Clients of consultancy Towers Watson awarded over 50% more hedge fund mandates and 30% more equity mandates in 2010 than the previous year, but recorded a 30% drop in bond mandates.
Private markets, meanwhile, saw a 73% increase in mandates, led by renewed interest in direct real estate and distressed debt. Towers Watson released the 2010 figures for its clients yesterday.
“Increased selection activity in general is probably a reflection of the fact that investors had spent much of 2009 focusing more on asset allocation than manager selection and de-selection,” says Mark Brugner, head of manager research for Asia at Towers Watson.
“In the equity space, while global mandates continue to dominate, there was a significant increase in emerging market equity mandates.”
Manager selection activity in Greater China last year was largely driven by demand for specialist equity mandates followed by alternatives, particularly private market mandates.
Brugner says that during the past three years, the firm’s institutional clients have maintained high demand for global equity, Asia-Pacific ex-Japan and global emerging market equity mandates.
Separately, passive mandates continued to rise, as they have for the past four years, with passive managers in Greater China picking up mandates from large institutional funds.
Brugner notes that investors are increasingly looking for more efficient market exposures in the passive area and are typically seeking better alternatives in terms of indices underlying existing investments.
“There has been a great deal of development within indexation, which is increasingly offering passive investors a broader range of options and the expectation of better risk-adjusted returns,” he adds.
Globally, there was renewed interest in hedge funds, with demand for fund of hedge fund mandates returning to 2008 levels last year. Mandates for direct hedge funds now account for 60% of all hedge fund searches, the firm notes, with equity, fixed income and insurance strategies the most popular.
“We believe that the larger institutional funds will continue to move to investing directly rather than via funds of funds,” says Brugner. “However, funds of funds can still be an ideal solution for many smaller and governance-constrained investors.”
Towers Watson clients awarded more than double the number of direct real estate mandates last year over 2009, while the level of private equity mandates, both direct and fund of funds, remained at the same low levels – reflecting the fact that fewer funds came to the market during the period.
Direct allocations remain more popular than funds of funds and accounted for 75% of private equity selections in 2010, in keeping with a trend over the past four years.
Private funds focusing on distressed debt also proved popular with investors in 2010, although the firm awarded few infrastructure mandates.
“2010 was another challenging year for managers in private markets, notably private equity managers coming to terms with the end of cheap, readily available debt and rising prices – it is not surprising that few funds were raised,” says Brugner.
“A noteworthy development of the year was the interest in distressed debt, which was the second most popular mandate after direct real estate in the private markets area.”
But following a surge in 2009, the number of bond mandates fell 30% in 2010 largely because of improved opportunities in equities. Global and emerging market bond mandates still dominate, each accounting for over 25% of all bond selections, while US and Australian bonds account for 19% and 11%, respectively.
Manager selection activity globally at Towers Watson exceeded 800 selections in 2010, reflecting over $57 billion of assets moved.