Investors are exhibiting "irrational behaviour" and failing to act in their own best interests, due to increasing awareness of economic instability and misaligned interests among investment providers, government and markets, new research suggests.

Investors are exhibiting "irrational behaviour" and failing to act in their own best interests, due to increasing awareness of economic instability and misaligned interests among investment providers, government and markets, new research suggests.

The study, The Influential Investor: How Investor Behavior is Redefining Performance, was conducted by State Street's Center for Applied Research and is based on 12 months of research and input from 3,300 investment management industry participants across 63 countries.

"While investors have never been as aware of their micro and macro environments, they are exhibiting behaviours that are divorced from their stated investment objectives," said Kelly McKenna, global head of the Center for Applied Research.  

For example, when retail investors were asked what steps needed to be taken over the next 10 years to retire, the majority said "to invest more aggressively". However, 31 per cent of their assets are in cash, which is expected to remain their number one allocation over the next decade.

Meanwhile, low-yield markets have boosted institutional investors’ appetite for alternative strategies. "Yet, the majority admit their greatest challenge is not having a deep enough understanding of these assets," State Street said.

At the same time however, the findings indicated that investors' seemingly irrational behaviour is in fact a rational response to a number of factors impacting the current global investment environment. These factors include major economic trends, mistrust of primary investment providers and impediments from politics and new regulation that most believe will be "ineffective and expensive".  

Accordingly, the Center for Applied Research calls for fully transparent performance models that focus on long-term sustainability of returns that are defined in terms of value to the investor.

Performance: "one size no longer fits all"

Meanwhile, investors cited performance as the most important metric for determining the value of their investment providers, as well as the greatest weakness of their investment providers.

"Current monolithic benchmarks based on relative performance to peer groups or indices serve the provider," said Suzanne Duncan, global head of research at the research centre. However, the investor's view of value is now more complex and reflects their own blend of strategies and objectives, Duncan explained.

Supporting this notion, the survey found that only a third of investors believe their primary investment provider is acting in their best interest, while 64 per cent believe regulation won't help address current problems and 62 per cent expect that related costs will be passed on to them.