Is the Pursuit of Alpha Sabotaging Investment Success?

Investors and managers are focusing too much on alpha and not enough on achieving their long-term goals, State Street has argued.

Behavioral biases could impede investors and managers from achieving their long-term goals, according to State Street.

The firm’s recent research—conducted over 18 months through surveys of nearly 4,000 investors and providers—said there are conscious and unconscious common beliefs that stand in the way of investment success.

“The models for success in the investment management industry are broken,” Kelly McKenna, global head of State Street’s think tank, said. “Investment professionals pay significantly more attention to activities that they believe will contribute value to alpha.”

The report found more than 60% of the industry’s capital is spent in search for alpha. But investors are becoming increasingly skeptical, with only 53% of individual investors and 42% of investment professionals stating they believe alpha is primarily driven by skill.

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McKenna continued to say true success includes not only achieving alpha, but also requires realizing investors’ long-term goals over time. However, only 12% of surveyed investors said with confidence they were prepared to meet their goals.

“Investment professionals pay significantly more attention to activities that they believe will contribute value to alpha.” —Kelly McKenna, global head of State Street’s think tank.

State Street said both asset owners and managers were overly dependent on past performance in making investment decisions.

According to the survey, nearly 60% of investment managers used a one- to three-year benchmark to measure performance. More than a fifth of institutional investors said they define success based on achieving long-term goals while 63% said they measure success against benchmarks.

Investors also made unconscious mistakes of being overly confident in their investment abilities or blaming external factors for failures, the report said.

More than three-quarters of asset managers said their “experience and analytical process” were top reasons for outperformance, the survey found. In cases of underperformance, managers blamed market conditions, clients’ expectations, or senior management of companies they invested in, according to State Street.

“It’s time to rewrite the story,” Suzanne Duncan, global head of research of the firm’s think tank, said. “By reconditioning the industry’s behavior, there’s an opportunity to reinforce the values necessary to achieve true success.”

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