A shift in American investor appetite towards investment outcome, as opposed to relative return, is changing their buying behavior, according to research published by Casey, Quirk & Associates and the eVestment Alliance.
According to the 2012 Consultant Search Forecast, four major themes are now affecting investor decisions when they shop for asset managers: steady income; globalization; alternative investment and liability-driven investing by corporate pension plans.
The survey found that these investor gatekeepers favor asset managers with characteristics including support for non-correlated investments that can add extra return to a portfolio. Gatekeepers also prized mixes of traditional and alternative investments, fully-globalized portfolios as well as innovative development of income-creating products. They also favored long-term incentive schemes.
Another key trend uncovered by the survey inludes the fact that alternative investments and real estate will drive a combined 20% of all manager search activity in the U.S., and one-fourth of all new or expanded investment mandates this year.
“As hedge funds continue to dominate news headlines, we are not surprised that many of the significant findings from this year’s survey were focused on alternative investments,” said eVestment’s vice president of new product innovation Benjamin Olmstead, in a statement.
Other notable trends in investor demand include booming appetites for emerging market, high-yield debt and multi-asset class portfolios. Investment consultants are also turning more towards global benchmarks, while pension plans have sown an increased interest in indexing. In fact, nearly 60% of those polled by the survey expect pensions to raise passive exposure, nearly three times the proportion recorded in 2011.
The survey also revealed a growing willingness by investors to fire underperforming managers.
For example, investment consultants continue to predict high turnover rates in domestic equities, core fixed income, and international equity, indicating—among other things— a high level of dissatisfaction with incumbent providers. Further, these consultants believe that hedge funds and funds of hedge funds will experience moderate turnover, with a respective 22% and 35% of total search activity reflecting replacement searches.
Finally, as consultants research new allocations in 2012, notably in such areas as domestic and international equities and core fixed income, those polled said that most of these searches will involve replacing managers on existing mandates—instead of new or increases allocations to these asset classes.
“This year’s consultant survey indicates asset owners and gatekeepers are making increasing demands from asset managers,’’ said Casey Quirk partner Ben Phillips, in a statement. “Investment managers failing to adapt to the changing investment framework will suffer from slower growth.’’
In the Forecast, 30 investment consultants, representing $9.7 trillion in advised assets, were polled in order to forecast preferences and buying behavior among U.S. institutional investors, as well as retail intermediaries who choose external managers.