• Investment consultants servicing North Americ an institu tional inve stors wil l continue to favor asset managers with the following five characteristics: - A focu s on n on-corre lated i nvest ments that ad d ex cess retur n to po rtfolios - The a bility to offe r both tradit ional and a lterna tive inves tments - Inn ova tiv e prod uct dev elo pme nt - Fu lly glo bali zed por tfol ios - Competi tive long-te rm incent ive schem es • These success factors r eflect three c ore s hifts in institutional portfolio cons truction: - A gre ate r emp has is on out comes - An incre asingl y c entral role for altern ative inves tments - A wid er use of glo bal ben chm arks • Managing inflation a nd longev ity risk have be come cr itical polic y concer ns, espe cially amon g corporate defined benefit plans. More than one-half of consultants expect increased search activity for inflation- hedging strategies; more than a one-third anticipate boosted mandates for liability-driven portfolios in 2011. • Inflation fears ar e driv ing de mand f or illi quid in vest ments, with consultants predicting significant increases in private equity and real estate mandates. • Appet ite for hedg e fu nds continues to r ise. Consultants expect the most search activity to center on hedge funds during 2011, although a growing number of large investors will turn to more direct mandates, using funds of hedge funds for specialist portfolios instead of core hedge fund exposure. • Inst itutional in vest ors wi ll cont inue to l ook outs ide the United States, with more than 80% of consultants expecting their clients to increase their non-U.S. equity exposures in 2011. • Demand for emergi ng mar kets e quity a nd debt s peci alis ts will s urge , with more than one-third of consultants expecting EME to see the most search activity in 2011. Conversely, less interest will manifest for EAFE mandates, the traditional international staple investment. • Interest in U.S. core and core-plus fixed in come strate gies will drop off material ly . Only 60% of consultants expect moderate or strong search activity for U.S. bonds, which rank 9th overall amongexpected mandates for tender . • T raditional asset clas ses ar e expe cted to experience material manager r eplacement. More than 50% of consultants expect more than half of U.S. equity, U.S. fixed income and EAFE equity search activity to involve manager replacements. Old Wine in New Bottles 2011 Consultant Search Forecast April 2011
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These new portfolio construction strategies continue to underscore longer-term implications for
fund managers servicing North American institutional investors:
• Managers offering non-correlated investments will realize the most success in winning
mandates.
• Firms offering both “traditional” and “alternative” investments will stand the best chance of providing institutional clients with a total portfolio solution.
• Product development and innovation will remain critical competitive differentiators.
• Managers using global benchmarks and demonstrating international expertise will benefit most
from broader policy reallocations among larger institutional investors.
• Asset owners and their consultants will keep favoring investment managers with long-term
incentive alignment structures that motivate and retain talent.
April 2011 Old Wine in New Bottles3
Emerging Institutional Investment Framework
Exhibit 1
Credit
Cash
Equity
Real Estate
Private Equity
Hedge FundAllocation
A l t e r n a t i v e s
Legacy Allocation
Paradigm*
Credit
Cash
Equity
Real Assets
Liquid Alpha
(Opportunistic)
IlliquidInvestments
• Private Equity• Distressed
• Portfolio objectives definedaround outcomes
• Alternatives become centerpieceof active asset management
Inflation risk drove increased search activity for commodities managers in 2010, as investors sought
real assets. Consultants expect this trend will broaden in 2011 to embrace a wider array of illiquid,
longer-dated asset classes, such as property and private equity, which are more immune to inflating
currencies. Respondents expect search activity in private equity to focus on niche strategies rather
than large buy-out funds.
Such fears are particularly palpable among U.S. corporate defined benefit plans. Nearly all consultantsfocused on corporate DB plans expect a significant focus on inflation-related search activity in 2011,
with more than 40% of consultants focused on the corporate sector predicting an increase in
mandates designed to protect portfolios from inflation. This dovetails with the growing interest in
liability-driven investing, in which more than half the consultants focused on corporate pensions
predict an increase during 2011. It also adds fuel to the trend of investment outsourcing: delegating
management of the entire pension plan to a third party able to provide total portfolio management that
anticipates and mitigates inflation and longevity risk. Nearly one-half of the consultants focused on
corporate pensions predict increased interest in investment outsourcing during 2011.
Search Activity Characteristics
Isolating search activity for new allocations, as opposed to searches for replacement managers
on existing mandates, shows the true extent to which “alternatives” are becoming mainstream.
Consultants report that a wide majority of searches for hedge funds, private equity, real estate,
and commodities—usually defined as “alternatives”—continue to represent new mandates,
reflecting a secular shift from benchmark-driven portfolios to less correlated instruments.
Analyst team: Michael D. Chia, Jonathan L. Doolan, Jason D. Roche
Casey, Quirk & Associates
17 Old King’s Highway SouthDarien, CT 06820
www.caseyquirk.com
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Old Wine in New Bottles:2011 Consultant Search Forecast