Few investors will be delighted with the past year's returns, but Asian institutions have been quicker than their Western peers -- perhaps too quick -- to blame external managers for poor results, according to a new Greenwich Associates report.

Last year, 25% of Asian institutions said they had fired an investment manager in the previous 12 months, but as many as two-thirds said the same this year, says the report, Asian Investment Management: After crisis, new doubts about external managers, published yesterday. That is a much higher proportion than in the US, where two-thirds of institutions said they planned to terminate an investment manager, but most did not intend to do so until later in 2009, according to a June survey from Greenwich.

Equity managers, in particular, have been hammered, with 18% of Asian institutions reporting that they had fired an equity manager this year compared with 11% in 2008. This increase would help explain a flurry of RFPs in this area, says Greenwich, with interest strongest in global equities, Asian equities and passive strategies.

It also suggests that a sizeable group of these institutions failed to hire a new manager before the equity market upswing this year, says the report. Such experiences demonstrate the need to commit and adhere to an investment strategy rather than succumb to short-term reactions, says Greenwich Associates consultant Markus Ohlig.

There is further evidence of Asian institutions turning against external managers. In 2008, 92% of Asian institutions said they planned to increase the share of their offshore assets managed externally and 45% said the same for their onshore assets. A year later, just 15% plan to outsource additional offshore assets, with 18% want to outsource more onshore asset management.

The reason for this new scepticism about the value provided by outside managers is simple, says Greenwich Associates. In many cases, the absolute performance of internally managed portfolios was as good as or better than that delivered by external managers through the crisis-hit markets of the past year.

However, the performance differential was largely down to portfolio composition rather than investment skill, says the report. That's because central banks and other large Asian institutions that keep such a big proportion of their assets in-house tend to keep them in relatively conservative investments, with a strong bias towards fixed income. These institutions were much more likely to outsource equity investments, so were much more likely to be disappointed by the performance of external managers, says Ohlig.

It could, of course, be argued that investment skill also comes down to one's choice of asset class, meaning it was wisdom as well as caution that led to smaller losses for some in-house investments. But that is something for another discussion.

The logical upshot of this negative reaction to external managers is that Asian institutions will look to build up their in-house capabilities -- and the survey suggests that this is the case. More than half (54%) of institutions say they plan to expand their internal management capabilities by 2012; and they are not simply planning to take passive investments in-house. "To the contrary, 68% are looking to generate alpha internally through active management," says Abhi Shroff, Greenwich Associates consultant.

Yet such moves will prove no easy task. "With institutions internalising a significant proportion of domestic investments," says Shroff, "these firms might find themselves forced to compete at an international level against the global firms, or to make do with retail business."

Caution is certainly advisable, given the experiences of many firms in the past. "In Europe and other markets we cover around the world, we have watched as time and again insurance companies and other institutions launched large expansions of their internal management capabilities," says Ohlig, "only to later realise that they had underestimated the challenges."