Trends We're Seeing in Manager Searches

Callan recently examined the trends we have seen in manager searches since 2012. Here are the highlights of our findings:

(Estimated reading time: 3 min 15 sec)

  • Non-U.S. and global equity searches are increasing while U.S. equity searches are declining
  • Low rates, which once encouraged diversification within fixed income allocations, have now become a reason for plan sponsors to shift away from fixed income in pursuit of higher returns
  • Multi-asset class (MAC) strategies are drawing growing interest, driven by their potential for higher returns and less risk as well as continued dissatisfaction with hedge funds
  • The pursuit of higher returns in a low-yield environment has also driven interest in real estate opportunities outside the U.S.
  • Private equity appears to be poised for an extremely robust year as investors take advantage of their strong total fund performance to invest in this asset class offering comparatively high returns
  • Hedge fund searches have declined dramatically, even as the opportunity set for hedge funds appears to be improving amid a toughening market for stocks and bonds, with less central bank-driven liquidity, rising rates, lower correlations, and more dispersion among stocks
  • Factor-based investing and environmental, social, and governance (ESG) strategies are drawing growing interest and turning into searches

For individual asset classes, here are the major themes:

U.S. Equity

  • Search activity so far this year has declined compared to 2016; small and smid cap continue to dominate searches
  • The decline in search activity stems from relative performance improvement by active managers and fewer mergers and acquisitions among fund managers that would otherwise lead to searches
  • Passive index searches increased significantly from years past, particularly in large cap

Non-U.S./Global Equity

  • Year-to-date search activity has been robust, driven by non-U.S., global, and ESG opportunities
  • Demand for emerging market equity has been depressed so far this year
  • Asset-liability and asset allocation studies are leading to increases in non-U.S. equity allocations; the largest number of searches was for non-U.S. equity managers
  • By plan type, the largest number of searches was for non-profit and public defined benefit plans

Fixed Income

  • Search activity is down year to date
  • Replacement searches are also down, as fewer firms have experienced the types of problems that in the past would have led to a replacement search
  • The pressure on fees is real, but the trend to passive is weaker compared to equities
  • The largest number of searches was for core-plus managers

Multi-Asset Class

  • Search activity for this strategy is here to stay as investors and managers adapt to the current environment, and reconsider hedge fund investments
  • Risk premia has seen the largest demand, followed by absolute return
  • Long biased should see some demand, but there is no imminent demand for risk parity

Real Assets

  • Capital deployment has moderated this year, due to uncertainty over the length/strength of the equity market run, while searches have focused on non-core allocations
  • Non-U.S. regions continue to attract capital; large pension plans are pursuing Europe and Asia as investors look to access “core” real estate globally similar to the way they access it within the U.S.
  • There is a divergence in property type searches; continued demand for logistics/industrial and multifamily (“sheds and beds”) while traditional retail remains challenged; the direction of the office market is not clear
  • There is continued demand for non-U.S. and debt strategies

Private Equity

  • Fundraising in 2017 is expected to approach the record set in 2007, as strong plan sponsor total fund returns over the past year are supporting high commitment volumes
  • New search activity in 2017 has already matched 2016’s total
  • We believe the reduction from last year in specialty mandates reflects the heated fundraising conditions

Hedge Funds

  • Clients are showing interest in trend-following beta and volatility-shorting strategies, as well as multi-asset class strategies, with their lower fees and scalable offerings
  • No hedge fund searches, but more client-directed evaluations of their existing hedge fund exposures

Our latest Capital Market Review offers additional analysis of returns and trends in all the major asset classes.