DB Sponsors Focus on Alt. Investment Managers

October 18, 2001 (PLANSPONSOR.com) - Defined benefit plan sponsors seeking new money management talent are most likely to be targeting those specializing in alternative investments - notably private equity and hedge funds, a survey has found.

Compared to other asset classes, plan sponsors both intend to hire additional managers and significantly increase allocations to alternative investments, says David Holmes, a consultant with Mercer Manager Advisory Services who worked on The 2001 Market Trends Report survey.

In the alternative investment arena, Holmes said, there is continued demand for both private equity and venture capital managers and a particular demand for market-neutral hedge funds.

Large Plans Most Likely Candidates

In fact, nearly a quarter of the 723 DB sponsors (23%) surveyed in the Mercer plan already include alternative investments in their strategies. That’s particularly true with $1 billion-plus plans where Mercer said 61% have money committed to alternative investments.

Limited partnerships, fund-of-funds, and separate accounts are the most widely used vehicles for implementing alternative investments; mutual funds and LLC (limited liability company) structures are the least favored, the Mercer study said.

Also expected to see a flurry of hiring activity are managers in active US small cap equity, active EAFE (Europe-Asia-Far East) equity, and active core-plus-fixed-income roles, according to the survey.

However investment manager hiring is expected to slow in several asset classes, particularly active US growth and mid-cap equity, active emerging markets equity, private debt, and active global mandates.

Little ETF Awareness

One place where sponsors will not be hiring is with exchange-traded funds (ETFs) — an investment vehicle few of the surveyed sponsors even heard of. Familiarity with this investment option is strongest among the largest plans, with 24% of plans with assets over $1 billion knowing what ETFs were.

Five percent of the sponsors currently use ETFs, with users praising ETFs for their ease of execution, lower fees, and the fact they don’t require a special manager.

Of the 723 DB sponsors surveyed in the Mercer study, 41% have hired an investment manager in the last year with that level of hiring activity expected to continue for the next two years.