Institutions worldwide rethink passive exposures: Towers Watson

The number of bond mandates awarded by institutional funds shot up by more than 50 per cent in 2009 as credit markets provided attractive investment opportunities, while the amount of passive allocations made by institutions increased fourfold in the past two years, according to Towers Watson.

The sharp increase in bond allocations overseen by the asset consultant was made as clients responded to opportunities in credit markets in the beginning of 2009 – particularly in the loans and securitised credit sectors – and followed a 20 per cent lift in the number of bond mandates awarded in 2008.

The activity took place amid a longer-term focus on passive exposures, which resulted in a fourfold increase in the number of mandates negotiated in the past two years, Craig Baker, global head of manager research with Towers Watson, said in a press statement.

“In the passive area, investors are increasingly looking for more efficient market exposures and are reviewing the indexes underlying their existing investments, with a view to seeking better alternatives,” Baker said.

“There has been a great development within indexation, which is increasingly offering passive investors a broader range of options and the expectation of better risk-adjusted returns.”

The consultant also observed that more institutional clients allocated directly to hedge fund and private equity managers in 2009.

The number of mandates awarded directly to hedge funds increased by 10 per cent in 2009, while interest in hedge fund-of-funds weakened. Fully 85 per cent of all hedge fund searches by Towers Watson targeted individual managers” up from 50 per cent in 2008 – with long/short equity and multi-strategy funds being the most popular.

Baker believed that skilled hedge fund managers could adapt to a changed environment and outperform.

“We believe that the larger institutional funds will continue to invest directly rather than through funds-of-funds, particularly as we see positive developments on fees for institutional clients,” Baker said.

Meanwhile, as the number of private equity mandates awarded by Towers Watson clients fell by 80 per cent – following an increase of more than 50 per cent between 2007 and 2008 – direct allocations to managers nonetheless accounted for 80 per cent of the mandates.

In total, Towers Watson was involved in the negotiation of 600 mandates accounting for $68 billion in 2009, compared with the $65 billion invested in 2008.