Mercer Investment Consulting has released data on its global investment manager search activity for 2004 indicating strong growth in hedge funds.
Mercer's manager search data is often viewed as a bellwether of trends within the institutional investment market, as the company advises on more manager searches than any other investment-consulting firm worldwide.
Hedge fund of fund mandate searches increased during 2004 with Mercer carrying out 29 searches over the course of the year, compared to 18 in 2003. More significantly, however, assets placed in hedge fund of funds grew to USD 1.8 billion in 2004, up from USD 0.3 billion in 2003.
Overall, Mercer advised on 764 manager searches globally during 2004. These searches accounted for USD 84.4 billion worth of assets placed - up 27 per cent from USD 66.7 billion in 2003 and a record high.
"The large growth in total assets placed has been driven by increased search activity among our national government fund clients," said Bill Muysken, global head of research at Mercer. "The number of national government-related funds we advise globally has now reached double figures, and some of them placed very large mandates with managers during 2004."
US equity was the most popular single product category among Mercer's clients for 2004, with 90 searches accounting for USD 6.1 billion of assets placed. Close behind was global equity, which had been the most popular category in 2003 and in 2002, with 85 searches and USD 8.9 billion worth of assets placed during 2004.
Currency overlay attracted the greatest increase in interest from Mercer's clients in 2004, with 28 searches and USD 10 billion worth of assets placed. This was a dramatic increase from 2003, when Mercer advised on just eight currency overlay searches accounting for USD 2.7 billion worth of assets.
Currency overlay also ranked highest in terms of value of assets placed during 2004. Mr Muysken commented: "UK pension funds, in particular, showed more interest in currency overlay, hiring managers both to reduce currency risk and to add value through active currency management."
Interest in Japan equity also rose substantially, with 23 searches conducted and USD 1.4 billion of assets placed during 2004. Only four searches were carried out in this category the previous year, accounting for USD 0.5 billion worth of assets.
In the UK, 241 searches were conducted, compared to 222 in 2003, with total assets placed at USD 36.1 billion. Muysken commented: "Search activity for non-traditional asset classes increased in the UK, with clients seeking to reduce their equity risk without sacrificing long-term performance."
In the rest of Europe, 78 searches were carried out, compared to 68 in 2003, with total assets placed of USD 22.7 billion.
Global equity mandates were among the most frequently sought in both the UK and Europe.
During 2004, 158 searches were conducted in the US, with total assets placed of USD 8.8 billion. In Canada, 110 searched were carried out, with total assets valued at USD 4.3 billion.
Muysken said: "We expect more interest in international mandates from Canadian pension funds following an announcement that foreign investment restrictions will be lifted."
Asia/Pacific and other regions
In Asia, 43 searches were carried out, compared to 33 in 2003, with assets placed totalling USD 6 billion. Search activity was stronger in Australia where 101 searches were conducted, although assets valued were slightly lower at USD 5.1bn.
Australia equity and global equity were the most popular mandates in Australia, while Japan equity and Asia Pacific fixed income were the most popular in Asia.
Mercer's global search activity details (Top 20 ranked on 2004 searches)<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Number of Amount placed
US Equity 90 11.8 6,133 7.3
Global Equity 85 11.1 8,906 10.6
Canadian Balanced 49 6.4 765 0.9
World ex US/EAFE Equity 46 6.0 3,231 3.8
<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK Fixed Income 43 5.6 6,780 8.0
Australian Equity 36 4.7 1,632 1.9
US Fixed Income 36 4.7 3,269 3.9
UK Equity 32 4.2 6,632 7.8
Hedge Fund of Funds 29 3.8 1,827 2.2
Currency Overlay 28 3.7 10,025 11.9
Japan Equity 23 3.0 1,426 1.7
UK Balanced/Multi Manager 19 2.5 991 1.2
Canadian Equity 18 2.4 468 0.6
UK Passive 16 2.1 560 0.7
Emerging Markets Equity 15 2.0 1,749 2.1
Global Fixed 15 2.0 3.259 3.9
Background notes: Manager search is the process that takes place when an institutional investor such as a pension fund is seeking to hire an investment manager to manage a portfolio of assets on its behalf. This hiring activity can arise as a result of growth in assets under management, a change in investment strategy, a change in investment manager structure or a decision to replace an incumbent investment manager.
Currency overlay is an investment management technique aimed solely at managing an investor's currency exposures.
Mercer Investment Consulting is a leading global provider of investment consulting services, and offers customized guidance at every stage of the investment decision, risk management, and investment monitoring process. The company works with the fiduciaries of pension funds, foundations, endowments, and other investors in some 35 countries.