One Percent of Institutional Investors Outperform After costs: State Street

One Percent of Institutional Investors Outperform After costs: State Street

State Street Corporation (NYSE:STT) Center for Applied Research released a new report recently with a shocking statistic. Just 1 percent of institutional investors do better after costs are deducted. The State Street analysis concentrated on investment decisions made by university endowments, global pension funds, and sovereign wealth funds.

One Percent of Institutional Investors Outperform After costs: State Street

The stat came from a paper entitled The Quest For Performance. The paper studied the effect of changes in world finances brought about by the international financial crisis of 2008 and policy shifts made after that event. Those shifts have turned many investment truths “on their head” according to the paper, and left some asset classes with historically low returns.

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Investing in the new world

The report concentrates on the way institutional investors create their portfolios, and particularly the way they balance risk return and diversification. There is a clear trend that can be seen in the way large university funds have allocated their investments. Institutional investors have used alternatives for years, but since 2008 their use of alternative assets has increased as they search for returns in a low return world.

There is a clear trend that has been happening in university portfolio allocation for the last 20 years, but jumped meaningfully in the financial crisis when bonds and equity stopped offering the returns they used to. The report demonstrates how this trend is mirrored in the portfolios of sovereign wealth funds and pension funds.

The 2008 financial crisis did not result in the calm and clear reconsideration of the way that institutional investors divided their portfolios. Instead, it caused an acceleration of trends that had been ongoing for years. The effects on performance are studied by the State Street Corporation (NYSE:STT) analysts.

Institutional investor performance

Two of the tables contained in the State Street Corporation (NYSE:STT) Report demonstrate the company’s point about investing in recent years better than almost anything else in the report. The first is the returns and standard deviation of a bunch of alternative assets from 1998-2007. The second looks at the same assets and the same metrics for the years 2008-2012.


The tables show that though returns for the asset classes in recent years look good, the average numbers disguise a large amount of volatility in those assets.

A similar piece of work was done to show how alternative asset correlation has changed in recent years.


Correlation has increased substantially in the years following the financial crisis and volatility varied widely in different asset classes. Equity and fixed income returns are still being affected by deleveraging, according to the research.

According to the analysis, 24 percent of the funds studied were unable to meet their benchmark, and 75 percent of the funds were unable to generate any Alpha on top of their benchmark. That leaves just 1 percent of funds that were able to exceed performance goals—a very poor number.

Just 1 percent of institutional investors were able to beat performance benchmarks. The State Street Corporation (NYSE:STT) blames the lack of return on several factors, including an asset liability gap in many institutions, and the differences in investment across investment managers and strategies.

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