LONDON — New mandates for global and international equities will drive worldwide manager search activity this year, according to a Mercer Investment Consulting report to be issued April 18.
But pension plans will also continue to search for currency overlay managers and hedge funds of funds as they try to squeeze returns from their investment portfolios, according to Bill Muysken, global head of manager research at Mercer in London.
The report, highlighting key trends in the firm's manager search activity during 2004, shows U.S. and international equity were the most desired asset classes.
U.S. equity mandates dominated Mercer's manager search activity last year, although money allocated to the asset class declined to $6.1 billion, from $7.4 billion in 2003.
Most search activity last year was driven by longer-term structural changes as U.S. pension plans rebalanced between U.S. equity styles, moved to alternative investments and reviewed money managers following the market-timing scandal of 2003, according to the report.
Searches for global equity managers fell slightly in 2004 to 11.1% of all searches from 14.7% in 2003, but the amounts placed increased to $8.9 billion from $7.1 billion in 2003.
"We are seeing a continuing trend for European investors to diversify their equity portfolios globally and offset their reduced domestic equity portfolios with an increase in global equity," said Mr. Muysken.
The firm reported 46 searches for world ex-U.S. and/or EAFE mandates, down from 47 in 2003. The value of assets placed in these mandates rose to $3.2 billion in 2004 from $2.4 billion.
Mercer reported 15 emerging market equity searches it ran for clients, up from 11 in 2003, But the value of assets placed in the strategy jumped to $1.7 billion in 2004 from $556 million in the previous year.
Mr. Muysken expected demand for emerging market equities to continue in 2005.
Currency overlay mandates took a big jump in 2004, to $10 billion, from $2.7 billion in 2003. The number of currency overlay searches rose to 28 from eight in 2003.
Currency managers are not responsible for handling the full amount of the underlying assets but run overlay programs on the existing portfolios to hedge out the exposure to fluctuations in foreign currencies. But the sharp increase in the amount of assets being hedged is likely to continue into this year as plan sponsors and trustees increase their international allocations and try to limit as much risk in their pension plans as possible, said Mr. Muysken.
The surprise abolition in March of limits on foreign investing by Canadian pension plans will likely trigger a surge in new international equity and bond mandates as Canadian plans attempt to diversify their asset mix, said Mr. Muysken. Before last month, Canadian pension plans could only invest up to 30% of plan assets in non-domestic equities and bonds (Pensions & Investments, March 7).