GREENWICH, Conn. -- European plan sponsors will provide rich pickings during 2000 for U.S.-based money managers offering specialist products, and U.S. equities in particular.
Institutional funds in Europe will continue to diversify their bond and equity holdings in the next year, said Bjorn Forfang, vice president of consultant Greenwich Associates.
And he expects the heaviest hirings to be for U.S., Japanese and emerging market equity portfolios.
"U.S. equities have been the most popular, that's why U.S. managers have done so well. This is the beginning of an international diversification and there are opportunities in all types of international mandates," he said.
European plan sponsors have spent the year since the launch of the euro looking for ways to diversify their equity holdings to better match their liabilities and improve returns on assets, Mr. Forfang said.
As a result, domestic European money managers have come under increasing competitive pressure from U.S. managers.
"Domestic (European) managers will have a home advantage, but only if they can match the sophistication of the international money managers. Domestic managers must step up to the challenge," he said.
Recent research by Greenwich, based in Greenwich, Conn., found European plan sponsors intended to make greater use of external managers where they did not have the in-house expertise to diversify across international markets.
At the end of 1999, roughly 76% of institutional assets in Europe were managed internally. By the beginning 2001, fund professionals interviewed expect 68% of institutional assets to be managed internally with 32% of assets managed by external managers.
The research showed the use of external managers in Italy is likely to soar to 77% of total assets from the current 27%. The Italian pension market is relatively new, but is expected to grow rapidly in the next year. So far there are only a few corporate and industrywide pension plans, and only a few of these have begun to allocate assets to either internal or external managers.
The Greenwich research found European institutional holdings of non-domestic equities will rise to 17% of total assets in the next year from the current level of 15%. Allocations to North American equities will increase to 5% of total assets from 4%, with non-domestic European equities accounting for 9% of total assets compared with 8%.
Average allocations to international equities will be unchanged at 3%, although Dutch funds are likely to increase their exposure to international equities to 7% in 2001 compared with 3% at the end of 1999.
Average holdings of domestic equities by European institutions will fall by 2001 to 13% of total assets from the current level of 15%.
More foreign bonds
Bonds will remain an important part of portfolios but international holdings will increase. Institutional holdings of non-domestic bonds will rise to 16% of total assets from the current level of 12%. The allocation to non-domestic European bonds will increase to 10% of total assets by 2001 from 8% for 1999 and international bonds will account for 6% of total assets, up from 4% in 1999.
Domestic bond holdings will fall sharply however, to 38% of total assets by 2001 compared with 45% now.
Italian institutions were expected to flock into non-European international bonds over the next year, according to the research. They were expected to hold 28% of total assets in international bonds in 2001 compared with 13% of total assets in 1999.
In France, the research showed, the average holding of non-domestic bonds was expected to rise to 10% of total assets by 2001 from the current 5% level. Holdings of non-domestic equities will rise to 11% of total assets from the current level of 7%. Holdings in real estate will be cut by on average one percentage point.
In a separate survey, Greenwich noted a "seismic shift" by U.K. plan sponsors toward specialist money managers. Mr. Forfang said this move might simply have been a short-term reaction to recent poor performance by some balanced money managers.
"But the big lesson from the last few years is that when you have one or two big balanced managers, you get very exposed to certain assets and certain styles," he said.
The proportion of U.K.-based funds using specialist managers jumped to 59% in late 1999, from 40% in 1998. The share of total U.K. fund assets managed by specialist managers also was higher at the end of last year at 27%, compared with 19% in 1998.
The share of assets allocated to passive management has increased sharply and looks set to continue to grow. U.K. funds surveyed expect passive management to account for 31% of domestic equity assets in 2001, up from 29% in 1999 and 23% in 1995. Passive managers' share of domestic fixed income is likely to increase to 26% by 2001 from 23% now and 20% in 1997.
But passive managers are likely to find stiffer competition and lower fees. Barclays Global Investors, Legal & General Investment Management Ltd. and State Street Global Advisors are the dominant managers in this market and have tended to pick up larger mandates from clients than they had in the past, said Mr. Forfang.
But money managers have not been slow to react to the potential opportunities in Europe, he said.
A typical continental European institution received around 12 solicitations from money managers this year. The average for Nordic institutions was higher at 17 approaches, Dutch plan sponsors received on average six solicitations over the past year while the U.K. average was seven.
"Our studies show that most Continental institutions are opening their doors to just about every investment manager that comes knocking. . . . While this is an amiable approach, it may be taking more time and trouble than institutional professionals really need to spare," he added.