Changes seen as a constant for 2009

Date: Monday, January 26, 2009
Author: Jennifer Byrd, PIonline.com

Survey shows much rebalancing, strategic adjustments expected in the coming year.

Credit strategies are in; hedge funds and 130/30 are out.

A new survey by money manager consultant Eager, Davis & Holmes LLC, shows investment consultants expect U.S. institutional investors to be actively rebalancing or making strategic adjustments to investment portfolios this year. As a result, managers that have not met expectations may get the boot, the survey found.

As part of those adjustments in 2009, opportunistic strategies will trump the quant strategies that were favored in 2007 and 2008.

David Eager and Glenn Davis, partners at the Louisville, Ky., firm, identified four themes for 2009: rebalancers; replacers; rethinkers; responders.

“A lot of money is going to be moving around in 2009,” Mr. Eager said in a phone interview. “The first half of the year there will be a lot of reflecting and challenging of investment assumptions. But all evidence points to a very active second half of the year.”

The online survey of 74 institutional investment consultants from 46 consulting firms took place in late December and early January. The 46 firms have more than $10 trillion in combined assets under advisement.

Of the consultants surveyed, 77% predicted a lot of U.S. institutional investor clients will be rebalancing, 42% predicted investors will make long-term strategic adjustments to their investment portfolios and replace managers not meeting expectations. Another 32% predicted clients would make investments that take advantage of opportunities created by the market crisis.

The consultants also predicted pretty clear winners and losers among money management strategies, Mr. Davis said. The consultants expect increased demand for liability-driven investing (53%), global mandates (45%), absolute-return strategies (41%), and tactical asset allocation/multiasset portfolios (39%).

When asked in which opportunistic areas they expected to see a lot of activity, consultants said distressed debt (48%), high-yield fixed income (46%) and bank loans (32%) would see the most interest.

As for decreased demand among investment products and strategies, the consultants predicted lower interest in single-manager hedge funds (78%), 130/30 equity strategies (70%), quantitative equity (62%), hedge funds of funds (52%) and private equity (31%). U.S. equity and core/core plus fixed-income strategies were relatively neutral.

Scandals, such as Bernard Madoff's alleged Ponzi scheme that may have defrauded investors of $50 billion, are a factor in the decreased demand for hedge funds, Mr. Eager said.

But performance is also key.

“Some fell way short of expectations,” Mr. Eager said. “The expectation was that they would provide protection in bad markets; (the funds) didn't get it in some cases.”

In order to respond to the shifts in thinking among institutional investors, money managers need to “stay close to their clients” and keep up conversations.

“2008 was a year of extreme market activity,” Mr. Eager said. “2009 is going to need to be the year managers focus on client communication.”

The consultants surveyed said managers should expect the most scrutiny from institutional investors in the areas of understanding portfolio risk controls (85%), stability and continuity of investment staff (81%), and financial wherewithal and stability of the managers (76%).

The survey also indicates that fund sponsors are likely to adopt portfolios that limit the impact of shorter-term market gyrations on balance sheets and funded status, and that domestic equity products that do not have rigid style-box constraints will be more popular.

Contact Jennifer Byrd at jbyrd@pionline.com