NEW YORK A thirst for outsized returns is triggering an increase in searches for alternative investment portfolio managers, leaving managers who offer traditional strategies high and dry.
Manager searches for alternatives were up approximately 20% worldwide in 2007 among Mercer LLC clients, according to a study by the consulting firm. Real estate in particular experienced an upswing, with 62 searches performed, up 12 from 2006, although the amount placed has remained virtually unchanged at $1.8 billion, the study said.
Clients are definitely interested in finding strategies that are higher alpha, Jeff Gabrione, Mercers head of investment manager research for the Americas, said in an interview. Theyre not interested in simple beta returns that they could get from indexes. As such, theyre looking to strategies involving alternatives.
Global equity continued as the most popular search category; global equity searches totaled $19.5 billion in assets in 2007 (or 26% of total assets placed) vs. $29 billion in 2006 (or 31% of total assets placed). Domestic equity search activity declined in both the United Kingdom and the United States.
Total assets placed declined in the U.K. to $29.2 billion in 2007 from $36.9 billion in 2006. In Europe outside the U.K., assets placed dipped to $18 billion in 2007, down from $20.8 billion the previous year. In Asia, they dropped to $4.2 billion in 2007 from $11.1 billion in 2006; Mercer officials noted that Asian searches are subject to high variability from year to year because of the diversity of clients in the region.
In the U.S., the number of defined contribution plan searches was 170 in 2007, up from 157 in 2006; the most frequent DC searches in 2007 were global/international equity, U.S. large-cap equity, and lifecycle funds. DC searches in 2007 were driven mainly by a desire to improve asset diversification and replace underperforming managers, the report said.
The upheaval in financial markets is fostering an out-of-the-box mentality among pension executives, who traditionally have viewed alternative investments as risky.
The classic and generally accepted asset allocation model of 60% equities, 35% fixed income and the balance in cash is under serious question, said Kevin Parker, global head of Deutsche Asset Management, New York.
Fund management firms that expect this model to persist could be an endangered species. In ever increasing numbers, investors are altering the balance of their portfolios, diversifying into alternative asset classes and innovative strategies that were once regarded as too risky or esoteric for most investors, he said
Not only are pension fund officials more willing to invest in alternatives such as hedge funds, but theyre making such investments directly rather than through intermediaries.