U.S. multi-manager assets fell by 24.2% to $403.5 billion last year, according to a report on global multi-manager products released by Cerulli Associates.
The results showed a reversal of five years of growth. The multi-manager segment, in which assets are placed primarily in long-only traditional investments, and held in funds of funds, is struggling because of a combination of factors, said Ben Poor, director of institutional asset management for Boston-based Cerulli.
First, active management has failed to outperform passive management. Second, institutional and retail investors alike increasingly focused on costs in 2008, and viewed some actively managed products as too expensive. As a result, institutional managers increased their use of passive and quantitative management styles, Poor said. Also, many investors pulled out of the equity market entirely, choosing to reallocate funds to money markets and deposit accounts that preserved assets.
Although 2009 has seen an equity market rebound so far, investors are still cautious, and they are bringing that caution into negotiations with multi-managers. “Portfolios are not back to where they were before the crisis began,” Poor noted. “There is still going to be this focus on costs. The investors want lower fees from the multi-managers, who in turn will ask for lower fees from the managers they use.”
In addition, Poor said: “We would expect some multi-managers to look for new ways to reduce risk in their portfolios,” including using more exchange-traded funds and other index products.
Globally, multi-manager assets fell by 30% in 2008, totaling $2.6 trillion.
The U.S. market fared better because of the success of target-date funds and those products’ ability to attract new inflows. And, despite short-term outflows and a recent Congressional hearing about the performance and safety of target-date funds, investors will not abandon the products altogether, Poor said.
Instead, he noted, some investors will change vendors and use more customized products.