P&I survey shows divergence in investors', market views

Uncertainty caused by last-minute congressional negotiations to avert the fiscal cliff created pessimism about the economy and markets in the short term, according to Pension & Investments readers responding to a P&I/Oxford University survey.

There was less pessimism about the longer-term implications.

The responses also highlighted a difference between individuals' beliefs about market behavior and their perceptions of how the market would react over different time horizons. That split underscores a significant shift in market theory and practice since the 2008-2009 financial crisis, according to the authors of the survey.

The survey on the current state of institutional investors' long-term investment beliefs was conducted Dec. 17-24 by P&I and Oxford University professor Gordon Clark, director of its Smith School of Enterprise and the Environment. Dane Rook, a Ph.D. student in long-term investment at Oxford, was responsible for the survey design and data analysis. Respondents were polled on their views and their views of others in the market for both short and long horizons pertaining to economic stability, economic growth, unemployment, international trade and consumer confidence.

The 811 survey respondents represented roughly equal proportions of asset owners, money managers, consultants and others.

The eight-question survey found a divergence between individuals' views of how the fiscal cliff affected the market and individuals' perceptions of the market's view of the same issue.

Mr. Clark attributed the difference to the financial crisis, which “has opened a gap between how individuals see the world, and their perception of market beliefs. The crisis has forced sophisticated investors to look at their own beliefs more in relation to others' beliefs.”

The survey also found no meaningful link between respondents' political affiliations and the time horizons, but people self-identified as Republican were more pessimistic about how Congress' fiscal cliff action would affect the economy and those self-identified as Democrats were less pessimistic. One-fourth of respondents did not identify with either party.

Across political affiliation and organization type, the definition of short term as predominantly “three months to less than one year” was consistent, with 70.8% of all respondents agreeing on that period. Another 17.3% considered short term to be one month to less than three months, and 11.2% saw it as one year to four years.

There was less consensus on what constitutes the long term. Half of all respondents considered it to be one year to four years, with another 43.3% seeing it as four years to less than 10 years.

“These differing definitions of the long term could generate conflict in the future for asset owners, but possible opportunity with well-defined belief sets that take others' perspectives into account,” said Mr. Rook.

Respondents with a longer view of what constitutes long term were the least pessimistic about Congress' impact on the overall investment climate. People defining “long term” as one year to less than four years were far more pessimistic on all questions than those who considered it a horizon of four years to less than 10 years.

“I think it's an important finding because it challenges a conventional assumption that market perceptions are only short term,” Mr. Clark said in an interview.

“So much of commentary would have the market being extremely short-term oriented, but in the results it's clear that people are able to hold together short-term and long-term perceptions. People can have a set of beliefs that are rather different. It is one of the first studies to give some credence to the existence of long-term beliefs, and that people can hold them simultaneously.

“The fact that P&I readers have a variety of time horizons suggests that it is far too simplistic to accuse the market of being too short term. The fact that there are differences tells you something about the diverse ecology of the market.”

The coexistence of different beliefs “is good for market stability,” Mr. Clark said. It can be particularly helpful during periods of uncertainty such as the fiscal cliff drama.

“It says this short-term pessimism and long-term optimism about the U.S. as an economic opportunity for investors is real and is justified by fundamentals behind it.”

But, he added, if the underlying issues still to be addressed, such as government spending and the federal budget deficit, were resolved, “you might see much higher rate of investment than many economists expect.”

On the question of beliefs about market behavior, a significant portion of respondents thought the market's view differed from their own on each of the questions. One-third of respondents thought themselves to be more pessimistic than the market.

“Confidence here is critical,” Mr. Rook said. “Those who put more faith in their beliefs will act more decisively and possibly be less dependent on what the market does over the short term.”

It presents a new realm of possibility for asset managers and owners in the long term in which they act upon faith in their own abilities and skills beyond the market,” he added.

“Beliefs are effectively the lens through which investors see the market. They combine those beliefs with news and information they see,” Mr. Rook said.

“That is particularly true of situations of ambiguity, where those with a longer-term perspective will rely upon their beliefs in combination with what they are seeing,” he added.

The survey is timely, Mr. Clark said, because belief systems behind investment management practices “are so much debated at the moment. It used to be the case that there was a settled system of investment beliefs informed by accepted theories such as modern portfolio theory. But we are in a new world, where some people no longer have confidence in these principles.”