Alternatives strategies still the top asset draw for institutional investors

Alternative investments — particularly private equity — were massively popular with institutional investors this year, continuing a trend that has endured at least three years.

Through November, Pensions & Investments' Research Center data showed 873 alternatives mandates awarded — including both new accounts and add-ons — totaling $73.02 billion. Of that, 376 were private equity, totaling $30.12 billion.

Based on dollar value, alternative mandates account for 43% of all institutional hiring activity made during this period.

This is a healthy bump up from last year's institutional hiring activity, when P&I reported 769 alternatives hires made during the same 11-month period, totaling $60 billion. Among the alternative mandates that were made then, 355 were in private equity, totaling $25.3 billion.

All told, institutional investors made 1,979 new hires totaling nearly $168.2 billion through November, representing a healthy 38% leap from the year-earlier period. Even excluding outsourced CIO and defined contribution activity, investors made $128.3 billion in hires during the first 11 months of 2013, up 15% from the same period a year earlier.

Traditional assets accounted for 33% of hiring activity for the year by dollar value, representing $55.2 billion. Of these traditional mandates, 67% ($36.9 billion) came in equities, 25% ($13.9 billion) in fixed-income and 8% ($4.4 billion) in other traditional assets.

Florida State Board of Administration, Tallahassee, was the second most active institutional investor in P&I's database for the 11 months, awarding 41 mandates. (The University of Michigan endowment was first, with 43.)

According to data provided by the FSBA for the 12 months ended Sept. 30, the fund made 37 hires totaling $4.8 billion — the majority of them in alternatives. Spokesman John Kuczwanski explained in an e-mail that this is part and parcel of its strategic investment plan.

“The SBA's focus has been, and will continue to be on filling out our alternative asset classes — mainly strategic investments and to a lesser extent private equity,” he said. As of Sept. 30, the FSBA had 17% of its $138 billion in defined benefit assets allocated to alternatives.

Pennsylvania State Employees' Retirement System, Harrisburg, also made a large number of hires through the year, 28 commitments totaling up to $1.96 billion.

“Our 2012-2013 strategic investment plan drove (our) hires,” explained Pamela Hile, spokeswoman for the $25.7 billion pension fund, in an e-mail. Ms. Hile added “liquidity is a primary concern for the system.”

Ryan Bisch, a principal at Mercer LLC and the leader for the consulting firm's alternatives boutique in North America, Toronto, was not surprised by P&I's data, saying he has seen “continued interest in alternatives for enhancing returns and embedding inflation protection,” particularly in infrastructure.

David Holmes, founding partner of Louisville, Ky.-based manager consultant Eager, Davis & Holmes LLC, said in a telephone interview that his firm also has seen a “significant increase in alternative and real estate investments.”

“The increase in alternatives is due to a desire among institutional investors to reduce risk, diversify and protect against the possibility of inflation,” he added, noting investors are merely “choosing a path based on where the opportunities are.”

“There's a reluctance to increase allocations in traditional fixed income in a low-interest-rate environment,” he said, adding “the volatility of traditional equities makes alternatives and real assets more attractive.”

According to Eager, Davis & Holmes' Tracker Hiring Analytics data, 2,364 mandates were placed in the first three quarters of 2013, representing $158.8 billion of capital. Of this tally, 40.6% of the total mandates were in alternatives, or 38.5% of the capital.

Advanced beta

Dan Farley, a senior managing director of State Street Global Advisors and the chief investment officer for SSgA's investment solutions group, Boston, said in a phone interview that he has seen an increased investor appetite for advanced beta, active investment, hedge funds and emerging markets, because investors are becoming less risk averse.

“We've been seeing an increased tolerance for risk. People were especially cautious post-crisis,” Mr. Farley said. “Now, they're more willing to take on risk in their portfolio to generate higher returns, which a 50-50 stock-bond mix won't provide.”

P&I"s data showed SSgA won 17 mandates totaling $3.5 billion in institutional money during the first 11 months of 2013. The bulk of the firm's mandates during the year have been in traditional assets and defined contribution accounts, the P&I data show.

Some 348 DC hires were recorded by P&I over the course of the year. Of these 348, 188 (54%) were in equities, 65 (19%) fixed income, 41 (12%) other, 19 (5%) bundled service providers, 18 (5%) target date, 11 (3%) DC and 6 (2%) stable value.

Malvern, Pa.-based Vanguard Group Inc. won the largest number of mandates so far this year, with the vast majority of them — 94% — being from defined contribution plans. Gerry Mullane, a principal in Vanguard's Institutional Investor Group, said in a phone interview that he attributes the firm's success in this space to its target-date funds.

“Our target-date offering has been so well received,” Mr. Mullane said. “They've had greater net cash flows than anyone else's over the last five years. That's been a huge driver of our success.”

Although alternatives continue to be popular among investors and new opportunities for equity managers have declined in the past three years, that does not spell certain doom for equities by any means.

“Hiring activity reflects changes in portfolio strategy and allocations rather than abandonment of one asset class vs. another,” Mr. Holmes said. “Obviously, long-only equity allocations are not going away.”

This article originally appeared in the December 9, 2013 print issue as, "Alternatives strategies still the top asset draw".