Searches for active international equity managers have dropped as much as 50%, as pension funds hand more of their additional foreign allocations to current managers or indexers.
"We have seen a significant slowdown," said June Debatin, senior vice president and principal, LCG Associates Inc., Atlanta.
Ms. Debatin estimates overall international searches - and international equities in particular - are down 50% vs. this time last year. This year, when clients of her firm increased their foreign allocations, they largely gave the money to existing managers, she said.
RogersCasey, Darien, Conn., has "nothing going on with international manager searches - except a few for emerging markets managers that . . . are now winding down," said Reza Vishkai, the consulting firm's international research director. This is "no comparison" with the heavier search activity in the last two years, he said.
For the year through September, Mr. Vishkai said RogersCasey had handled 17 international searches - eight of which were for emerging markets managers. That was only half of the 35 international searches for all of 1995 (including six for emerging markets managers) and 33 for 1994.
Among active money managers, Clay Finlay Inc., New York, has gotten 75% of its additional money under management this year from existing clients, said principal Mark Ahern. About half of all new money came from clients expanding their existing allocations; another 25% came from additional mandates from existing clients; and the remainder from new clients.
Mr. Ahern said many funds already have one or more international managers. For cost and time-saving reasons, many appear to be comfortable having "a couple of managers with big portfolios."
Trouble for new managers?
But although that may benefit firms with a large clientele, it could spell trouble for newer market entrants, some suggest. As Mr. Ahern put it, "if you're a start-up firm, good luck. It's going to be tough."
At the same time, passive international investing is clearly gaining steam. Statistics from InterSec Research Corp., Stamford, Conn., show a huge jump in passive strategies. In 1995, cash flow to passive international equities portfolios leapt to $12 billion vs. $4 billion the year before. In comparison, active strategies attracted $22 billion last year, down from $32 billion in 1994.
One huge indexer, BZW Barclays Global Investors, San Francisco, has seen "substantial growth in commitments to international stock index and enhanced index strategies," said Chief Investment Officer Blake Grossman. For 1996 so far, new allocations from current and new clients to passive portfolios have grown in excess of 20%, he said. "On the enhanced index side, they are up more than 50% just this year."
He said assets flowing to indexed and enhanced international passive strategies also were strong last year; taken together, cash flow to passive and enhanced passive portfolios in 1995 and 1996 was "certainly above trend compared with the previous five years."
According to Mr. Grossman, funds are attracted to passive strategies because of lower fees and costs than for active management and because active international equity managers are typically underweighted to Japan - the world's second largest market. Some investors worry about what would happen with performance if Japan's market roared.
2 pension funds' experiences
For the first time this year, the roughly $3 billion Oklahoma Public Employees' Retirement System, Oklahoma City, embraced indexing for a portion of both its international and domestic equities. For foreign equities, the fund hired BZW for a $200 million portfolio.
Executive Director Stephen Edmonds said part of the assets for the indexed international portfolio came from the decision, following an asset allocation study, to drop two active regional managers. One active manager, Scudder, Stevens & Clark, New York, was retained for a broad international portfolio.
However, the fund is now in the throes of a search for a roughly $60 million actively managed emerging markets portfolio. That search should be completed by January, he said.
The $353 million East Bay Municipal Utility District Employees' Retirement System, Oakland, Calif., was among the funds that increased its allocations to its current active international equities managers.
Last year, the fund hired Templeton Investment Counsel, Fort Lauderdale, Fla., and Wellington Management Co., Boston, but gave them only 10% of the fund's total assets instead of the 15% targeted. This year, the fund gave Templeton and Wellington the increases.
Using the same managers for increased allocations "saves on administrative costs," said Treasurer Gary Breau. After all, "asset allocation is key, not the number of managers you have."
Trends will continue
Many experts believe the trends will persist.
BZW's Mr. Grossman estimates that, in time, the proportion of international equities passively vs. actively managed should approximate their U.S. equity portfolios. Now, between one-third to two-thirds of funds' domestic equities are indexed, he said. But only 20% of international stocks are being indexed.
Many investment managers appear keenly aware of the trends -especially the tendency to give current managers increased allocations.
As Churchill Franklin, senior vice president of Boston's Acadian Asset Management said: "It occurred to us that if you were not getting significant cash flow from clients, you should be worried."
In fact, "we are getting a lot of this cash flow," he said. His firm now has $3.5 billion under management, compared with $2 billion about 18 months ago. Of that increase, "probably 20 of our now 35 clients gave us additional monies, and we added a handful of very large new accounts," Mr. Franklin said.
But even if the going does get tougher for active international managers, especially smaller managers, some newer opportunities are emerging.
401(k) plans are 'fertile'
Roger Bransford, managing director, Watson Wyatt Investment Consulting in Atlanta, said defined contribution plans could be fertile territory for international managers. "The most popular addition to 401(k) plans is an international equities option," he said.
With defined benefit plans, additional foreign allotments are "predominantly going to funds' existing managers," he said. But Watson Wyatt's own international search volume isn't down; instead, such activity often now entails a search for a manager that in some way "fine-tunes" a fund's overall international investment program, he said.
Mr. Bransford believes "it's not too late, although it is getting later" for international managers to address the defined contribution market.
"There is still significant demand" and "it will (continue to) grow," he said. As minimum requirements, managers would need a daily valued fund, such as an international equities mutual fund or commingled fund. Then, managers would have to have "the ability to get out and talk to consultants and prospective clients," Mr. Bransford said.
