Investor Demand for Income, Alternatives to Rise

The 2013 Consultant Search Forecast surveyed investment consultants to forecast their investment preferences and buying behavior among U.S. institutional investors.

Search activity in 2013 will be guided by many of the same portfolio trends seen in recent years, the report said. Alternative investments, yield, portfolio globalization and outcomes will continue to dominate the investment landscape. However, investors are increasingly sharpening their focus on risk management and downside protection, with three-quarters of consultants reporting an increased client focus on risk.

Investment consultants in the U.S. expect substantially lower returns from portfolios, forecasting an average return of 7% in 2013 and beyond, compared with 2010 expectations of 8%.

Private equity, hedge funds, real estate and commodities will drive a combined 24% of total manager search activity in the U.S. and 28% of new or expanded investment mandates this year, the report found.

“The sectors that are showing change are very specific to the universe,” Benjamin Olmstead, vice president of new product innovation at eVestment, told PLANADVISER.

“The sector trends for an actively managed U.S. equity product are often very different from the sector trends in an emerging markets equity strategy. 

Olmstead said eVestment would focus on the emerging markets equity space since this was top of the list for the most sought-after asset classes for 2013.  For emerging markets equity, eVestment saw increased allocations to technology (+2.18%),  financial services (+1.64%) and consumer staples (+1.56%) during 2012. Sectors with decreasing allocations were materials and processing (-2.65%), energy (-1.53%) and producer durables (-0.33%).

“Traditional benchmark investing is no longer a sufficient stand-alone vehicle for driving flows into today’s volatile marketplace,” Olmstead said. “Managers have to focus on outcomes, not just their strategies, to remain successful and maintain and grow client share.”

Survey results indicate that emerging markets equity is expected to be the most sought-after strategy in 2013, representing 9% of all search activity—an increase of three percentage points over the previous year. Consultants also expect clients to round out their exposures with capitalization and style-specific global mandates.

Concern about volatility, given the current state of economies worldwide, remains high among institutional investors, and 75% of consultants reported elevated client focus on measuring and managing risk. Consultants said their clients continue to seek higher-yielding fixed-income strategies.

Consultants forecast emerging markets debt and high-yield fixed income will represent the third- and seventh-most popular asset classes in 2013, respectively, and a decreased interest in long-duration bonds.

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Olmstead called the survey a valuable tool for gaining a clear sense of marketplace demand.
“As we’ve seen in our database analysis over the past year, innovation and diversification of portfolio assets are driving investment behavior for this year’s survey respondents.” he said.

“For institutional investors, the line between U.S. and international investments continues to erode, meaning savvy consultants increasingly address client needs for liability management, income, diversification and volatility in a global context,” said Ben Phillips, partner at Casey Quirk. 

In 2012, the respondents conducted nearly 5,300 searches and placed a total of $400 billion in mandates. The survey was conducted over a month from December 2012 to January 2013, and polled U.S.-based investment consultants on forecasts for investment preferences and buying behavior among U.S. institutional investors, as well as retail intermediaries who select external managers on a client’s behalf. This year’s survey included responses from 35 investment consultants in the U.S., representing $14 trillion in assets under advisement.

eVestment is a global provider of institutional investment data intelligence and analytic solutions. Casey, Quirk & Associates is a management consulting firm serving the global asset management industry.

The 2013 Consultant Search Forecast report can be found on both eVestment and Casey Quirk’s websites. Please visit www.evestment.com and www.caseyquirk.com for copies of the full report.