AIG pins hopes on alternatives to boost institutional business

AIG Global Investment Group Inc. is looking at alternative investments as a way to get its foot in the door with U.S. and European institutional investors.

Steven Guterman, managing director, global business development at the New York firm, said it's been four years since AIG decided to boost its asset management capabilities and make a serious attempt to crack the pensions market in Europe and the United States.

The firm has $340 billion in total assets under management, which includes $294 billion in fixed income and $24 billion in U.S. and international equities, as of June 30. But only $56 billion comes from clients not connected to the parent, American International Group Inc.

AIG Global — which is still digesting its American General Inc. acquisition of two years ago — has no current plans to buy any money management firms, but purchases would be considered if sound opportunities presented themselves, Mr. Guterman said.

He declined to comment on whether bids were made on firms that recently came up for sale in Europe, including Threadneedle Investments Ltd., London, sold by Zurich Financial Services AG, Zurich, to American Express Asset Management Group Inc. three months ago.

Any acquisition in Europe would boost the firm's profile there, where it already manages some $7 billion, primarily in alternative or "high alpha" products such as European small-capitalization stocks, said Mr. Guterman.

Mr. Guterman said the market shift of the past two years, when stocks and interest rates fell in tandem, is causing pension schemes to look to "less traditional" asset classes such as hedge funds, private equity, real estate, small-cap equities and the use of "satellite" approaches. That's been a boon for the firm.

"I think we have just come to the end of a period where pension schemes said: ‘Why do anything else other than large-cap equities?' We've now moved to an era where pension schemes are looking beyond their traditional product set, and that's fitting in with our business," he said.

"At the moment, especially in Europe, alternatives are where we see our capabilities overlapping with their needs. We are focusing on areas where we think we can add value to clients. The world doesn't need another large-cap equities manager," Mr. Guterman said.

The firm was one of the first mainstream players into hedge funds. Mr. Guterman said the company's hedge fund of funds product was launched in 1982, although it was marketed to pension schemes only in the past four years. He said this product is now popular with investors in Switzerland and Scandinavia. The firm has global hedge-fund-of-fund assets under management of $2.5 billion as of June 30.

He declined to provide details of any hedge fund clients in Europe.

"Two or three years ago, we had very little in hedge funds, next to zero," he said, referring to the fact the firm hasn't until recently managed hedge fund assets for clients outside of the AIG Group.

Of the $7 billion in European assets managed by AIGGIG, about 20% — $1.4 billion — is invested in either private equity or hedge funds, he said.

He expects that share to shoot up dramatically in the next few years, driven by what he believes will be the translation of investors' curiosity about hedge funds into actual commitments.

There's a similar story in private equity, where AIGGIG manages some $1.4 billion in private equity worldwide, both in direct investments and funds of funds, as of Jan. 1. The firm is raising more assets this year, and also manages some money in infrastructure assets.

"I'm not saying we don't want a traditional business in Europe with large-cap equities, bonds and all that. We want to provide everything to the clients, but that will take time. And it's hard in the U.S. There, having a five-year track record in large-cap U.S. equities is nothing, because there are so many firms that have 15- or 20-year track records," he said.

He said the firm had relatively short track records in some asset classes, including U.S. equities and large-cap global equities.

Thus, he isn't expecting AIGGIG to begin winning mandates from clients both in Europe and the United States for some time.

"We are talking to the consultants, in London also, but the feedback we are getting is our niche products are more interesting to them. One (U.S.) consultant told us there's a real need for small-cap managers, but there isn't a good supply of them," he said.

He couldn't provide a breakdown of how much the firm manages in small-cap assets.

He said AIG, unlike other American firms looking to Europe, does not see the Continent as a single market.

"We treat every country in Europe as a different market. We don't have a Europe strategy — we do it country by country, and to do otherwise, like other firms, I think is dangerous," he said.

The firm's focus is on Britain and Switzerland, where it has marketing staff and investment professionals managing European equities, bonds and real estate.

In Scandinavia, Austria and The Netherlands, it also has local staff talking to pension schemes, he said. Germany is next on the company's list, he added.

Unlike many other American firms, AIG Global also has offices in a number of Eastern European countries, including Budapest, Hungary; Prague, Czech Republic; and Warsaw, Poland, where its real estate division has a presence.

"We believe in being on the ground in places. If you can't do that, we don't think you should be in the country," Mr. Guterman said.