U.S. institutional investors will most heavily search for alternatives, income and global strategies this year, according to the 2013 Consultant Search Forecast survey produced by Casey, Quirk & Associates and eVestment.
The survey of 35 consultants representing about $14 trillion in assets under advisement identified four key demand trends for this year — portfolio globalization favoring global and emerging markets equity strategies, alternative investments with an increased demand toward direct investments, higher-yielding strategies such as emerging markets debt and low-rated debt, and managing volatility and tail risk in areas such as absolute-return and liability-hedging strategies.
Consultants expect alternatives to drive 24% of all search activity, up one percentage point from last year, and 28% of new or expanded mandates, up from 26% last year.
Emerging markets equity is expected to be the most-sought asset class, representing 9% of search activity, a three percentage point increase from 2012. Hedge funds, emerging markets debt and domestic equity are the next three most-sought asset classes.
The 2013 forecast is quite a reversal for domestic equity, which has seen outflows in the last three years and was not even included in the top eight of most-sought asset classes in 2012. Turnover in U.S. equity is expected to decrease to 56% from 75%, but the report said it is likely the result of a cyclical force following a downturn in the asset class from 2010 to 2012.
However, consultants expect most of the traditional asset class searches to involve replacing existing managers rather than new or increased allocations. The report said it is unclear how much of the search activity will be for passive strategies as opposed to active.
Equity searches are expected to make up 46% of the total activity, led by 20% for U.S. equity, each up one percentage point from last year. Fixed-income searches are expected to make up 22% of total activity, down from 25% last year.
Investors are seeking higher-yielding investments as consultants' average returns expectations fell to 6.6% from 8% in 2010.
For defined contribution plans, target-date fund searches are expected to make up 31% of DC searches, up from 26% last year. Custom target-date strategies represent most of the increase, going to 14% from 10%. Searches for retirement income products are expected to more than double to 7%, while searches to add or replace a single-strategy investment option are expected to decrease to 47% from 51%.
The seventh annual survey was conducted in December and January. The respondents conducted more than 5,300 searches and placed a total of $400 billion in allocations last year, moderately higher than 2011.
