LOUISVILLE, Ky. - Money manager search activity was at its lowest level in nearly a decade in 2001 as market uncertainty and a busy previous few years kept many plan sponsors, and money managers, on the sidelines.
The amount of dollars placed slid 37%.
Hardest hit were domestic indexed equity placements - off by 82%. By contrast, both emerging markets equities and alternative investments saw huge gains.
Meanwhile, the number of manager placements by institutional plan sponsors dropped 18% to 933 in 2001 from the previous year, according to Mercer Manager Advisory Services, a Louisville-based money management consulting firm.
It's the first time since 1993 that MMAS has tracked less than 1,000 placements in a year.
"Uncertainty in the markets made a lot of people hesitant to launch searches," said Jim Bowen, principal at MMAS. On top of that, the terrorist attacks of Sept. 11 appeared to exacerbate an already slow year for search activity. In the fourth quarter there were just 187 placements, down 23% from the previous quarter and 38% from the 304 placements in the fourth quarter of 2000.
The end of the year typically is a busy time for search activity, said Mr. Bowen, but a number of searches were postponed following the terrorist attacks.
Tough to beat
Barry McInerney, head of the U.S. investment consulting practice at William M. Mercer Investment Consulting Inc., New York, said search activity was down in part because it was so high in 2000. That was a banner year for search activity because pension funds had seen their assets grow through the bull market and were adding managers for diversification.
"There was a lot of activity in 2000 that was not going to be replicated in 2001 because it was simply a case of adding managers on as funds grew," said Mr. McInerney. As a result of the declining stock market, pension fund assets shrank - and so did the need to add managers.
The other reason activity slowed, said Mr. McInerney, was more plan sponsors focused on risk management following the volatility of 2000 and 2001. "People stepped back and looked at their asset allocation," he said. The focus of plan sponsors was not so much on switching managers because they were underperforming, he said; rather, it was on the bigger picture.
"They understood that it really wasn't about the managers in 2001, it was more about asset allocation and risk and where they should position themselves."
Dollar amount down
The amount of dollars placed also fell significantly from 2000 levels, according to the MMAS report, dropping 37% to $97.2 billion. While the drop is steep, Mr. Bowen said the decline has more to do with the unusual 2000 numbers than 2001 activity. Activity in 2000 was bolstered by large passive equity placements by California public pension funds. The 2001 number is more on par with 1999 and 1998 levels. Assets placed in 2001 were down 5% from 1999 totals and up 3.5% from 1998 figures.
In terms of where the money went, active management ruled the day. Sixty-five percent of the assets placed were actively managed, up from 44% in 2000. And assets placed in active domestic equity climbed to 20% from 12%, an increase of 67%. Active fixed-income assets rose to 20% from 17%, an increase of 18%.
Among active domestic equity classes:
* Midcap equities made the biggest jump, representing 16% of all active domestic equity searches, up from 10% in 2000.
* Active domestic small-cap searches rose to 36% from 33% in 2000.
* Midcap garnered 12% of the domestic equity assets, an increase of 71%.
* Large-cap growth assets accounted for 29% of searches, an increase of 26%.
* Large-cap core assets rose to 15% of searches from 7% in 2000.
* The number of active domestic large-cap value equity placements declined to 25% from 27% in 2000, while assets for the same dropped to 22% from 36% in 2000.
Mr. Bowen said the growth and value activity over the last few years shows plan sponsors have been consistent about taking advantage of weakness in the market. In a solid year for value managers in 2001, more assets were placed in growth mandates. In each of the previous four years, when growth outperformed value, more assets were placed with value managers than growth.
The biggest overall increase in dollars came in international equities and alternatives. Actively managed international equity assets jumped to 25% of all 2001 placements up from 9% in 2000, an increase of 178%.
A majority of the international action - 44% of the mandates and 85% of the assets - was placed in emerging markets. The number of mandates benchmarked to the Morgan Stanley Capital International Europe Australasia Far East index declined dramatically - just 9% went into EAFE down from 49% in 2000, a drop of 82%.
A big reason for the boost in emerging market assets was public pension funds from California, which placed several billion dollars in the asset class in 2001, said Mr. Bowen.
Assets placed in EAFE mandates dropped to just 4%, down from 56% in 2000, a decrease of 93%.
The decline in EAFE can be partly attributed to the fact that plan sponsors have become more style specific in international mandates. Whereas plan sponsors previously may have put assets in EAFE, they now are putting money in international growth, value, core and small-cap, said Mr. Bowen.
Fifty-one percent of the mandates specified a particular style, such as growth or value, up from 28% in 2000. Twenty-two percent of international mandates were designated core while 10% were value-oriented and 5% were growth.
Alternative investments made a similarly giant leap, as 16% of the assets placed in 2001 were in alternatives, up from just 6% in 2000, an increase of 167%.
Bob Burke, principal at MMAS, said one reason for the rise in alternatives is that plan sponsors and consultants have grown more comfortable with alternatives over the years as managers have built up track records. Plus, "as they lose alpha, the hedge fund strategies have greater appeal."
On the flip side, indexed assets saw a huge drop - just 13% of total assets placed in 2001 were indexed. Seven percent was indexed domestic equity, while 3% went to passive domestic fixed income and 3% to passive international equity.
Domestic equity indexed placements decreased 82%. Mr. Bowen said the steep decline largely was because a few large placements from California public funds skewed the 2000 numbers.
Search activity in the defined contribution market place was much more robust in 2001. MMAS tracked 365 defined contribution manager placements in 2001, an increase of 41%, and the highest total since 1997 when there were 426.
Dollars placed in defined contribution skyrocketed to its highest total in five years, jumping to $41.6 billion up from $18.8 billion in 2000.