State Street Global Advisors (SSGA), the asset management business of State Street Corporation, has 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 of which one quarter were based in the Asia Pacific region, found that investors recognize the need for change and subsequently 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% return on their long-term portfolio performance. Just 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 (90 percent in APAC) believe that portfolio under-performance will continue for at least another year and 16 percent (10 percent in APAC) 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 Kevin Anderson, head of investments, Asia-Pacific at SSGA. “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 said they planned to increase their use of smart beta strategies to address performance shortfalls.

•           In APAC however, 22% of such investors said they planned to increase their use of smart beta strategies to tackle underperformance whereas 78% said they would boost their investments in alternatives and 72% in objective-based investing.

•           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 75% of users report a moderate-to-significant improvement in meeting long-term aims. In APAC 17% of respondents have already used smart beta strategies although 35% said they were planning to implement them.

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 SSGA. “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.”