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  Staying Focused on Long-Term Investment Goals: The Institutional Approach

Wilshire annually examines the investment returns and relative performance of retail investors as compared to their institutional investor counterparts. Although capital markets present similar levels of uncertainty for all participants, institutions have generally outperformed retail investors over 10- and 20-year time horizons, as illustrated in Exhibit 1 below. This paper will review trends within retail investing in an effort to better understand certain dynamics that drive investor decision making. We will also examine the institutional approach to investment management, with the goal of identifying investment characteristics retail investors might consider adopting.

We use data from DALBAR’s 2019 Quantitative Analysis of Investor Behavior Report (the “DALBAR Report”) and the Wilshire Trust Universe Comparison Service® (“Wilshire TUCS®”) in our analysis. The DALBAR Report utilizes monthly mutual fund sales, redemptions and exchanges as the measure of “average investor” behavior, reflecting results net of investment fees. Wilshire TUCS® is a cooperative effort between Wilshire Associates and several global custodian banks and trust companies to aggregate the asset allocation and holdings data of approximately $3.6 trillion dollars of U.S institutional assets. For the purposes of this paper, data from Wilshire TUCS® is used as a proxy for institutional investor performance. Wilshire TUCS® provides plan data contributed gross of fees by the participating custodian, bank, or consultant and is calculated using accounting inputs and computational method standards.

Exhibit 1: 10–Year and 20–Year Annualized Returns for Average and Institutional Investors Ending 12/31/2018

Chart illustrating how institutions have consistently outperformed retail investors over various time periods

Source: DALBAR and Wilshire TUCS®. Average Equity Fund Investor, Fixed Income Fund Investor, and Asset Allocation Fund Investor from the DALBAR Report. Average institutional investor data from Wilshire TUCS is represented by the median total returns of master trusts - all plans, as of 12/31/18. The chart shown intends to demonstrate what Wilshire believes to be the effect of behavioral biases, including market timing, exhibited by retail investors. The reader should view these returns in consideration of other relevant additional factors and should not rely solely on performance data shown.

While there are key differences between institutional investors and their retail counterparts, including, but not limited to, different investment horizons, liquidity requirements, and the larger asset pools that generally give institutional investors access to lower investment fees, a wealth of data, including some depicted here, suggests that individual investors could nonetheless benefit from taking cues from their institutional counterparts to improve the overall performance of their portfolios.

Retail Asset Flows

Evaluating the flow of funds to and from specific asset classes is helpful in understanding the tendencies of retail investors. Mutual fund flows are useful in tracking the asset allocation decisions of individual investors, as institutions often invest through separate accounts. Exhibit 2 charts the net flow of capital in and out of U.S. mutual funds against the growth of a hypothetical $10,000 investment in the Wilshire 5000 Total Market IndexSM, an index that measures the performance of all U.S. stocks with readily available price data, from January 2009 to December 2018.

Since the bottom of the financial crash in March 2009, the stock market has entered one of the longest bull runs in history, as depicted in Exhibit 2, with the value of a $10,000 investment more than quadrupling over the nearly ten years ending December 2018. In the same period, equity flows have been consistently negative, while bond flows have been mostly positive as retail investors chose safety over potentially higher returns. Additionally, the variability of capital movement in and out of mutual funds, known as the volatility of fund flows and attributable in part to market timing efforts, has also continued to increase post-2008. Even minor market dips are often followed by significant outflows from both equity and bond mutual funds. In February 2018, investors fled equity mutual funds in exchange for the safety of money market mutual funds as global stock market turmoil impacted the U.S., leading to a February S&P 500 Index return of -3.89% following a January return of 5.62%. The pattern continued later in the year as the S&P 500 Index lost -9.18% in December after a November gain of 1.79%. According to Morningstar, investors ended the year by withdrawing a record-breaking $143 billion in December across all asset classes with the exception of money market funds. In 2018, money market funds had their strongest year of inflows since 2008, with $57 billion in inflows in December 2018 alone.

Exhibit 2: Inflows and Outflows of Equity and Bond Mutual Funds: January 2009 – December 2018

Chart illustrating the net flow of capital in and out of U.S. mutual funds against the growth of a hypothetical $10,000 investment in the Wilshire 5000 Index.

Sources: Wilshire Compass, Investment Company Institute.

DALBAR’s Guess Right Ratio

Exhibit 3 below charts DALBAR’s Guess Right Ratio, which depicts the frequency with which investors “guess right” in their attempts to time the market. In general, when the Guess Right Ratio exceeds 50 percent investors have made money from their allocation decisions, which has happened in 14 out of the last 20 years. In 2018, the average investor was able to “guess right” in half of the months of the year. However, guessing correctly does not necessarily equate to better performance. Guessing incorrectly only a few times can substantially offset gains, demonstrating that emotional and reactionary investment decisions can be damaging to long-term performance.

Exhibit 3: DALBAR’s Guess Right Ratio

Chart depicting the frequency with which investors guess right in their attempts to time the market.

Source: DALBAR Report, Wilshire Compass.

In 2018, the average equity fund investor was a net withdrawer in 10 out of 12 months, with the largest withdrawals occurring in July, August, and November, all months with positive equity market returns. In fact, the average equity fund investor was a net withdrawer in 7 of the 8 months in 2018 when the equity market was positive. The average equity fund investor’s decision to withdraw from their portfolio meant that they were not able to fully reap the gains from positive market performance and grow their portfolio to the same degree they could have if they stayed invested.

Comparing the Performance of Individual and Institutional Investors

A wealth of data suggests that individual investors should take their cues from their institutional counterparts and remain committed to their long-term strategic asset allocation. Exhibit 4 depicts the performance of the average equity fund investor versus the average equity fund for the 10-year period ending 2018, and the eventual underperformance caused by emotional investment decisions.

Exhibit 4: Average Equity Fund Investor Returns versus Average Equity Fund Returns by Year

Chart depicting the frequency with which investors guess right in their attempts to time the market.

Source: DALBAR Report.

The average equity fund investor returned –9.42% in 2018, while the average equity fund returned –4.38% for the year, a difference of 5.04%. 2018’s performance discrepancy was not anomalous, for the 10-year period from 2009-2018, the average equity fund outperformed the average equity fund investor in every year except 2009. The average equity fund investor trailed the average equity fund every year through one of the longest bull runs in history. This underperformance in 2018 was especially prevalent in August and October where the average equity fund investor underperformed the average equity fund by 146 basis points and 113 basis points, respectively.

Although the gap between individual investors and their institutional counterparts has decreased from prior years, we continue to observe a disparity, caused in part by retention rates of individual investors. Equity funds investors have rarely held their investments for a period of more than four years, especially when there is a dip in the market. Although retention rates for equity fund investors in 2017 and 2018 hovered around four years, this was peak retention and mostly credited to the long running bull market. For the 20-year period between 1999 and 2018, retail equity investors stayed invested between two and four years, short of a full market cycle, defined as a period that contains a wide range of market conditions. Unlike many individual investors, institutional investors generally adhere to a structured investment policy to provide a framework for their decision-making process and to curtail the potential for emotional investing. For example, starting in the fourth quarter of 2018, investor concern regarding the ongoing trade war with China and the Fed’s likely increase in the Fed Funds Rate triggered a selloff in equities. Immediately subsequent to the market selloff, retail investors withdrew from equity mutual funds and ETFs, with December 2018 recording the 2nd largest monthly outflow from equities since March 2009. Investors who fled equities in December missed the sharp equity market rebound in early 2019, whereas institutional investors that remained committed to their asset allocation policy fully participated in the equity market recovery.

Remaining committed to an investment policy is not synonymous with setting and forgetting your portfolio. Exhibit 5 illustrates the asset allocation shifts that master trusts (all plans) made from 1998 to 2018. Regular reallocation and rebalancing activities based on long-term objectives and capital market assumptions is consistent with the best practices of successful institutional investors. By exiting the market and attempting to guess the most opportune time to re-enter, individual investors jeopardize the ability to achieve their investment goals.

Exhibit 5: Shifting Institutional Allocations, Master Trusts (all plans), 1998–2018

Chart illustrating the asset allocation shifts that foundations and endowments over $1 billion made from 1998 to 2018.

Source: Wilshire TUCS®
Allocations do not total 100% due to rounding.

As depicted in Exhibit 5 above, between 2008 and 2018 there was a shift in institutional allocations, most notably toward non-U.S. equities and alternatives. According to Wilshire TUCS® data, institutions were allocating 15.1% of their portfolios to non-U.S. equity by year-end 2018, up 3.9% from 2008. Within the equity bucket of these institutional portfolios, 35.5% of total equity exposure was to non-U.S. equities in 2018, a jump of 18% from the 17.5% total equity exposure observed in 2008. Even more drastic, institutions were allocating 17.8% of their portfolios to alternatives by the end of 2018, a significant increase from a mere 2% in 2008. These rebalancing efforts by institutions are critical to achieving their long-term investment objectives.


There are a number of factors that contribute to institutional investors’ consistently better performance relative to their retail peers. Institutional investors maintain a long-term investment philosophy, digesting poor earnings, market corrections, and economic shocks as a part of regular market activity. Additionally, the practicality of managing large amounts of money involves adherence to firm policy targets, enforcing a more disciplined investing style based on allocating capital in-line with set targets rather than fleeting short-term trends. Conversely, many individual investors monitor their portfolios daily, leading them to make impulsive investment decisions in the face of short-term market dislocations. This irrational investor behavior has led to the consistent underperformance of retail investors versus their institutional counterparts.

These key characteristics and constraints have proven to benefit institutional performance over time, and the continued outperformance of institutional investors supports our thesis that a thoughtfully diversified asset allocation policy has the highest likelihood of maximizing risk-adjusted returns over a full market cycle. Given that no one has certainty as to what the market will deliver, timing the market correctly is virtually impossible. However, staying focused on long-term goals, diligently monitoring risks and exposures, and broadly investing with an institutional mindset is a time-tested approach that has been shown to produce better long-term outcomes.

Important Information
Wilshire Funds Management (“WFM”) is a business unit of Wilshire Associates Incorporated. WFM delivers Wilshire Advisor Solutions, which include models designed to provide a broad range of outcome-oriented investment portfolios for advisors to use with their clients. Wilshire Funds Management uses mathematical and statistical investment processes to allocate assets, select managers, and construct portfolios and funds in ways that seek to outperform their specific benchmarks. Past performance does not guarantee future returns, and processes used may not achieve the desired results.

Wilshire is a global financial services firm providing diverse services to various types of investors and intermediaries. Wilshire’s products, services, investment approach and advice may differ between clients and not all of Wilshire’s products and services may be available to all clients. For more information regarding Wilshire’s services, please see Wilshire’s ADV Part 2 available at

This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. In the creation and provision to you of this informational document, Wilshire is not acting in an advisory or fiduciary capacity in any way, including without limitation with respect to the Employee Retirement Income Security Act of 1974, as amended, or the Department of Labor rules and regulations thereunder, and accepts no fiduciary responsibility or liability with respect to this information or any decision(s) that may be made based on the information provided.

Information contained herein that has been obtained from third party sources is believed to be reliable, but has not been verified. Wilshire gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use.

Investments in equities are subject to market risk. Security prices can fluctuate significantly in the short term or over extended periods of time. These price fluctuations may result from factors affecting individual companies, industries, or the securities market as a whole. Investments in bonds are subject to interest rate, inflation, credit, currency, and sovereign risks. Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including lack of liquidity, limited diversification, sensitivity to certain economic factors such as interest rate changes and market recessions, and falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments. An alternative investments strategy is subject to a number of risks and is not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing to bear the high economic risk associated with such an investment. Investments in international securities involve additional risks including currency rate fluctuations, political and economic instability, differences in financial reporting standards, and less stringent regulation of securities markets.

Wilshire® is a registered service mark of Wilshire Associates Incorporated, Santa Monica, California. All other trade names, trademarks, and/or service marks are the property of their respective holders.

© 2019 Wilshire Associates Incorporated. All rights reserved. Information in this document is subject to change without notice.

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