MFS: short-term bias likely to harm returns

Institutional investors in Asia are too short-termist when it comes to monitoring performance of asset managers, but they have tempered their return expectations, according to a survey due for release today by US fund house MFS.

The findings also show that MFS’s clients, both globally and in Asia Pacific, have maintained a steady allocation to actively managed strategies since last year, despite the growing popularity of passive investments.

The poll was conducted in August with 220 global institutional investors, including 55 in Asia Pacific.

Short-term bias

When it came to measuring the success of their investment portfolios, 40% of Asia-Pacific respondents said they focused on one- or three-year performance. Six in 10 (58%) said their organisations expected them to generate positive returns over either one or three years.

Eight in 10 said they reviewed the performance of their external managers on a daily, monthly or quarterly basis.

Jonathan Tiu, senior managing director for Asia ex-Japan at MFS, said: “In the end, these investors are likely setting themselves up for diminished returns, greater risk and higher volatility.”

And even though two-thirds of Asia-Pacific respondents looked at performance track records of five years or more when hiring external managers, 72% said they would begin a search for a replacement manager after three years of underperformance.

Kevin Beatty, MFS's chief investment officer for global equity, told AsianInvestor: “Academically and theoretically, we all understand we have to be long-term investors. But people get measured on short-term statistics and performance. It is a behavioural bias in the industry.”

Lower return expectations

However, asset owners do seem to have reduced their performance expectations.

With global growth hindered by large amounts of debt in developed markets and lower-for-longer central bank policies, there is a strong consensus that returns will be lower than in the past for the foreseeable future.

Only six in 10 institutional investors in Asia were highly confident about achieving an expected return of 7.4% annually over the next three years. MFS could not provide similar data for last year, as it had posed different survey questions.

And just one-third said they were optimistic about the prospects for their home country’s economy. Seven in 10 were concerned about negative interest rates and 64% about growing government deficits.

In the current environment, investors must take three times the risk they did 20 years ago to achieve the same returns, according to research published in September by US-based Callan Associates.

Steady active allocations

Amid these challenges, MFS’s clients appear to be keeping faith with active management. Institutional clients have retained similar allocations to active strategies to last year, despite the rising popularity of passive investments in recent years.

Respondents overall said they had allocated 74% to active strategies, 20% to passive and 6% to cash. Last year, the figures were active 76%, passive 19% and cash 5%.

The breakdown for Asia-Pacific clients was very similar, both this year (active 75%, passive 17% and cash 8%) and last (76% active, 16% passive and 8% cash).

This is despite the increased interest in passive strategies in the past couple of years, as investors have sought to reduce the fees they pay, particularly in light of data showing widespread underperformance by active managers.

According to research on the US equity market released by S&P Global in September, over five years to June 30, 91.91% of large-cap managers, 87.87% of mid-cap managers and 97.58% of small-cap managers lagged their respective benchmarks.

Admittedly, the US is among the most efficient stock markets globally and thus among the hardest to outperform, but these are nonetheless startlingly high figures.

“It is completely understandable that there’s a need and desire for passive strategies,” said Beatty. But asset owners still come back to ask how to produce alpha despite the noise around new investment and trading ideas, he noted.