Mercer's investment consulting business has released data on its global investment manager search activity for 2007.

As Mercer's investment consulting business probably advises on more manager searches worldwide than any other investment consulting firm, this search data is often viewed as a bellwether of trends within the institutional investment market. 

Highlights include:

• Recent market turmoil further accelerates search activity in non-traditional asset classes.
  
  
• Value of assets placed through Mercer's manager search activity totalling US$76.3 billion in 2007, with an average placement size of US$100 million.
  
  
• Global equity and real estate are the most searched product categories globally in 2007.  

Overview

During 2007 searches ran at similar levels to 2006 across the globe. The UK continued to generate the most search activity. It declined somewhat elsewhere, for instance, trailing off a little in Australia and Asia, but it picked up in number terms in New Zealand and Canada.

International equity (including all global, EAFE and other global ex domestic markets) continued to be the most popular category in 2007, with 158 searches accounting for some US$19.5 billion worth of assets placed.

There were no dramatic changes in terms of the spread of search activity, though we note a decline in domestic equity searches in the US and the UK. More generally, non-traditional search activity continues to increase albeit gradually. Real estate continues to be popular, with 62 searches in 2007.

Andy Barber, global and European head of research at Mercer, commented: "The key trends of earlier years are clearly continuing, including a steady increase in search activity in non-traditional asset classes. Recent market turmoil is, however, expected to further accelerate search activity as investors seek not only to further diversify but also, on an opportunistic basis, to identify investments with the potential for higher returns."

What's covered

Mercer examines search activity in Asia, Australia, Canada, Europe (ex UK), which includes country-specific analyses for France, Germany, Ireland, the Netherlands, Portugal, Spain and Switzerland. We conclude with reviews of New Zealand, UK and US search activity.

Regions included

Europe

Search activity within Europe was some 20% higher in 2007 than in 2006, with 116 searches totalling US$18 billion. The distribution of that search activity by country changed dramatically. We saw large increases in activity in Germany, Switzerland and Spain, with declines in Ireland, the Netherlands and France.

Notable changes from last year included the re-emergence of global fixed income as a significant search category and an increased number of searches in the alternatives arena. Mr Barber commented: “European countries continue to display a diverse range of activity. Germany, Switzerland and the UK appear to be leading the way in terms of non-traditional search activity.”

The number of searches conducted in the UK last year was marginally higher than in 2006 at 242, though the monetary amount placed declined from US$36.9 billion to US$29.2 billion. The most common search was for global/international equities.  Last year’s predicted growth in alternative categories has materialised in the UK with a significant increase in activity.

North America

US search activity increased to 280 in 2007, from 267 searches in 2006, mainly because of a rise in the number of defined contribution (DC) searches from 157 to 170. The number of defined benefit (DB) and other searches was unchanged at 110, but the value of assets placed in DB searches continues to exceed those placed in DC searches.

“We expect 2008 search activity to stay at current levels as plan sponsors continue to diversify into higher alpha-generating asset classes, such as global/international equities, distressed debt and other alternative strategies,” said Jeff Gabrione, Mercer’s head of investment manager research for the Americas. “However, there may be additional searches as plan sponsors increase the frequency of asset liability studies and adopt new methods of portfolio analysis and risk budgeting.”

Canada experienced noticeably more search activity in 2007, with a total of 120 searches, up from 101 in 2006. While the number of Canadian equity searches increased, these were overshadowed by the combined growth of non-domestic equity mandates. Equity funds with a socially responsible or ESG (environmental, social and corporate governance) focus generated some interest. “With some traditional managers now starting to consider the impact of climate change in their research, we expect to see more dialogue between plan sponsors and managers about the role of ESG issues on investment decisions,” said Mr Gabrione.

Asia-Pacific

Search activity in Asia declined by nearly 50% in 2007 after practically doubling in the previous year. The most common search activity was global/international equities. Across the region there has been growing interest in higher-returning areas such as private equity and infrastructure, but placements in alternatives have tended to be small, reflecting more “toe-in-the-water” type positions.

Marianne Feeley, Asia-Pacific head of research at Mercer said, “Asian search activity can experience considerable variability from one year to the next given the diversity of clients in the region. In 2008, we expect to see growing demand for alternatives, especially given current volatile market conditions, but as with 2007 we expect a measured approach reflecting investors’ emerging understanding of this asset class.”

Search activity in Australia declined to 82 in 2007 from 110 in 2006, however the amount of assets placed increased from US$9.3 billion to US$10.1 billion, reflecting a trend for larger placements. Australian and global equity were the largest drivers of search activity in Australia, with several clients conducting overall reviews of their Australian equity allocation.

“The number of searches in emerging markets equity increased substantially, with Australian clients favouring global emerging market mandates rather than region or country specific mandates. Also after several years of minimal activity there were multiple searches for currency managers, due to recent fluctuations in the value of the Australian dollar” Ms Feeley said.

New Zealand search activity topped the US$1 billion mark and 2007 was a landmark year in terms of the total number of searches, which equalled the total number carried out for the previous three years, combined. “2007 was something of a ‘catch up’ year as, prior to this investors were inclined to hold off on material portfolio adjustments as they awaited finalisation of Government decisions on changes to investment tax,” said Ms Feeley.