To Understand an Allocator, Ask This Question

One of the most telling characteristics about an institution’s process is how investment leaders see themselves when it comes to innovation, according to Fidelity.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Allocators’ investment style and decision-making can vary widely depending on how the people at the top view innovation.

That’s what Fidelity Investments found when it interviewed 500 senior professionals at institutional investors. Just like there are people who eagerly start using new technologies, there are early adopters — and laggards — when it comes to innovative investment thinking and governance structures.

With that in mind, Fidelity Asset Management Solutions surveyed institutional investors for the first time about their decision-making and structure, including objectives, market perspectives, asset allocation, and other factors, using a construct adapted from a landmark innovation study, the Diffusion of Innovations, by Everett Rogers. The 500 respondents to Fidelity’s survey self-identified themselves as innovators, early adopters, early majority, late majority, and laggards based on their organization’s ability and willingness to experiment with new investment approaches and asset classes.

Innovators and early adopters see more opportunities in making tactical changes to their portfolio, according to the study, which is expected to published on Tuesday. Ninety-three percent of innovators and early adopters said they believe there could be value in short-term opportunities, compared to 70 percent of laggards. Although similar proportions of innovators, early adopters, and laggards said they are permitted to invest in short-term opportunities, 43 percent of laggards were more likely to need a formal sign-off to make tactical changes to their portfolios versus only 27 percent of innovators and early adopters. In addition, 42 percent of innovators and early adopters were more likely to give asset managers flexible mandates, compared to 27 percent of laggards.

Vadim Zlotnikov, president of Fidelity Asset Management Solutions and Fidelity Institutional Asset Management, said the survey marked the “first time anybody has done this: apply a tech diffusion framework to the financial industry.” He said he was surprised by how investors categorized themselves, in that it was in line with the results of the original study, done in late 1950s, and consistent with other areas of innovation.

The majority of institutional investors categorized themselves in the middle, with 33 percent saying they were early majority and 31 percent saying late majority. Innovators made up 5 percent, early adopters 18 percent, and laggards 13 percent.


“The biggest difference between innovators and early adopters and laggards is time horizon,” Zlotnikov told Institutional Investor. “In my career, I found that the time frame is the single most important determinant of investment style, the type of people you hire, and your governance structure. The style of a day trader, who has a time horizon of one day, is very different from distressed debt or private equity.”

Zlotnikov said early adopters, innovators, and laggards all believed there were short-term opportunities, but “to exploit them you need more flexibility in your mandates, you need a governance structure that allows you to seek changes without seeking board approval. The big difference is that [laggards] don’t have the infrastructure or people to take advantage of them. They have guard rails that are much tighter.”

He said the findings are also consistent in how these different groups think about new asset classes, such as cryptocurrencies, or even active management in general.

Overall, institutional investors reported that they had an asset allocation of 63.5 percent to active strategies; 28.9 percent to traditional passive products, such as funds weighted by market capitalization; and 7.6 percent to non-traditional passive, including factors, non-cap weighted, and smart, or strategic, beta.

In addition, 31 percent of those surveyed said that by 2025 they expected to increase their allocations to active investments, including public equity and private strategies. Just under half expected not to make any changes, while 22 percent expected to decrease their allocations to active. Among innovators and early adopters, half expected to increase their active investments.

Innovators and early adopters also reported higher allocations to alternatives than laggards (23 percent versus 16 percent for laggards). The portfolios of laggards had more of a home country bias toward U.S. equity (35 percent versus 29 percent for innovators and early adopters) as well as U.S. investment grade fixed income (21 percent versus 17 percent).

“Early adopters and innovators tended to view current valuations as a risk to the level of future returns,” Zlotnikov said. “Laggards did not see as much risk associated with valuations. That also explained why innovators and early adopters pursue greater degrees of diversification away from traditional equities. They see the valuation as being perhaps more of a headwind to the returns going forward, so they seek [returns] in other areas, such as active, the illiquidity premium, or the pursuit of vehicles like hedge funds that can exploit mispricings.”