Overseas investments notch solid growth for year

International investments rose a solid 17% to $1.533 trillion at year-end 2012, according to Pensions & Investments' annual survey of the largest money managers of U.S. institutional assets.

International equity assets under management rose 15.1% to $1.26 trillion and international fixed income rose 27.3% to $270 billion in 2012.

Even after adjusting for the 4.5% gain in the Citigroup World Government Bond index, international fixed income increased 21.9%. Equities had a 2% decrease after adjusting for the 17.4% gain in the MSCI Europe Australasia Far East index.

“There was momentum to diversify outside of the U.S. and transition toward a more global portfolio,” said Jeff Schutes, global leader of manager research at New York-based Mercer. “Everyone's chasing alpha, and individual securities selection may or may not be able to get you what you need, so clients are looking for managers to not only select stocks, but to be nimble and to be able to move between countries.”

The uptick in international investments can also be attributed to clients and investors getting back on track after the market crash in 2008.

“We saw people disinvesting in international and emerging markets (in 2008),” said Iain Douglas, New York-based investment consultant at Towers Watson & Co. “I think it's fair to say that all the clients had more urgent things on their plates than looking at international investments. But now investors have taken a long, hard look at those allocations, especially in regards to emerging markets, and are realizing that they heavily underweighted those markets.”

Mr. Schutes agreed. “Emerging markets now are becoming much more mainstream,” he said. “In the early days, you worried about the quality of accounting and information and labor issues, but the emerging markets you work with today are more mainstream economies, and so the fear factor has gone away. I think that now, almost everyone considers emerging markets in their asset allocation strategy.”

“On the fixed-income side, it's really about yield,” Mr. Schutes said. “I think people felt that emerging market debt was a good place, and there was a good opportunity to pick up some yield.”

Emerging markets debt assets of managers tracked by P&I saw a 31.9% increase to $84 billion in 2012. After adjusting for the 18.54% market gains by the J.P. Morgan Emerging Market Bond index, the increase was still 11.2%.

Emerging markets equity also saw a sizable increase in assets, increasing 20.9% to $289.1 billion. With market adjustments for the 18.31% gain in the MSCI Emerging Markets index, the increase was 2.2%.

Dimensional Fund Advisors topped the emerging markets equity ranking with $28.4 billion in assets, a 49.1% increase, while Wellington Management led the pack for emerging markets debt, with $9.89 billion in assets, a 40.2% increase.

“What we've seen at Dimensional is that emerging markets has been one of the more popular areas and has been very strong in terms of cash flow,” said Steve Clark, head of institutional, North Americas, at Dimensional Fund Advisors, Austin, Texas. “Emerging markets is not new to the game, but I think we're seeing a lot of clients and investors now catching up.”

Among overall international investment strategies, passive equity maintained its dominance, increasing 23.5% to $336 billion in 2012, and was still up 5.2% after adjusting for market gains. Passive international fixed income was up 66% to $9.49 billion.

BlackRock Inc. topped the passive international rankings with $154.1 billion in passive equities and bonds managed internally for U.S. institutional tax-exempt clients, up 18% from the previous year.

The rest of the top five passive international managers saw even higher increases in assets under management, although they started from smaller bases. State Street Global Advisors' passive international assets were up 22.7% to $59.8 billion; Northern Trust Global Investments, up 69.6% to $45.3 billion; BNY Mellon Asset Management, 47% to $29.8 billion; and Vanguard Group Inc., 29.9% to $22.9 billion.

Active international equities, meanwhile, saw a 10.6% increase to $904.9 billion, but after adjusting for market gains, the decrease was 5.8%. Among active international/ global fixed income managers, assets increased 23.9% overall and 18.5% on a market-adjusted basis.

“We continue to see some structural issues in active management,” Towers Watson's Mr. Douglas said. “What you have is a set of managers that are charging fees which are too high, so for a lot of clients, it makes a lot of sense to go passive.”

The leaders in active international management were Fidelity Investments with $84.5 billion, a 13.2% increase, followed by Dimensional Fund Advisors with $58.2 billion, a 35.7% increase; TIAA-CREF, $49.5 billion, up 8.7%;, BlackRock, $48.6 billion, a 46.2% increase; and Franklin Templeton Investments, $45.8 billion, up 43.4%.

Dimensional's Mr. Clark said that although there is still “big home-country bias” among institutional investors in the U.S., he has noticed that more clients are seeking broader, global portfolios.

Global equities saw a nearly 20% increase in 2012, with managers reporting $351.4 billion in internally managed assets for U.S. institutional tax-exempt clients; the increase was 2.96% after adjusting for the 16.5% gain of the MSCI All-Country World index.

The top manager of global equity was SSgA, with a 4.2% increase to $82.5 billion in assets, followed by BlackRock with a 64.2% increase to $70.2 billion and Wellington Management with a 3.2% increase to $21.7 billion.

This was the first survey in which P&I asked about frontier market assets: Nine managers reported internally managed assets for U.S. institutional tax-exempt clients in the category, for a total of $707 million. The top managers were Acadian Asset Management, with $157 million; Aberdeen Asset Management, $131 million; Northern Trust, $130 million; and Franklin Templeton, $111 million.

“There's definitely a lot of conversation about frontier markets. It's one of those asset classes where there's a lot of discussion but not a lot of allocation right now,” Mr. Schutes said. “We only have 14 frontier dedicated strategies, which is about double what it was a couple years ago. So it's definitely increasing, and there seems to be interest, but not a lot of uptake yet.”