Written by Ben Carlson

The combination of overconfidence and misplaced expectations are a killer in the markets. Institutional investors can only lie to themselves for so long before reality sets in and the markets don’t cooperate.

Just before the market peaked prior to the tech bubble bursting in 2000 Gallup surveyed a group of individual investors to ask for their expected annual stock market returns. On average, these individuals expected the market to return 13.3% over the following year (not even close), but they also expected their own portfolio to earn 15.5%. The same survey was conducted in 2002 — towards the end of the bear market — and investors expected the market to deliver an 8.9% return over the next year. Again, these investors assumed their own portfolios would do even better then average as they expected to see 9.7% gains in their own stock holdings.

Of course these were mom and pop individual investors. Surely, highly sophisticated institutional investors have their expectations more aligned with reality. State Street and FT Remark recently surveyed a large group of institutional investors that sheds some light on how these large investors think about their own performance. You can see that this survey included a wide range of institutional funds at various asset levels. The majority are managing in excess of $5 billion.

Here are the forward 5 year return expectations for this group:

These responses are, in a word — ambitious. It’s impossible to predict the future but if investors think they’re going to earn 11%/year over the next 5 years at current interest rate levels then they’re either insane or they’re lying to themselves and, if you look at their own assessment of performance expectations, my guess is that many of these funds aren’t living in reality:

The data would suggest otherwise, but it’s probably difficult for these large pools of capital to admit that they have underachieved. There’s no way that the majority of these investors are meeting or exceeding their unreasonably high return expectations. My guess is they don’t want to fess up to this or have moved the goalposts so many times that they don’t even know when they’re wrong after the fact anymore.