February 2008

NEWS ANALYSIS: ALPHA Managers predict capacity constraints

Asset managers can expect their concerns about capacity constraints in high-alpha and active funds to increase in 2008. A recent poll of 100 pension fund managers in the UK showed that appetite for absolute return strategies will increase this year... 08_02_capacity_constrain.jpg.... while a separate piece of research among investment managers showed that one in ten managers are already concerned about capacity constraints after investors poured assets into UK high alpha and global products last year. Pension funds will continue the move to invest in absolute return strategies over the next year, according to 95% of institutional fund managers polled at a seminar hosted by Hewitt Associates, a pension consulting firm. Pension fund interest in investment strategies which target absolute returns, rather than those measured relative to a wider market performance or a benchmark, was a major feature of 2007, with 35% of all of Hewitt’s manager selections during the year focusing on absolute return strategies, including hedge funds.  In contrast, just 5% of those surveyed indicated that passive investing is set for a resurgence this year.

Active management
Hewitt believes that investors should not only rely on market beta for returns and that trustees will continue to look for skilled managers who can consistently add value. In addition to this, a majority of the fund manager audience (65%) indicated that the desire for active management and absolute returns will lead independent investment boutiques to take market share from mainstream investment houses during 2008. Commenting on the results, Andy Tunningley, head of Hewitt’s UK investment practice, said: “Hewitt has long been in favour of absolute return strategies and true active management, as shown by our support for unconstrained mandates and allocations to carefully selected hedge funds. “In the context of volatile public markets, pension schemes really see the value that manager skill can add over and above passive management. Our clients’ focus is on appointing talented investment managers, regardless of the size of the organisation.”Ã? Meanwhile, the 2007 Asset Management Trend Survey conducted by Investment Solutions, showed that institutional investors have ‘poured’ new assets into UK high alpha and global equity. With the popularity of higher alpha mandates in particular, capacity is beginning to become a concern, the firm said. One in ten fund managers reported capacity constraints within their product ranges with this “increasingly becoming a key consideration in the investment arena”. Suzanne Lubbe, research analyst at Investment Solutions, said: “As investors continue to search for alpha, the industry needs to respond by continually evolving and providing innovative products to meet their needs.”  Respondents to the annual survey, which covered 67 managers across the UK institutional universe with £8 trillion (E10.6 trillion) of assets under management, reported high levels of product innovation with 124 new products launched over the past three years, evenly spread across asset classes. Core fixed income has been the least popular with other absolute return strategies dominating product development.

Performance related fees
The survey also found that nearly a third of fund mangers now offer clients the option of performance related fees on all institutional mandates and up to 50% consider them on request. But 5% refuse to consider this type of remuneration. Lubbe said: “The alignment of investor and manager interests through performance-related fees is likely to remain a feature within the industry although it may still adapt to more fully meet market needs.” The Hewitt poll of pension fund managers also found that 65% of fund managers in the audience agreed that pension funds will engage in more risk-hedging activity than they currently employ. Hewitt’s Tunningley added: “We are not surprised by the view that schemes will seek to hedge risk more fully, but this should not be viewed in isolation. As part of our Global Risk Services approach, we are proactively speaking to clients across our retirement consulting business to ensure that risk, in relation to both investment and funding, is evaluated and understood.  “Only by identifying and quantifying the risks in a pension scheme, can sponsors and trustees take the right action. This might mean reducing or removing risks, but in many cases will involve retaining or even raising the level of risk being run. Getting the right risk-reward balance will be a key feature of 2008.” ©  funds europe February 2008

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