Global equity managers with strong performance and more active strategies are gobbling up assets, taking advantage of pension funds' move away from quant managers and those with core fundamental approaches.
Managers raking in assets in the year ended June 30 were: Scottish managers Aberdeen Asset Management PLC, Aberdeen, and Baillie Gifford & Co. and Walter Scott & Partners Ltd., both of Edinburgh; Marathon Asset Management LLP (Marathon-London), London; and managers with burgeoning institutional global equity businesses such as First Eagle Investment Management LLC, New York, and Hexavest Inc., Montreal.
Large managers in this winning camp grew institutional global equity assets by as much as 84% in the year, although they had help, especially from global equity market improvements. Still, on a market-adjusted basis, institutional global equity assets under management at these firms showed hefty gains (see chart on page 26).
Marathon took top performance honors in the period, with a 26.3% return on its global equity strategy. (All data in this article refer to a manager's largest global equity portfolio and come from eVestment Alliance LLC, Marietta, Ga., unless otherwise noted.)
On the other hand, managers such as AllianceBernstein LP, New York, and Brandes Investment Partners LP, San Diego, saw assets in their largest global equity strategies decline 31% and 22%, respectively, in the year ended June 30, despite a 10% rise in their benchmark, the MSCI World index.
Grantham, Mayo, Van Otterloo & Co. LLC and Acadian Asset Management LLC, both of Boston, experienced more modest asset declines in their largest global equity strategies — 4% and 3%, respectively.
In addition to asset flows, the two groups of managers also — perhaps not surprisingly — were separated by performance, with asset winners achieving outperformance of hundreds of basis points over the one-, three-, five- and even 10-year periods ended June 30. Managers losing assets tended to lag benchmarks, especially over three- and five-year runs.
No investment banks
“A large part of our outperformance over time was that we didn't have any investment banks (through the crisis),” said Stephen Docherty, Edinburgh-based head of global equities at Aberdeen. “We simply couldn't understand them.”
Aberdeen returned 15.6% in the year ended June 30, topping the MSCI World (gross dividends) index by 484 basis points. Three-year annualized returns were still negative, at -5.6%, but Aberdeen outperformed its benchmark by 537, 612 and 322 basis points over the three-, five- and 10-year periods, respectively.
Mark Thurston, head of global equity research at Russell Investments in Tacoma, Wash., said “defensive” managers — those that tend to shy away from investing in cyclical sectors and small-cap companies in favor of sectors such as consumer staples and more stable large-cap stocks — are winning more business now because generally they avoided pitfalls in the crisis, such as the financial stocks to which Mr. Docherty referred.
What's more, Mr. Thurston said mandate wins often are driven more by whether an approach is in favor than by manager skill. “It's more true than not that the vagaries of the market drive business success over the short to medium term,” he said, adding that investors should be looking for managers that can outperform over the long term.
As markets shift favor from style to style, managers often get caught in a boom/bust cycle, losing assets and staff in downturns, forcing them to rebuild, he said.
And managers are wary of this. Asset-winning managers interviewed for this article noted they are careful about winning business too quickly. For example, Marathon has closed periodically to new clients to ensure asset size doesn't disrupt performance, according to Wilson Phillips, director of client services.
While good strategies can be found at managers of all sizes, being small often helps, experts said. Smaller managers “have fewer ways to trip themselves up,” because generally they're more nimble and flexible in decision-making and because less assets means lower trading costs, Mr. Thurston said.
Debbie Clarke, London-based principal and global head of the equity manager research boutique at investment consultant Mercer LLC, said boutique managers' specialist and benchmark-agnostic approaches will continue to win assets away from large multistrategy managers, which generally have been slower to move away from traditional strategies that seek to deliver benchmark returns plus 100 basis points — so-called “plus-one” strategies.
“Plus-one is dead,” she said. “I don't know why you'd pay active fees for performance that's cheaper and easier to get with a passive approach.” She declined to comment directly on individual managers.
That change in thinking is starting to pay off for First Eagle, whose unconstrained global equity strategy has never fit well into investment consultants' style boxes, said Doug Meyer, New York-based senior vice president and head of institutional sales and marketing. First Eagle not only is benchmark-agnostic, it's also usually not fully invested, and will even hold gold bullion — not as an investment, but as a hedge.
Still, “the majority (of new assets in the past year) has been from overseas investors,” Mr. Meyer said. “In the U.S., the institutional investors have been largely multifamily offices, endowments and foundations.”
U.K. institutional investors have taken a liking to unconstrained strategies (Pensions & Investments, June 14), and consultants say the most experienced managers in this area have been running wealth and retail assets in unconstrained strategies for years. Although their approach has come into vogue lately with pension funds outside the U.S., Scottish equity managers have managed money the same way for about 100 years, Aberdeen's Mr. Docherty said. “We've tended not to follow those benchmark approaches,” he said.
He said Aberdeen's AUM increase was “somewhat flattered” by the acquisition of Credit Suisse's traditional asset management business, which brought in $1.3 billion in global equity assets.
But “we have seen significant billions (of dollars) of flows” in new global equity assets. The flows have come from clients around the world, but he said, “we've been particularly successful in Canada.” That's because restrictions on foreign investments in Canada have eased in recent years, and because Canadian pension funds “tend to have a global approach when they diversify away” from domestic equities.
At Brandes, assets have fallen primarily because its global equity strategy was closed to new clients from 2001 to 2009, said Edward W. Blodgett, a Brandes partner and director of the private client group. The year ended June 30 “was one of our worst years in terms of losing assets,” but that was exacerbated by the inability to add new clients, Mr. Blodgett said.
He pointed to stronger recent performance in emerging markets and international small-cap strategies. He also said the firm's two main international and global strategies, which together make up nearly 90% of total assets at Brandes, are poised for strong returns.
Seth Masters, chief investment officer of blend strategies and defined contribution at AllianceBernstein said the firm has seen outflows in all of its active strategies because neither growth nor value factors have performed as investors have “indiscriminately” abandoned equities for bonds and active strategies for passive.
“Ironically, that exact situation is creating a huge opportunity for us today,” as stock prices are extremely low and huge growth potential exists, Mr. Masters said.
He noted that AllianceBernstein is one of the largest global equity managers in the world, with $55.7 billion under management in global equities as of June 30. The global style blend strategy is the firm's largest equity strategy, with about 7% of total AUM, according to eVestment Alliance.