It will also drive one-fourth of all new or expanded investment mandates this year, according to the 2012 Consultant Search Forecast conducted by eVestment Alliance and Casey, Quirk & Associates.
According to the forecast, four themes will power investor search activity in 2012: generating steady income in a low interest rate environment, globalization, alternatives becoming core positions in portfolios and the shift to liability-driven investing by corporate pension plans.
Consultants expect to see three noticeable shifts in search activity during 2012:
- Alternatives: Consultants expect the plurality of search activity in 2012 to focus on hedge funds, private equity and real estate, with interest reflecting both new allocations and turnover. The ongoing shift toward outcome-oriented portfolios—which require investments that avoid market correlation—will favor all flavors of alternatives.
- Long-duration fixed income: Rising interest in this asset class reflects the cyclical realities of the yield curve, but also the secular shift of corporate defined benefit pension plans trying to immunize liabilities. An influx of top-up contributions during 2011 also has likely boosted demand for long-dated bonds.
- Domestic long-only portfolios: As a group, U.S. equity and domestic core/core-plus fixed income managers will continue to face shrinking flows from asset owners and intermediaries in 2012. While continued portfolio globalization is a key reason for this, the current low-interest-rate environment has pushed asset owners to consider income flows from emerging and high-yield markets within fixed income. Consultants expect strong interest in global equity to continue.
Search Activity Allocation
This year’s survey also asked consultants to more explicitly estimate the proportion of search activity their clients would ask them to dedicate to each asset class. Search activity allocation for 2012 broadly mirrors asset allocation among institutions and intermediaries, with the biggest allocations to domestic equity, core/core-plus fixed income, and international equity. But consultants expect most of these searches to involve replacing managers on existing mandates, rather than new or increased allocations to an asset class.
Conversely, consultants expect most searches for multi-asset class solutions (MACS) portfolios and emerging market debt managers will represent new mandates. Emerging market debt managers, especially those focused on local currency, will benefit from asset owners and intermediaries seeking improved risk-adjusted returns and exposure to fast-growing economies and currency. Consultants also believe asset owners will raise allocations to private equity, real estate, and commodities.
Consultants believe hedge funds and funds of hedge funds will experience moderate turnover, with a respective 22% and 35% of total search activity reflecting replacement searches. Last year was a poor year for the asset class, as managers delivered their second-worst performance year over the last quarter-century and failed to deliver promised absolute return. While consultants do not expect hedge fund investing to cease, they appear increasingly ready to fire poor managers.
“As hedge funds continue to dominate news headlines, we are not surprised that many of the significant findings from this year’s survey were focused on alternative investments,” said Vice President of New Product Innovation Benjamin Olmstead.
Other investor preferences remain largely unchanged from 2011 with two key exceptions:
1. Heightened interest in passive portfolios among pension plans:While endowments and foundations appear to remain interested in building active, benchmark-agnostic portfolios, defined benefit pension plans appear to be retreating toward passive mandates. Investor disappointment with active manager underperformance in equities has driven outflows from both active domestic and active international stocks, and inflows into passive international equities. Shrinking interest rates in developed markets globally also have piqued further interest in passive bond portfolios.
2. A shift toward global equity mandates for non-U.S. exposure:Although last year consultants predicted demand for international equity portfolios (i.e., those excluding the U.S.) would outpace appetite for global stock mandates, this year consultants have decidedly reversed their opinion, expecting more focus on global equity portfolios. Demand for emerging market exposure—more prevalent among global equity products—is a likely driver, as is the secular trend toward global portfolio construction. Consultants believe nearly 75% of global equity search activity will represent new mandates, while only 40% of international equity searches will involve new or increased allocations.
Consultants expect roughly half their searches on behalf of defined contribution pension schemes will involve adding a single-strategy investment product to the plan’s menu of investment options, or (more likely) replacing an existing option. Search activity increasingly will focus on target-date retirement funds (TDRFs) and their target-risk cousins, the mandated default options for many defined contribution pension schemes.
“This year’s consultant survey indicates asset owners and gatekeepers are making increasing demands from asset managers,’’ said Ben Phillips, partner at Casey Quirk. “Investment managers failing to adapt to the changing investment framework will suffer from slower growth.’’
The survey was conducted from December 2011 through January 2012. The survey asked investment consultants to forecast investment preferences and buying behavior among U.S. institutional investors, as well as retail intermediaries who select external managers, during 2012. This year, 30 investment consultants, representing $9.7 trillion in assets under advisement from U.S. investors, participated in the survey.
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