27 Feb, 2012

The number of alternative asset mandates awarded by Towers Watson’s clients worldwide to direct fund managers increased in most asset classes in 2011, continuing a five-year trend. Last year the number of hedge fund mandates awarded to direct fund managers was nearly three times higher than via fund of funds, which have fallen by two-thirds (by number of mandates) during the past five years. Similarly, last year the number of direct private equity mandates awarded by the company’s clients was almost four times higher than via fund of fund managers, with the number of these mandates down by half compared to five years ago. Last year the number of mandates awarded by Towers Watson’s clients to direct real estate fund managers was almost ten times higher than via fund of funds managers.


Craig Baker, global head of investment research at Towers Watson (pictured) said: “Throughout the past five years the direct alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment and generate good net-of-fees performances. Larger institutional funds are likely to continue to invest directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures and greater transparency.”


According to Towers Watson, institutional demand for global equity and bond mandates has remained high during the past five years, while demand for UK-focused equity and bond funds has fallen substantially during the same period. There were half as many UK bond and UK equity searches in 2011 than in 2010. Last year the company’s clients awarded three UK bond mandates compared with 28 in 2007. Similarly, the number of manager searches for UK equity managers fell from 12 five years ago to four last year.


Global and emerging-market bond mandates continued to be popular in 2011, but US bonds were the most popular bond mandate among the company’s clients, almost doubling compared to the previous year. In total, bond mandate selections accounted for US$21 billion in assets invested last year. In equities, global mandates continued to be the most popular with Towers Watson’s clients, accounting for a third of all equity mandate selections, followed in popularity by US equity and emerging-market equity mandates. In total, equity mandate selections accounted for US$24 billion in assets invested last year.


Craig Baker said: “These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally.”


Towers Watson’s clients also continued to opt for passive mandates during 2011 which have increased year-on-year in the past five years. The value of assets invested in this way last year by its clients exceeded US$16 billion – a 60% increase from the previous year.


Craig Baker said: “Indexation and smart beta* are playing increasingly important roles in investors’ portfolios as many new innovations provide efficient access to markets at lower cost. Passive investors can now choose from a range of options to access a number of asset classes, including insurance and emerging market currency, but with the expectation of better risk-adjusted returns.”


Manager selection activity globally at Towers Watson exceeded 800 selections in 2011; reflecting around US$80 billion of assets moved, up 40% from US$57 billion the year before. Towers Watson’s manager selection activity, by value of assets, is almost equally split between Asia, Europe and North America.


*Smart beta: products based on non-traditional benchmarks which use a variety of criteria to weight stocks and indices and aim to deliver close to market returns but with less risk, improving the overall efficiency of an institutional investor’s portfolio and reducing the cost.


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