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Manager search activity declines globally in 2008 as investors concentrate on strategic issues

United Kingdom
London, 5 May 2009

Search activity slows down on a global level – Europe, Australia and New Zealand see drops in activity while a slight increase is observed in North America and Asia
International equity remains the dominant search category
Search activity increases for private equity and multi-strategy hedge funds
Value of assets placed through Mercer’s manager search activity totalled US$93 billion in 2008, with an average placement of US$139 million

Globally, manager search activity is slowing down as investors focus their attention on strategic issues, according to data released by Mercer. The 2008 Global Manager Search Trends report gives insight into institutional investment manager hiring patterns and trends across the world, and is based on activity reported through Mercer's global client database.

During 2008, Mercer advised on 676 manager searches across the world, representing US$93 billion in assets placed. Globally, searches ran at lower levels than in previous years although assets placed reached their highest levels yet.

The most notable decreases were seen in the UK, Continental Europe and Australia where funds focused on strategy issues rather than manager changes and structures. In New Zealand the number of searches also dropped after a year of high levels brought on mainly by tax changes. In the US, search activity was up as plan sponsors reacted to the large losses in equity markets by reconsidering their policies and making some tactical decisions on rebalancing, as well as replacing managers who had performed exceptionally poorly.

International equity (including all global, EAFE and other global ex domestic) remained the dominant search category, with 155 searches accounting for close to US$23.5 billion in assets placed, up from US$19.5 billion in 2007. There has been a decline in domestic equity searches in Continental Europe and the UK, with combined figures dropping from US$3.9 billion to US$1.7 billion 2008.

Searches in real estate nearly halved from 62 in 2007 to 32 in 2008, however the amount placed went up slightly to US$1.9 billion. The survey shows an overall decline in non-traditional search activity, though most of this is accounted for by a large decline in the number of global TAA/global macro searches in the UK. Of note is the global increase in activity in both private equity (up from 5 to 22 in 2008) and multi-strategy hedge funds (up from 9 to 20 in 2008).

Andy Barber, global head of manager research at Mercer, commented: “Plan sponsors across the globe have been busy analysing how last year’s unprecedented market conditions are shaping their investment strategies going forward.

"We currently see a number of attractive beta opportunities, particularly in credit markets, and are encouraging clients to explore these. We expect search activity to pick up in these areas."

Europe

In 2008, 189 searches were conducted in the UK, with total assets placed declining to US$26.1 billion from US$29.2 billion in 2007. As the market turmoil intensified, schemes became more focused on strategic issues than on manager structure/manager selection. Within the traditional arena, global equities (48 searches) and UK fixed income (41 searches) saw the most activity. The number of UK equity searches declined to just 17, from 27 in 2007 and 32 in 2006.

In the UK, search activity in alternatives was lower than anticipated at the start of the year. The decline in activity was most notable in real estate (down to 7 from 25 in 2007) and non-traditional asset classes. The number of searches in global TAA/global macro and currency fell from 36 in 2007 to 10 in 2008. Contrary to this general trend, multi-strategy hedge funds witnessed a large pick up last year (6 searches in 2007 and 17 in 2008).

Mr Barber commented: “We share the market consensus view that, after the events of 2008, there will be a considerable shake-out in the hedge industry. Ultimately, the industry may emerge stronger, but we nonetheless expect some clients to be wary of the alternatives sector for a while.”

In the rest of Europe the individual countries that showed the highest percentage fall in activity were Switzerland and Spain. Elsewhere search activity remained at similar levels to 2007. The most common search category was balanced/multi-asset which covers most of the activity in Spain and Portugal. Within the traditional space, global equity and European fixed interest were the most popular search categories. The majority of the activity in alternatives took place in Germany.

Asia

Search activity increased slightly in 2008, however no strong trends emerged. The most common search category remained global/international equities with 14 searches and US$3.9 billion placed.The search for hedge funds/absolute return funds is also still growing, up to 13 searches from 7 in 2007.

Marianne Feeley, principal in Mercer’s Asia Pac research team said: “Asian search activity continues to vary from one year to the next given the diversity of clients in the region. In 2009, although many clients may like to review their existing manager structures and line-up, early indications are that most clients are putting such activities on hold while the volatile global market conditions persist.”

North America

In the US virtually every asset class experienced significant losses, yet search activity was fairly strong compared to 2007 (up to 123 from 110). The number of defined contribution (DC) searches (151) continued to outpace defined benefit (DB) (123, but they declined in 2008 from the level of the previous year (170). The value of assets placed in DB searches, however, continued to exceed the assets placed in DC searches.

With a total of 21 searches, global/international equity continued to be the most frequently sought asset class in both DC and DB plans. Continued diversification, among equity styles and capitalisations, was also an apparent common denominator in both plan types.

Jeff Gabrione, principal in Mercer’s research team in the US, said: “Given the continued capital market volatility we expect 2009 search activity to be uneven as sponsors evaluate their asset allocation policies, manager performance/risk and liquidity. In the DC market we expect to see increased use of separate accounts and commingled funds as alternatives to mutual funds due to a greater scrutiny of fees. For sponsors with a larger DC asset base, there is greater flexibility to offer non-mutual fund vehicles.”

Canada maintained approximately the same level of search activity overall in 2008 as in 2007 (124 searches, US$5.7billion in assets placed in 2008). The volume of searches rose for equities and alternatives, but declined by two-thirds for fixed income.

The number of Canadian equity searches increased in 2008 (32 to 38). However, they were overshadowed by the increase in amounts placed in non-domestic equity mandates, jumping from US$1.8 billion to US$2.7 billion in 2008. On the alternatives side, activity increased. The most popular strategy was infrastructure, where a doubling of search activity was observed in 2008.

Sharon Wilson, principal in Mercer’s research team in Canada, said: “Given the recent markets, we believe that sponsors will pay close attention to the risk-reward trade-off inherent in investment strategies, relative to liabilities. We expect to see strong continued interest in liability-driven solutions, both customised and packaged.

“Given the spreads between credit and federal strategies, we also anticipate interest in specialty credit strategies, and in domestic bond strategies that have the capability to invest opportunistically in interesting areas within the fixed income space.”

Australia and New Zealand

Search activity in Australia declined to 61 in 2008 from 82 in 2007; however the amount of assets placed increased from US$10.1 billion to US$15.2 billion, reflecting a trend for larger placements.

During the year, equity searches accounted for the lion’s share of activity in 2008 with Australian equity searches leading the pack (18 searches, US$3.6 billion placed). Global equity searches came second in the number of searches (12), but surpassed the Australia total in the amount of assets placed (US$6.7 billion). Of all equity searches, there were several that were focused on socially responsible investment (SRI). “We saw 2008 as a year of two parts, with worries over the global financial crisis acting as a damper on search activity towards the latter half of the year,” said Ms Feeley.

For New Zealand, 2008 saw a return to normal search levels (26) after a particularly busy year in 2007 (50), driven primarily by tax changes. Searches in 2008 were dominated by global rather than domestic asset class searches, with global fixed income making up the highest percentage of assets placed (US$ 97 million). Searches in the alternative asset sector were relatively subdued in 2008.

“We are not expecting a marked increase in 2009 as investors focus on coming to grips with the recent experience of marked volatility across virtually all asset classes,” said Ms Feeley.

Copies of Mercer’s Manager Search Trends: 2008 Year-End Report cost US$2,000 and can be purchased at www.mercer.com/managersearchtrends. The full report includes country-specific commentary for France, Germany, Ireland, The Netherlands, Portugal, Spain and Switzerland in addition to the countries and regions highlighted in this release.