Investors Reassessing Strategic Asset Allocation Models

Based on the current environment, investors’ return expectations may be more difficult to reach with traditional investment models.

The current low-return environment means investors’ return expectations may be more difficult to achieve unless they find new investment models, according to a research report from SSGA titled “Building Bridges.”

Nearly a quarter of respondents in a survey of 400 global institutional investors said their long-term return expectations are not currently being met and many expect the underperformance to continue. Only 13% said that, on average, their asset classes were performing above expectations. Those who are experiencing underperformance said they prefer increases in active investing, objective-based investing or allocations to alternatives to grow portfolios. Twenty-two percent of respondents said they are seeking higher allocations to alternative asset classes, and 27% indicated a preference to increase their allocation to active investing. The same percentage said they sought objective-based investing. Allocations to alternative asset, active or smart beta approaches were typically funded from passive portfolios, SSGA found.

Although traditional asset allocation approaches still dominate, investors are looking for factor-based approaches such as smart beta. While 41% of respondents indicated that traditional asset class distinction remains the single most important way of approaching asset exposures, alternative classifications including factor- and objective-based are favored by 30% and 25%, respectively. Among investors wanting to address performance gaps, only 11% indicated that smart beta was the most important part of their new asset allocation approach, but 38% included it among other approaches used. SSGA also found that three-quarters of the respondents who have introduced smart beta approaches found moderate to significant improvement in portfolio performance.

Although investors are interested in finding new approaches to meet performance goals, they still face significant barriers. SSGA found that obstacles 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.

Building understanding as to how these strategies work and are best evaluated will be a necessary step to build confidence and adoption by investors, according to SSGA. 

The full report is available here.