Mercer Investment Consulting's latest data on 2005 manager search trends shows an increasing use of consultants by Continental European investors.
The value of assets placed through Mercer IC's manager search activity totalled USD 76 billion in 2005, with the average placement USD 101.6 million.
International equities remain popular, with assets placed rising to nearly USD 16 billion in 2005 from about USD 12 billion the preceding year. This diversification away from domestic equity exposures is particularly seen in the US, Canada, and Ireland.
The research also reveals that more than one in six searches globally is in relation to alternative mandates. Search trends also show an increasing use of consultants by Continental European investors.
During 2005, Mercer IC advised on 748 manager searches globally, accounting for USD 76 billion in assets placed. This was down slightly from 764 searches conducted in 2004, which accounted for USD 84.2 billion. However, there was particular growth in search activity in the Europe region (excluding the UK) with 152 searches conducted, up from 78 in 2004.
International equity overtook US equity as the most popular single product category among Mercer IC's clients for 2005, with 164 searches accounting for nearly USD 16 billion, or 21% of total assets placed. US equity was the second most popular category, with 75 searches and more than USD 7.4 billion worth of assets placed, or 9.8% of the total.
In Europe, excluding the UK, assets placed rose slightly, from USD 22.7 billion in 2004 to USD 25.2 billion in 2005. Multi-asset and global equity saw the most search activity in the region.
"The number of searches in Continental Europe increased dramatically in 2005 as both our business and the use of consultants continue to grow across the region," said Andy Barber, European Head of Research at Mercer IC. Ireland saw the most search activity within the region, driven by changes in asset allocation and by the trend away from single-manager balanced structures towards structures seeking global equity exposure. "We expect specialist search activity to increase across Europe this year," added Barber.
Nearly 230 searches were conducted within the UK, compared to 241 in 2004, with total assets placed at USD 29.9 billion. Global equity represented 42 of the searches and nearly USD 6.2 billion in placed assets, an increase from 2004.
Barber commented: "While global equity continues to see the most search activity within the UK, the pick-up in private equity searches is striking. This suggests our UK clients are continuing to take a long-term view when deciding on strategic asset allocation."
US search activity decreased overall in 2005, mainly due to reduced defined contribution (DC) search activity, which fell from 441 searches in 2004 to 164 in 2005. "We believe the reason for this downturn is the delayed impact of the mutual fund late-trading and market-timing scandals of 2003, which prompted an unusual level of search activity in 2004," said John Frede, Americas Head of Research at Mercer IC.
"We expect DC search activity to remain on pace with 2005 levels as search activity reverts to more normal trends. There should be few, if any, searches due to replacement of managers caught up in the mutual fund trading scandals, as reforms have been implemented that address regulatory issues," Frede added.
Despite the downturn in DC searches, assets placed rose slightly, from nearly USD 8.8 billion in 2004 to nearly USD 9.2 billion in 2005. International mandates continued to be the most frequently sought asset class in both DC and defined benefit (DB) plans.
Similarly, DB/other searches saw a rise in assets placed despite a slowdown in search activity. In the US, Mercer IC conducted 117 DB/other searches in 2005, compared to 158 in 2004.
"Plan sponsors' implementation of portfolio structural changes was the main driver of DB search activity in 2005," said Frede. "These ongoing structural changes include increasing exposure to international investments, diversification into alternative investments, and rebalancing between growth and value, and small cap and large cap equities."
In Canada, search activity in 2005 was broadly in line with that of prior years, but the type of searches varied considerably from 2004. For instance, the elimination of foreign content restrictions early in 2005 resulted in an increase in the activity of non-domestic asset class searches, particularly with respect to US equity searches.
Mercer IC conducted 101 searches in Canada representing a total of USD 4.3 billion in assets. The most popular search mandates were Canada balanced and Canada equity, which accounted for USD 288 million and USD 682 million, respectively.
ASIA AND AUSTRALIA
Search activity in Asia remained essentially unchanged from the previous year, with 44 searches in 2005. Assets placed as a result of these searches totalled USD 3.4 billion, a considerable decline from the USD 6 billion placed in 43 searches in 2004. There was increased interest in global equity mandates, which represented 36.4% of searches, up from 9.3% in 2004. Global equity accounted for nearly one-third (31.2%) of total placements for Asia, rising from just 1.0% the previous year.
"Search activity in Asia can be subject to considerable variability from one year to the next given the diversity of clients and volume of assets being placed from year to year. In 2006 we expect to see sustained interest in search activity, as Asian markets continue to open up to offshore investments and institutions," said Marianne Feeley, Asia Head of Research for Mercer IC.
In Australia, investors seeking diversification and higher returns were the primary drivers behind most search activity in 2005. Mercer IC conducted 97 searches, with assets valued at nearly USD 3.9 billion. Property was the most popular mandate in Australia, rising from 10.9% to 23.7% of activity in 2005 and USD 1.1 billion in assets placed.
However, Feeley said: "Overall, however, 2005 was below average in terms of search activity. In general, clients are satisfied with their current investment manager mix, and strong performance of equity and fixed income markets have given them little reason to reconsider that structure."
Background Note: 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.