Assets in Traditional Investments Decline as Institutions Seek Alternatives

Callan also noted an 8% decline in the $3.3 trillion tax-exempt asset pool and merger and acquisition activity among investment management firms that set new records in value and volume at $26 billion. According to a Callan news release, the M&A activity along with a heavy demand for alternative strategies from clients fueled the traditional asset declines.

In 2007, very few institutional areas experienced asset growth, Callan said. Core plus fixed income showed net gains of $7.4 billion and Global equity received net inflows of $5.6 billion in 2007.

The STAR report cites industry sources that show asset gains across various alternative strategies. Hedge fund assets across all investor types topped $2.7 trillion in 2007, with approximately 48% managed in hedge fund-of-fund vehicles. Private equity scored record levels in fundraising, deal volume, and the largest buyout to date, while real estate gained roughly $80 billion with commodities and infrastructure strategies seeing renewed interest from institutional investors.

Two other factors that likely contributed to institutional outflows in the traditional asset category, according to Callan’s news release, included rebalancing – particularly evident in styles with strong recent results including: mid-cap, small cap, international and emerging market equities – and movement by corporate fund sponsors towards liability-driven investing (See  Cover1.2008 BuyersGuide.Asset Liability Management ). The move to LDI pushed an estimated $50 billion in assets into long-duration strategies in 2007.

Inga Sweet, senior vice president of Callan’s Published Research group observed in the release that active extension strategies raised $9 billion, primarily at the expense of other large cap equity strategies. In total, as measured by the STAR report, the active extension group managed U.S. tax-exempt assets of nearly $20 billion at year-end.

The report also found that investment managers, in response to rising interest to diversify plan assets using alternatives, have concentrated on developing specialty product offerings; including active extension strategies (U.S., international and global), frontier emerging markets, international small cap and international/global REITs.

For more information on the STAR report, contact Nancy Malinowsky at 415-274-3011.