Institutional Hires Abound in Alts and RE at Expense of Equities

(August 2, 2011) — In the first two quarters of 2011, institutional hires in alternative investments and real estate increased at the expense of domestic equity and fixed-income, according to David Holmes, Partner at Eager, Davis & Holmes, a Louisville-based consultant to investment managers.

“We’ve known for a while now that institutional investments in equity were out of favor, while interest in alternatives — particularly private equity — have increased,” Holmes told aiCIO. With such a high level of volatility in equity, the drive among investors to reduce their risk has driven investors to pursue other asset classes. “Pension funds are seriously underfunded — they’re looking to increase returns. Equities have traditionally been a hedge against inflation — but they’re not the only answer now.”

The trend away from equities toward alternative investments has also been revealed by consulting firm Towers Watson. The firm’s Global Pension Asset Study — which collected responses from 271 asset managers — showed that North America continues to account for the largest amount of pension fund assets in alternatives, followed by Europe and Asia. The share of alternative investments in global pension fund portfolios ballooned to an average of 19% in 2010 from 7% in 2000.

Holmes added: “Investments that address special situations or are favored in an inflationary environment are seeing more hiring activity. Examples are oil and gas, commodities, timber, real assets, credit, and bank loans.” The research showed that alternative investments comprised 42% of placements in 2011’s first two quarters compared to a 37% average over the past six years.

On the other side of the equation, Eager, Davis & Holmes’ research showed domestic active equity placements are down 42% in dollar terms for new mandates in the first two quarters of 2011 relative to 2010. “US active fixed income mandates are down slightly from 2010, but with strong hiring activity in some fixed income styles, including core plus, bank loans and credit-oriented mandates,” Holmes explained.

Additionally, according to Holmes, the current trend favors investment managers with a broad product array. “The high demand in specialty areas continues,” Holmes explained, “and underscores the importance of consultative selling to meet fund sponsors’ changing needs.” According to the research, PIMCO captured the most mandates over the past six quarters measured in terms of number of mandates. Blackrock, State Street Global, JPMorgan and Wellington round out the top five.

In particular, Holmes noted that PIMCO has been exceptional at broadening its product array over the past five years.

The research — indicative of what US retirement plans and endowments and foundations are doing with their investments — from Eager, Davis & Holmes’ Tracker Hiring Analytics database was compiled from publicly reported mandates outsourced by US institutional investors. The figures do not include insurance assets, since those mandates are not typically reported publicly. The firm tracks insurance asset outsourcing in a separate global database called Insurance Asset Tracker.