Investment - Articles - Manager search activity increase reflects growing appetite

  Globally, manager search activity increased in 2010 as institutional investors looked to diversify their portfolios by pursuing opportunities in emerging market and alternative asset classes, according to data released by Mercer. Its 2010 Global Manager Search Trendsreport gives insight into institutional investment manager hiring patterns and search trends across the world, and is based on activity reported through Mercer’s global client database.

   

  During 2010, Mercer advised on 940 searches across the world, up 14% from 826 in 2009. This increase is a continuation of the strong rebound from 2008 (676 searches), when investors were busy focusing on strategic decisions following the financial crisis. The 2010 searches represent US$95.6 billion in assets placed by 361 institutional investors. Global/international equity remains the most popular search category (177 searches in 2010 – down from 191 in 2009), though more assets were placed in global fixed income (US$13.5 billion compared to US$11.2 billion in global/international equity).

   

  In 2010, searches ran higher across a range of alternative asset classes compared with 2009. Interest in property has rebounded significantly with real estate totalling 67 searches in 2009 and 72 in 2010, reflecting, in part, the relative cheapness of this asset class following a significant correction during the crash.  Growing interest in commodities (from 7 to 20 searches), infrastructure (from 14 to 17 searches) and multi-strategy hedge funds (from 24 to 31) was also evident. Emerging market searches, both in equity and debt, saw a substantial increase, reflecting a desire on the part of investors to capture the strong economic growth in some Asian and other developing economies. Emerging market equity searches rose from 21 in 2009 to 50 in 2010 and emerging market debt searches increased from 4 to 45.

   

  Andy Barber, Global Director of Manager Research at Mercer, commented: “Interest in non-traditional asset classes continues to grow as investors look to increase diversification and take advantage of perceived attractive beta and alpha generation opportunities. The trend away from traditional investment began some time ago and while events such as the global financial crisis led to a slowing of the trend, it is one we expect to continue. That said, traditional equity and bond mandates are likely to remain the dominant areas of search activity for the foreseeable future.”

   

  UK & Europe

  Following the surge of search activity in 2009, UK investors focused on maintaining the new mandates through 2010, leading to a significant reduction in searches and assets placed. Manager searches were down from 245 in 2009 to 196 in 2010, and assets placed dropped from US$41.9 billion to US$23.9 billion.

   

  The strongest UK trend of 2010 was the growing interest in emerging market equity and debt with total searches rising from 1 equity search in 2009 to 36 (23 debt and 13 equity). The weight towards debt may reflect growing concern at the high valuation of some emerging equity markets. The move away from domestic equities continued with only 4 searches in 2010 compared to 8 in 2009 and 17 in 2008. Searches for global and UK fixed income also dropped considerably, from 45 to 8 and 33 to 10 respectively.

   

  Mr Barber said: “The move away from fixed income may reflect the high activity in 2009 as investors sought to exploit the large yield spread of corporate bonds over gilts. Additionally, there appears to be a dwindling appetite for nominal and, in particular, index-linked gilts, in spite of their liability-matching characteristics, because of a growing perception that valuations are stretched. This poses a very real dilemma for institutions seeking to de-risk but baulking at the cost of doing so.”

   

  “Looking forward we expect to see limited interest in domestic equities or in the traditional markets’ regional blocs. Exposure to alternative investments in aggregate is rising and we expect to see increasing activity in this area.”

   

  Search activity across the rest of Europe increased from 126 to 168, with assets placed surging from US$10 billion in 2009 to US$35 billion. A dramatic increase in Germany accounted for more than 50% of the searches in the region, particularly in emerging market strategies, both fixed income and equity. Search activity increased in Switzerland and Sweden; however France, Ireland and the Netherlands saw a decline.

   

  US & Canada

  In the US, DB searches ran at slightly lower levels compared with the previous year – down from 126 in 2009 to 118. DC searches were also down on the previous year (from 173 in 2009 to 162) but continued to outpace DB searches. The most significant US trend, driven by the desire to further diversify portfolios, has been the change in focus from fixed income to alternative asset classes and equities. The total number of global/international equity searches (54) in both DB and DC plans continued to increase (44 in 2009, 39 in 2008).

   

  Terry Dennison, US Director of Consulting in Mercer’s Investment Consulting business, said: “In the DB space the main driver of search activity was sponsors’ focus on increasing exposure to international equity – both developed and emerging market. Sponsors also sought to review and realign their domestic equity exposures.

  “On the DC side, sponsors showed a desire to both increase asset diversification for their members and provide some inflation protection. Hence, the most popular searches were global/international equity, emerging market equity, TIPS, REITs and real return-type options.”

   

  In Canada search activity ran at higher levels than last year (147, up from 137), however asset placements have dropped from US$6.7 billion to US$4.3 billion. DC accounted for most of the increase in searches, particularly within the traditional balanced, equity and fixed income classes. Global/international equity remains the most popular category (47 searches), followed by Canadian equities (32) and balanced/multi-asset (27).

   

  Sharon Wilson, Mercer’s Head of Manager Research for Canada and Latin America, said: ”Global/international equity searches continue to dominate Canadian search activity as allocations to domestic equity in the local DB market are steadily decreasing. We also note an increased interest in emerging market equities and debt as many institutional investors are starting to recognise that they are structurally underweight in this region.”

   

  Asia Pacific

  Searches in Asia increased from 40 in 2009 to 70 in 2010, however assets placed dropped significantly from US$19.2 to US$4.8. The most popular search category remained global/international equity (11 searches), but the bulk of assets were placed in real estate (US$1.2 billion). Some Asian investors are increasingly worried about the impact of future increases in inflation, which has resulted in searches for global inflation-linked bonds (3 searches).

   

  Marianne Feeley, Mercer’s Head of Manager Research for Asia Pacific, said: “Some Asian investors have remained on the sideline since the start of the financial crisis and only started investing their funds at the start of 2010. This resulted in a marked increase in searches in mainstream asset classes such as global equities and bonds.”

   

  Search activity in Australia almost doubled from 120 in 2009 to 216 in 2010 and there was a sharp rise in assets placed - from US$7.7billion to US$14.9 billion. Notable increases came through growing interest in real estate (up from 8 searches in 2009 to 31) and emerging market equities (up from 2 to 7) as well as in niche areas such as commodities (2 searches in 2010).  Global/international and domestic equity searches also saw a significant increase as investors sought to diversify their portfolios. Global/international equity searches increased from 23 in 2009 to 39 in 2010 and domestic equity from 24 to 44.

   

  Ms Feeley commented: “We saw a lot of manager movement in Australian equities last year and search activity focused on smaller fund asset managers with highly rated teams. Our clients have also been looking for small cap managers, as small cap outperformed large cap in 2010.Another possible driver behind the increase in Australian equity searches is the tendency of some managers, particularly boutiques and small cap, to close to new investments.”

   

  In New Zealand, manager search activity dropped from 32 in 2009 to 25 in 2010, though assets placed increased from US$483 million to US$842 million. Searches in the traditional sectors dominated with New Zealand equities (11) and global fixed income (8) the most popular asset classes.

   

  Copies of Mercer’s Global Manager Search Trends: 2010 Year-End Report can be obtained at www.mercer.com/manager-search-trends