Institutional Investors ‘Confident’ in Return Expectations

Asset owners surveyed by Fidelity reported strong chances of excess return despite market uncertainty.

Not even a low return environment can get institutional investors down.

In a Fidelity survey of 933 allocators across 25 countries, 96% of investors said they believed they can still generate alpha above their benchmarks to meet growth objectives.

This was despite 28% citing current and future low returns as a top concern regarding their investment portfolio, and 27% worrying about volatility. Pension funds, both corporate and public, were the most worried about the low return environment, while sovereign wealth funds were more likely to fear the impact of volatility.

Yet sovereign funds also had the loftiest performance expectations, reporting an average expected long-term return of 9.8%—more than two percentage points above their required return rate of 7.5%.

Endowments and foundations, meanwhile, were the most conservative, citing a 5.5% required rate of return and total expected returns of 7.3%.

“Despite uncertainty in a number of markets around the world, institutional investors remain confident in their ability to generate investment returns, with a majority believing they enjoy a competitive advantage because of confidence in their staff or better access to managers,” said Derek Young, vice chairman of Fidelity Institutional Asset Management.

Over the next three years, asset owners across the board said they believed the largest portion of excess return would come from strategic asset allocation. Just under a third was attributed to potential outperformance by individual managers, while roughly a quarter was estimated to come from tactical asset allocation.

Survey respondents said asset allocation decisions were influenced by a number of factors, both data-driven and behavioral. Although considerations like performance and risk tolerance remained the most important, 90% of investors admitted asset allocation was influenced at least somewhat by board member emotions, while 85% took the asset allocation of their peers into consideration when forming their own investment strategy.

“Whether it’s qualitative or quantitative factors, institutional investors today face an information overload,” said Scott Couto, president of Fidelity Institutional Asset Management. “A more disciplined investment process may help them achieve more efficient, effective, and repeatable portfolio outcomes, particularly in a low return environment.”

fidelity surveySource: Fidelity’s “Global Institutional Investor Survey”

Related: Don’t Count on Hitting Your Return Target: Research Affiliates