It's the calm during the storm.
After an end-of-year rush that saw them busy with searches in 2000, consultants have seen a lull in search activity among plan sponsors early this year - typically a time when pension fund officials reassess performance and rebalance assets.
Many investors, both retail and institutional, are "like deer caught in the headlights," said Donald Stanforth, president with Investment Consulting Group, Davenport, Iowa. Like retail investors, many institutional investors are standing by for now "waiting to see what's going to happen on the other side." However, he hasn't noticed any change in the number of searches at his firm.
Along with recent stock market volatility, the relative lull can be attributed to the tremendous amount of search activity of the past two years, said Michael D'Agostino, president of Cleveland-based consulting firm Hartland & Co. Because most plan sponsors like to wait at least three years before changing managers, the likelihood of seeing even more manager changes now is lower.
"We've had a lull in the cycle because of all the energy and effort that went into portfolios the last two years," said Mr. D'Agostino, who suspects search activity will pick up later this year.
More into alternatives
One area where he is seeing a growing interest among plan sponsors is alternative investments, particularly over the past year or so. More small and midsize pension funds are following the lead of large pension plans and foundations and endowments in bulking up their exposure to private equity, hedge funds and other alternatives - in part to diversify beyond volatile public markets.
In contrast to the late 1990s, when the stock market posted unusually high returns, Mr. D'Agostino doesn't see the early 2000s as quite so rosy for equities. "You'll probably see the best returns in non-traditional markets," he said.
Mr. Stanforth said the volatile market has provided investors with "a great opportunity for a lesson in diversification."
William M. Mercer Cos. LLC, Chicago, has seen things calm down a bit this year after logging a record number of searches in 2000. Brian Collins, head of the research group at consultant Mercer, said search activity is down slightly from a typical first quarter but down significantly from the last two quarters of 2000. Because of the activity of the last two years, Mr. Collins said, more plan sponsors may be "waiting to see if the moves they made were the right ones."
The searches that are going on are much broader-based in terms of style and asset class than they were a couple of years ago, when they were predominantly for domestic growth equities, said Mr. Collins.
Phil Kosmala, manager of investment research at consultant DiMeo Schneider & Associates, Chicago, said his firm also has seen less search activity this year. He said that in 2000 the first quarter was the firm's busiest time of year for searches, but so far this year search activity is down about 25%. The firm picked up a number of new accounts at the end of 1999, he added, which may explain the heightened search activity in early 2000.
Riding it out
One reason for the current decline, said Mr. Kosmala, is the skittishness of the market. A year or two ago, more plan sponsors demanded searches to follow "hot" equity performance. Also, plan sponsors realize they are adequately diversified and well-positioned to ride out the market, he added.
One of the most popular asset classes in terms of search activity this year, said Mr. Kosmala, is domestic small-cap value equities. In addition, real estate equity, inflation-indexed bonds and Treasury inflation-protected securities are seeing increased activity this year, with search activity at the firm up 13% over last year.
Michael Flynn, president of consultant Stratford Advisory Group, Chicago, said the large number of consultant searches by pension funds late last year might have spurred a decline in search activity in the first quarter as new consultants assessed asset allocation needs. Stratford landed four new clients in January, said Mr. Flynn. He would not disclose their names.
Not all consultants noticed a difference in search activity. Ennis Knupp & Associates, Chicago; Watson Wyatt Worldwide, Atlanta; and Disabato Associates Inc., Chicago, had search activity at normal level compared with other years.
Ted Disabato, president of Disabato Associates, is gearing up to do more growth searches as the year goes on. He said the firm's value orientation served his clients well through 2000.
