in their portfolios than three years ago, and 37% said they are not comfortable with the total level of risk in their portfolios.
“This year’s study signals headwinds that have been putting pressure on firms to consider taking on more risk as they look for new sources of excess returns,” Vadim Zlotnikov, president of Fidelity Asset Management Solutions and Fidelity Institutional Asset Management, said in a statement.
“As we consider the impact of potential future macroeconomic changes, this is an opportunity for institutional investors to reevaluate their investment philosophies and decision-making processes.”
CoreData Research executed the online survey from May 28 to July 26 among chief executive officers, chief investment officers, treasurers and other investment executives at 500 institutions in the U.S., representing $12 trillion in assets under management.
The survey was supplemented by 11 in-depth qualitative interviews with respondents.
Investment Innovators Curve
For two decades, Fidelity has been conducting primary research to understand decision-making among institutional investors. This year, Fidelity’s study introduced a new framework called the Investment Innovators Curve to help institutions benchmark against their peers.
Respondents selected their placement in an innovation category, based on their organization’s ability and willingness to experiment with new investment approaches and asset classes.
The majority of institutional investors in the study placed themselves in the middle, 33% as Early Majority and 31% as Late Majority.
However, an analysis of segments at the “tails” of this curve — made up of 5% Innovators and 18% Early Adopters at one end and 13% Laggards at the other — demonstrates how widely investment and decision-making approaches can differ depending on an organization’s orientation around innovation, Fidelity said. This is true even among institutions of similar type and size.