The Markets May 5, 2009

Most Asset Classes Negative for Separate Account/Collective Trusts

While the first quarter of 2009 saw an equity market rally, most asset classes had negative returns during the period, according to the latest data from Morningstar’s Separate Account/Collective Trust (CIT) database.
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A Morningstar news release said the median domestic equity strategy in the database lost 9.5% for the first quarter—a substantial improvement over fourth quarter 2008’s dramatic 20.3% loss. Even though equity market givebacks were reduced, there were still losses, resulting in an average one-year decline of 37.1%, and a 10-year return of only 2.2%.

Alternative categories that use various short-selling techniques focused on the domestic equity markets, such as Long-Short, Leveraged Net Long, and Market Neutral, performed somewhat better, losing 3% for first quarter and 9.8% for the year, but posting a 10-year annualized return of 5.1%, Morningstar said.

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International stocks landed in between domestic equity and alternative strategies, with 10-year average returns of 3.9% but three-month and one-year declines of 10% and 45%, respectively.

Fixed-income strategies fared better than equity strategies. The median domestic, taxable bond strategy—the only asset class with a positive three-month return—returned 0.8% in first quarter 2009, lost 1.4% for the year, and had a 10-year annualized return of 5.2%. International bonds declined 1.3% for first quarter 2009 and 9.2% for the year, but their 10-year return of 7.8% was the highest of all asset classes evaluated.

Better Long-Term but Worse Short-Term Returns

Meanwhile, according to the data, separate accounts and collective trusts had significantly better long-term returns but significantly worse short-term returns. Of the 44 categories that overlap between both investment universes and include at least 20 products each, mutual funds outperformed separate accounts and CITs in 68% of categories in March and 59% of categories during the quarter, with average outperformance of 0.77% and 1.09%, respectively.

However, Morningstar said this trend reversed when evaluating the vehicles over longer time periods; separate accounts and CITs outperformed mutual funds in 70%, 73%, and 68% of categories for the one-, three-, and five-year periods, respectively, with average outperformance of 2.52%, 1.12%, and 0.78%.

One possible explanation is that separate account and CIT managers have more flexibility than mutual fund managers because of their lack of registration with the SEC. Their mandates tend to allow for more manager discretion. For example, many domestic equity separate account and CIT managers may be allowed to use derivatives or short a significant percentage of their portfolios, whereas mutual funds often have stricter provisions in prospectuses, Morningstar said.

Data & Research May 5, 2009

Manager Search Activity Down Globally, but Up in the U.S.

Globally, investment manager search activity is slowing down as investors focus their attention on strategic issues, according to Mercer’s 2008 Global Manager Search Trends report.
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During 2008, Mercer advised on 676 manager searches across the world, representing $93 billion in assets placed, according to a news release. Globally, searches ran at lower levels than in previous years, although assets placed reached their highest levels yet.

In the U.S., search activity was up as plan sponsors reacted to the large losses in equity markets by reconsidering their policies and making some tactical decisions about rebalancing, as well as replacing managers who had performed exceptionally poorly, Mercer said. The most notable decreases in search activity were seen in the United Kingdom, Continental Europe, and Australia, where funds focused on strategy issues rather than manager changes and structures. In New Zealand the number of searches also dropped after a year of high levels brought on mainly by tax changes.

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In the U.S., virtually every asset class experienced significant losses, yet search activity was fairly strong compared to 2007 (up to 123 from 110). Defined contribution (DC) searches (151) continued to outpace defined benefit (DB) searches (123), although the number of DB searches in 2008 declined from the previous year (170). The value of assets placed in DB searches continued to exceed the assets placed in DC searches.

With a total of 21 searches, global/international equity continued to be the most frequently sought asset class in both DC and DB plans in the U.S. Continued diversification, among equity styles and capitalizations, was also an apparent common denominator in both plan types, according to Mercer.

The number of Canadian equity searches increased in 2008 (32 to 38). However, they were overshadowed by the increase in amounts placed in non-domestic equity mandates, jumping from $1.8 billion to $2.7 billion in 2008. On the alternatives side, activity increased, with the most popular strategy being infrastructure, where a doubling of search activity was observed in 2008.

International Equity Tops Manager Search Categories

Globally, international equity (including all global, EAFE and other global ex domestic) remained the dominant investment manager search category, with 155 searches accounting for close to $23.5 billion in assets placed, up from $19.5 billion in 2007, according to Mercer’s 2008 Global Manager Search Trends report. There has been a decline in domestic equity searches in Continental Europe and the U.K., with combined figures dropping from $3.9 billion to $1.7 billion 2008, Mercer said.

Searches in real estate nearly halved from 62 in 2007 to 32 in 2008, however, the amount placed went up slightly to $1.9 billion. The survey shows an overall decline in non-traditional search activity, though most of this is accounted for by a large decline in the number of global TAA/global macro searches in the U.K. Of note is the global increase in activity in both private equity (up from five to 22 in 2008) and multi-strategy hedge funds (up from nine to 20 in 2008).

 

 

Copies of Mercer’s Manager Search Trends: 2008 Year-End Report and can be purchased for cost $2,000 at www.mercer.com/managersearchtrends.

 

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