There are significant differences in investment flows between asset classes by institutional and retail investors, especially over the short-medium term, and differences between the types of research available to each sector, according to a recent study by eVestment.
Basically, the study, which is based on eVestment’s European database, shows institutional investors tend to be ahead of their retail counterparts in observing asset class trends, even though retail investors should be less bureaucratic and more nimble in their decision-making processes.
There are also big differences in the way institutional and retail investors select fund managers, according to the eVestment study – “Get the Full Picture: How Using Both Retail and Institutional Data in Your Analysis Can Fill in the Missing Pieces”.
About 41 per cent of the eVestment European database consists of discrete mandates for institutional clients which are not reflected in a manager’s specific mutual fund offerings. The total global universe, according to a recent PwC report, is US$30.4 trillion in institutional discrete mandates, $27 trillion in retail mutual funds and $6.7 trillion in alternatives.
The eVestment study says institutional flows often precede retail flows. Institutions tend to move assets into or out of an asset class one to two years in advance of retail investors.
For instance, institutional investors started buying more emerging markets debt at the end of 2009, and that trend did not materialise on the retail side until a couple of quarters later. Even then, the institutional flows are about US$150 billion more than the retail flows over time.
The story for European bonds is a little different. From 2007 to mid-2009, retail and institutional investors exhibited similar behavior regarding European bonds. In 2010, the flow trends diverge, and over time, the retail and institutional flows show a $100 billion gap. Using retail flows alone would vastly underestimate the growth and potential for asset flows in this space, the study says.
On manager selection, institutional investors tend to look top-down, or be more concerned with the manager, the operations of the manager, the firm strategy and philosophy, etc. versus specific stocks. Investors also may be required to choose specific managers based on stated investment policies – for example, selecting a certain percentage of ESG managers. Retail investors tend to be more performance-and-stock-influenced in their manager selection. They are less interested in the operational aspects of
a manager’s investment process that make up a significant part of the institutional investors’ due diligence process. As a result, retail investors tend to be bottom-up investors and are typically not held to specific investment policies.
The breadth of data collected by institutional investors compared with their retail counterparts allows deep insight into a particular asset class, or a strategy within an asset class. The study says that about 2,800 different characteristics across all asset classes can be reported in an institutional manager questionnaire, which is more than 50 times as much information than a standard retail questionnaire. However, eVestment advises all investors to use both classes of data.
“Retail fund data is intended to help the retail investor make fund buying decisions and to track a specific fund’s performance for investors investing a relatively small amount of money. Institutional investment data is intended to track fundamental and behavioral changes within the institutional markets to monitor existing managers, potential managers and product changes.
“If you are an institutional asset manager, it’s vital to be using the same data as your potential clients to drive meaningful conversations and analysis. If you are using retail data to support your institutional investment decisions, your discussion may fall apart.
“For institutional investors, go beyond performance and returns in your analysis of managers. Institutional data provides a much broader amount of data covering personnel, asset profiles, portfolio characteristics, holdings as well as performance. By incorporating this information, you can create
a robust mosaic of a manager – understanding how they think about their strategy, how they implement their decisions and how those decisions have led to the returns and outcomes they produce.”