After a disturbing look at the ailing worldwide retirement plan space – severely damaged by weak markets and stagnant economies (See Study Paints Somber Worldwide Pension Picture )- the latest Cerulli Edge report from Cerulli Associates shows institutional investors have shifted their attention to“absolute return” instruments.
Of particular influence are funds of hedge funds that are becoming a powerful influence in the alternative investment space. Cerulli cites BARRA Strategic Consulting Group forecasts that the funds of hedge funds market holds between US$90 billion and US$100 billion, about 20% of the global total for hedge funds. Breaking the total down shows:
- about 70% of these assets are managed on behalf of US investors
- Europeans comprise another 15%
- Japanese nationals represent some 10%.
This trend is particularly evident amongSwiss and Japanese pension plans that have ramped up their alternative exposure significantly. Swiss pension systems are grappling with meeting a state-mandated guaranteed return on retirement assets, as noted in the previous month , while the Japanese argue that hedged investments may wake Japanese employee benefit schemes from their underfunding nightmare.
With the shift, Cerulli notes a shift in business strategies of traditional asset managers so as to not experience a drain of assets to alternative investment firms. Among them, Deutsche Asset Management elected to build its expertise organically, and Germany’s Metzler Asset Management added alternative investments through an agreement to distribute Frank Russell Co.’s multimanager hedge funds.
However, most fund managers have relied on mergers and acquisitions to enter the space. This has includes a US$150-million deal that saw BlackRock Financial acquire HPB Management in 2003 and 2001’s mammoth US$9.5 billion MassMutual acquisition of Tremont Advisors.
Earlier Cerulli research shows that one out of every seven mutual fund dollars is going into similar fund of funds. The infusion of capital comes as assets in these funds depreciated 17% in 2002. Worldwide, mutual funds of funds hold $235 billion, down from $254 billion in 2001 but representing a three-year annualized growth rate of 16%. By contrast, the global fund industry shrank 3% per year during the same period (See Cerulli: Fund of Funds Continue Asset Gain ).
Cerulli attributes the continued investment in fund of funds to embedded advice, affordable diversification, and access to foreign investments and managers. Further, the international climate continues to look bright, as approximately $178 billion in fund-of-funds assets are domiciled outside the United States. Over the trailing three years, these international assets have expanded at a compound annual growth rate of 18%. In 2002, two-thirds of net new fund of funds business came from international markets.