A drop in search activity has left money managers hungry for the assets that are up for grabs, no matter how small. Some large money managers are dropping their minimums, going after smaller mandates. Others are making fee concessions to bring home the bacon.
Last year was the worst year for placement activity since 1993, according to Mercer Manager Advisory Services, Louisville, Ky. And 2002 is on pace to be even worse. Defined benefit placements for the first six months of 2002 were down 6% from the first six months of 2001, according to Mercer.
"I see managers more interested in mandates they wouldn't look at in the bull market," said Jeffrey MacLean, president of Wurts & Associates, Los Angeles.
David Holmes, principal at Mercer Manager Advisory Services, Louisville, Ky., agrees managers are going "down-market" to get assets. The large market is pretty well penetrated, said Mr. Holmes, and managers are finding more opportunities with smaller pension funds.
However, searches appear to be on the upswing. Consultants and money managers say activity picked up in July and they expect to see more, fueled by rebalancing and a rise in asset-liability studies.
"Activity may be down, but it's building a head of steam," said William Schneider, managing director at Dimeo Schneider & Associates, Chicago. He and other consultants expect to see search activity rise once the market hits bottom.
"Trustees have been reluctant to switch because the environment has been an anomaly," said Mr. Schneider.
But for the first half of the year, money managers have had to deal with declining assets caused by market depreciation and fewer searches, which has put pressure on fee revenues, said David Hammerstein, chief strategist at Yanni Partners, Pittsburgh.
As a result, many money managers are going the extra mile.
`Every dollar counts'
"In this competitive environment, every dollar counts," said Christopher Abbott, head of institutional marketing and client service at State Street Research & Management Co., Boston.
Mr. Abbott said State Street Research, which has $46 billion in assets under management, recently was a finalist in a $2.5 million fixed-income search for a foundation in upstate New York. State Street Research sent a team of people to win the mandate but came up short, said Mr. Abbott.
Mr. Abbott said State Street Research has created commingled vehicles to go after smaller mandates. "We purposely focused on a variety of different sized clients," he said, and launched commingled institutional mutual funds this year to go after mandates of $1 million and up.
State Street Research also is taking lower separate account mandates, although it has no set-in-stone minimum, said Mr. Abbott. The minimums depend on the asset class and the account, he said. Separate account equity minimums are about $10 million while fixed income may be higher. "We are certainly amenable to lower minimums given market circumstances," he said.
Richard Dahab, president of Dahab Associates Inc., Bayshore, N.Y., deals with one manager that recently dropped its minimum from $25 million to anything over $5 million. Fees are tied to assets, said Mr. Dahab, and managers need the assets.
Jerry Kelly, director of institutional sales at State Street Global Advisors Inc., Boston, which has $784 billion in assets under management, said the firm has been taking smaller mandates than in the past. But like State Street Research, there is no hard-and-fast rule on minimums. When SSgA takes slammer mandates, it is on a case-by-case basis, depending on the client, the relationship and other factors.
The strategy has paid off for the firm, Mr. Kelly added, as search activity and win rates are up for the firm. Through June 30, SSgA has seen 40% more searches than the year before and revenues are up nearly 50% on new mandates won, said Mr. Kelly.
Kevin Rochford, managing director-global sales and client servicing at Northern Trust Global Investments, Chicago, with $330 billion in assets, said fewer mandates have led to heightened competition, particularly in the midsized pension fund arena.
"More managers are looking to different pockets of opportunities," he said. In particular, he has noticed some large East Coast money managers fishing in middle-market searches in the Midwest.
"Managers need to find revenues and create opportunities where they can," said Mr. Rochford. While the field is more crowded now, he doesn't think it will stay that way once the stock market stabilizes. At some point things will return to normal and money managers will revert to their typical beats, he said.
Pat O'Brien, president of institutional asset management at Evergreen Investments Inc., Charlotte, N.C., which has $210 billion in assets, concurs that more money managers are going down-market. He also is among those who feel search activity is on the uptick. "We're on the edge of a fair amount of search activity," in the industry, said Mr. O'Brien.
"I'm banking on activity picking up."