Fiduciary management of institutional investors' alternatives portfolios is beginning to blossom in the midst of extreme market volatility.
Institutional investors globally are looking to substantially add alternative investments that are also better managed against liabilities, and they're increasingly turning to consultants and multiasset managers to take on a bigger role in running non-traditional assets, sources said.
As a result, the next crop of multiasset alternatives mandates is emerging from the roots of fiduciary management, in which assets are managed with an eye toward liability reduction and a better risk/return profile at the total portfolio level. Another notable difference compared to traditional funds of funds or managers of managers is the additional flexibility that fiduciary managers have to quickly move between a wider variety of asset classes, and in some cases, lower fees.
Customized multiasset alternatives are offered within the fiduciary management units of consultants such as Aon Hewitt, Mercer, Towers Watson & Co. and Cambridge Associates LLC, or multimanagers such as Russell Investments and SEI Investments Co. Multiasset managers such as Morgan Stanley Investment Management Inc., J.P. Morgan Asset Management, State Street Global Advisors and BlackRock Inc. also have been strengthening their capabilities in the multiasset alternatives solutions.
Among the institutions that have been dramatically increasing the use of fiduciary management for alternatives is the £1.3 billion ($2.04 billion) Lincolnshire County Council Pension Fund, Lincoln, England.
“We had decided to triple the size of our alternatives portfolio and expand into hedge funds and commodities, but the main thing about alternatives is that it's so much more resource intensive” compared with long-only equities and bonds, said Jo Ray, group manager for pensions and treasury at the fund.
Earlier this year, pension executives at Lincolnshire transferred an existing legacy private equity portfolio to Morgan Stanley Alternative Investment Partners, a subsidiary of MSIM. AIP had been appointed to mold a broader £150 million multiasset alternatives portfolio from Lincolnshire's estimated £50 million private equity holdings. Although the program is in its early days, Ms. Ray said fund officials “are pleased with the progress,” especially through the recent bout of high volatility spurred by the eurozone debt crisis.
The 2008-2009 financial crisis forced institutional investors to face up to their unhealthy dependency on long-only equities and bonds for returns, particularly for those applying a liability-driven investing approach. As a result, a more considerable allocation to alternatives is playing a crucial role both in terms of obtaining alpha and in dampening overall portfolio volatility, said Kathleen Mann, senior managing director and director of SSgA's investment solutions fiduciary services group in Boston. SSgA has about $41 billion in assets under management for worldwide clients within the solutions group.
“Now we have another round of (market) difficulties,” said Bill Muysken, London-based partner and global chief investment officer for alternatives at Mercer's investment management group. “Clients are more convinced than ever by the need to diversify away from (long-only) equities into alternatives.”
Within Mercer's asset management division, for example, AUM in multiasset alternatives has more than doubled to $3.6 billion in the year ended June 30, the latest figures available. Of that, 45% is sourced from European clients, another 40% come from Australia and New Zealand, and the remainder from the U.S.