Investment consultants in the U.S. and Canada expect searches in traditional asset classes, especially core and core-plus fixed income, to surge in 2009.
Searches for alternative fund managers, meanwhile, are expected to slow, according to the “2009 Consultant Search Forecast Annual Survey” conducted by Casey, Quirk & Associates LLC and eVestment Alliance.
According to the survey:
• nearly 80% of the consultants expected significant or moderate search activity for core and core-plus mandates, a nearly fivefold increase from 2008 expectations;
• around 60% of consultants expect significant or moderate search activity for hedge funds, private equity and real estate, down from last year's numbers. Also, preference for funds of hedge funds over single-manager vehicles shot up in 2009; and
• as traditional asset classes regain favor, 86% of consultants predicted significant or moderate search activity for long-only U.S. equities, while 92% expect significant or moderate search activity for long-only international stocks.
“Fixed income is sexy again,” Yariv Itah, partner at Darien, Conn.-based Casey, Quirk & Associates, said in an interview. “The opportunity is there.”
Mr. Itah and Philip Kim, associate director at Casey Quirk, were co-authors of the report on the survey.
Before the financial crisis, institutional investors did not spend much of their time thinking about fixed-income portfolios, Mr. Kim said in the interview. They often automatically used a large core-plus fixed-income manager because, with core plus, they would have access to many asset classes. Since performance numbers were not much different among all types of fixed-income managers, it made sense for institutional investors to go with the large core-plus fixed income, he said. Instead of going out and trying to find a fourth or fifth fixed-income manager, institutional investors spent time searching for alpha-generating vehicles, such as hedge funds.
“Now that has changed because of the severe underperformance in core plus,” Mr. Kim said.
Because of that underporfmance, consultants expect clients to “look beyond the traditional oligopoly of large core and core-plus fixed-income managers and consider a wider number of firms, given the view that investment opportunities still exist in the fixed-income markets, particularly for firms with strong credit analysis skills,” the report said.