Euro funds think global as risk appetite returns

Investment appetite among European institutions rebounded in 2009, with Mercer Investment Consulting identifying a surge in clients’ demands for new global fixed income, global equity and specialist credit exposures. Andy Barber, global head of manager research at Mercer, tells Simon Mumme about the investment themes driving these searches, and the evident decline of the ‘home country bias’ among UK institutions.

Manager search activity stalled in the fourth quarter of 2008 and first quarter of 2009, but as listed markets rallied, investors stopped “sitting on their hands” and pursued some of the opportunities caused by the market collapse, Andy Barber, global head of manager research at Mercer, said.

Mercer ran 161 searches in the nine months to September 2009, compared to 189 in the whole of 2008 and 226 in 2006.

“This year it will be more than 240 in total,” Barber said.

Most of these searches targeted global fixed income, global equity and opportunistic credit managers. The institutions commissioned Mercer to carry out 61 searches for global fixed income, 52 for global equity, 40 for buy-and-hold credit and 15 for buy-and-hold convertibles strategies.

The provisional search numbers also confirmed the weakening ‘home country bias’ among UK institutions, as they steadily reduce their exposure to domestic equities and sign more global equity mandates.

In 2005, the consultant conducted 42 searches for both domestic and global equity managers. But in subsequent years clients demanded more global searches and, in 2008, sent Mercer on 48 global equity searches and 17 domestic searches. In the first nine months of 2009, Mercer performed 38 global searches, and six in the UK.

This diminishing home market bias was not occurring in continental Europe, but was “currently a UK phenomenon,” Barber said.

“At the turn of the century, funds might have had a 70/30 split between UK and offshore equities. Now there is more offshore than domestic.”

He said the trend was being driven by institutions’ diversification into alternative assets, which cut back their overall equity exposures, and the diversification provided by global equity mandates.

This was not because the UK market was “structurally disadvantaged” in comparison to the global market. But it is more concentrated: its top 10 stocks – among them HSBC, Shell, BP, GlaxoSmithKline and Rio Tinto -Â account for 41.7 per cent of the index.

Within global equity allocations, institutions targeted some exposure to emerging markets. While Mercer has not published a house view of emerging markets, Barber said some clients have oriented portfolios towards emerging markets.

“There are others who prefer to leave it to fund managers. But when people have global briefs, most managers have a positive view of emerging markets.”

 In 2008, Mercer promoted short-dated global credit and convertibles strategies as attractive opportunities. Now it is focusing on investment grade government debt in emerging markets, denominated in local currencies.

“We’re looking at a basket of countries, rather than country-specific, and assume it to be more the BRICs than Eastern Europe.

“If you look at the finances of some of these places and compare it to the developed world, they offer very high yields, and seem to be a little bit more solvent.”

Barber said this theme could also include the investment grade debt of emerging market corporations.

Somewhat surprisingly, few institutions took the opportunity to access hedge funds that were no longer at full capacity, given the widespread redemptions these managers incurred in 2008. In the UK, searches for alternatives managers dropped from 35 to 21; in Europe, the search tally fell from 17 to seven.

However, Barber expected investments in most non-traditional strategies to grow in coming years, as institutions aimed to become less reliant on equity market beta for performance.

But this shift would be made with frequent recourse to opportunities in the equity market.

“Do you really want to be detatched from equity market beta when equities are still not particularly expensive, and go into expensive alternatives?” Barber asked.