The lack of a cohesive process in constructing and implementing investment beliefs threatens to further erode returns amid volatile market conditions, according to analysis of a survey conducted by Pensions & Investments and Oxford University.
A clear set of investment beliefs aligned to institutional investors' objectives “gives a logic and coherence to the investment process over time,” said Gordon L. Clark, professor at Oxford University's Centre for the Environment, Oxford, England, who led the survey. “It's an important way of encouraging investment boards of pension funds to be more effective.”
The 2008-2009 global financial crisis “prompted two responses (from institutional investors): One has been to look back at market behavior and patterns for common threads; (the second is) searching for a coherent set of investment beliefs that can underpin (investors') investment strategies going forward,” Mr. Clark said.
“Inevitably looking back informs looking forward; the trick is to be self-conscious about investment beliefs so as not to be seduced by herd behavior and market momentum.”
At the same time, investors are increasingly scrutinizing the investment beliefs of external managers within the selection process (see related story above).
“It's very important to realize that even if you have an investment belief as an owner, there's always an agent who has to act on that belief who probably has a different belief,” said Rob Bauer, professor of finance and chairman of the institutional investments division at Maastricht University, Maastricht, Netherlands. Mr. Bauer, who has co-authored academic papers on investment beliefs, also advises pension funds on formulating investment beliefs and implementing them within an investment process, including manager selection.