Sharp jump found in hirings of new money managers

GREENWICH, Conn. — Sixty percent of U.S. plan sponsors hired a new money manager last year, a sharp increase from 56% in each year from 2000 to 2002 and 51% in 1999, according to new research from Greenwich Associates, Greenwich.

"U.S. pension funds are opening their doors to new managers and looking for fresh insights and ideas to a greater extent than we've seen in 30 years of covering this market," said Greenwich consultant Rodger Smith in the report. "They're not abandoning their traditional asset allocations and classes, but they are shopping smarter."

At the same time, manager terminations remained flat between 2002 and 2003, at 45%, resulting in a substantial net increase in managers employed, according to the February "U.S. Investment Management"report. Hiring expectations have also risen, with 49% of pension funds expecting to hire a new manager in 2004, up from 48% for 2003 and 42% each in 2002 and 2001.

"U.S. plan sponsors are hiring an unusually large number of new and additional managers," Mr. Smith said in the report, "and these managers are bringing in original ideas and incremental diversification."

This incremental diversification is taking place within traditional asset classes, as plan sponsors shift to slightly more exotic instruments with marginally higher risks and potentially larger returns.

That's what is meant by "shopping smarter," Mr. Smith said in an interview. "When you look under the surface, (pension funds are) looking for a way to increase returns without raising their risk level very much."

For example, pension funds are replacing active core equities with enhanced index equities in many portfolios, allowing them to achieve higher equity returns with lower benchmark risk. The proportion of enhanced index equity investments in total domestic equity portfolios has jumped to 9.9% in 2003 from 5.9% in 2002.

In a similar manner, pension funds are augmenting their traditional fixed-income portfolios with global bonds, high-yield bonds and private placements, which all promise higher returns with a slightly higher level of risk.

Between 2001 and 2003, the defined benefit plans with more than $1 billion in assets increased the proportion of global bonds in their portfolios to 4% from less than 1%; high-yield bonds, to 6% from 2%; and private placements, to almost 2% from less than 1%, according to the report.

Pension executives are also making changes in their international equity portfolios, replacing some of the basic developed-country equities with slightly riskier emerging market stocks that offer the possibility of significantly higher returns.

Among pension funds with more than $1 billion in assets, the proportion of investments in the core Morgan Stanley Capital International Europe Australasia Far East index equity funds slid to 24.2% in 2003 from 31% in 2002, while the proportion of funds invested in portfolios benchmarked against the MSCI All Country World index, which are allowed to invest in emerging market equities on an opportunistic basis, increased to 2.1% from 1.5%.

"Pension fund sponsors are saying, ‘We see some attractive opportunities in emerging markets'," Mr. Smith said in the interview. "They want to keep their risk level about the same but are looking for a little more return. The overall allocation to international equity has actually stayed the same, at 11%, for the last three years."

Equity real estate investments have also increased, according to the report. U.S. pension fund assets invested in equity real estate increased to $192 billion in 2003 from $175 billion in 2002 — a figure that is about 50% higher than investment levels of the late 1990s, according to the report.

More pension funds are investing in real estate, with 44% of pension funds surveyed reporting using equity real estate in 2003, up from 39% in 2002. Real estate manager hirings also increased sharply, with 13% of pension funds hiring an equity real estate manager in 2003, up from 9% in 2002 and 7% in 2001.

Pension funds' cash flow expectations have also increased dramatically, to more than $17 billion in 2003 from slightly less than $8 billion in 2002.

The use of hedge fund investments by U.S. pension funds, endowments and foundations climbed sharply throughout 2003, with 23% of funds reporting hedge fund use, compared with just 12% in 2000. A projected 12% of pension funds hired a hedge fund manager in 2003, and 15% of plan sponsors expect to hire one in 2004. This is because plan sponsors expect the net rate of return from hedge funds to average 9.1% per year for the next five years, according to the report.

However, this surge in interest has created a capacity problem and caused plan sponsors to question whether there are enough good opportunities for hedge fund investments.

"These concerns have caused a substantial number of plan sponsors who have been contemplating hedge fund investment to get cold feet and hold back," said Mr. Smith in the report. While 14% of pension funds surveyed by Greenwich in 2002 said they planned to hire a hedge fund manager in the following 12 months, only 12% actually did so. The same problem occurred in preceding years, according to the report.

However, the report said that given plan officials' strong desire to increase investment returns, they will probably overcome their concerns and make large investments in hedge funds in the future.

The report also points out the changes in the compensation levels of pension fund and endowment professionals. Average salaries rose about 3%, to $130,700 in 2003, from $126,700 in 2002, for the 686 fund professionals who provided data on their compensation to Greenwich. However, the 43% of fund executives eligible for bonuses had a more substantial increase, with average bonuses rising 11% to an expected $38,100 in 2003 from $34,300 in 2002.

Endowment and foundation officials received the highest compensation, followed by corporate fund executives and, lastly, public fund executives.

Chief investment officers were the most highly compensated group by job title, with the average CIO salary increasing to $191,400 in 2003 from $187,000 in 2002.