Cerulli: Emerging markets, LDI and ESG strategies were investor favorites in 2012

Institutional investors expressed the greatest interest in emerging markets, long-duration fixed income and environmental, social and governance investing products in 2012, according to a report from Cerulli Associates.

ESG and socially responsible investing have seen increased interest in the last year among all institutional investors, especially public pension plans, said Michele Giuditta, associate director at Cerulli. Foundations remain the largest segment using ESG strategies.

“The difference was public plans' (interest) in relation to recent years,” Ms. Giuditta said in a telephone interview. “We have seen more interest from public pensions and seen more institutions incorporate (ESG) into portfolios.”

Of money managers surveyed, 45% said they had received “several requests” on ESG and SRI strategies in the last year, while 30% said they received one or two requests.

Emerging markets strategies, equity and debt, had the most “several requests” at 55%, followed by long-duration fixed income at 47% as more corporate plans looked to employ liability-driven investing strategies.

Ms. Giuditta said ESG strategies are being used across traditional long-only investing as well as in private equity and real estate. SRI assets have increased by 22% over the last several years, she added.

“There is a demand on the hedge fund side, but a lot of managers haven't come up with the products,” Ms. Giuditta said.

About 40% of surveyed consultants have dedicated resources for SRI and ESG manager research with another 10% in the process of adding that expertise.

As investors continue to move away from traditional asset classes into alternatives and LDI, it has become more important for consultants to expand the breadth of services offered, according to the report. All the consultants surveyed offer outsourcing and LDI solutions and 80% have dedicated operational due diligence resources for alternative assets.

“Now that the outsourced CIO model is gaining more assets, consultants that have expertise on the alternatives side really have an advantage,” Ms. Giuditta said.

The increased interest in areas such as alternatives, SRI/ESG investing and LDI should continue to be strong in the near term, Ms. Giuditta said.

Managers that are most successful in gaining assets are able to leverage their defined benefit relationships to win defined contribution business as most companies support both types of plans with a greater focus toward DC, according to the report. Private DC plans make up the largest segment of the U.S. institutional market with more than $3.5 trillion in assets and that segment has grown at a compounded annual growth rate of 5.4% compared to just 2.3% for DB plan assets.