US equities’ reallocations to hit small players

The US asset management and consulting arena is undergoing massive change, with large institutions re-allocating away from domestic exposures potentially having a big effect on the market, president of Rogerscasey, Tim Barron, says.

According to Barron, large US institutions are selling domestic equities to buy fixed income, international equities, commodities and timber, which could have massive implications for US funds managers.

“It will be particularly hard for the small players running US equities only to continue to survive in this market,” he says. “The mid-sized firms will also struggle. The big guys will get bigger and the small, specialised guys will do well.”

In addition the US market is undergoing reorganisation on the consulting side, with firms merging – such as Aon Hewitt EnnisKnupp – and the decision by Mercer to exit the defined-benefit consulting market.

There are more than 200 consulting firms in the US, Barron says, and about 90 per cent of them are small.

“The decision by Mercer to pull out of consulting to defined-benefit funds has changed the landscape for consulting again in the US. Mercer had about 25 such clients and now that’s opening the market to the other players.”

Barron believes the plan sponsor community has been innovative in the post-crisis environment.

“We’ve seen things like risk parity and asset liability matching gaining traction. It’s like medical innovation during the war: you have a lot of patients that need help. I’m not sure that 60:40 is the promised land.”

Barron says he has been a proponent of diversification and more global weightings by US pension funds since Rogerscasey started in 1984.

“Diversification reigns; it is still the only free lunch. But so many US institutions are so US-centric.”

He says the US equities market is so mature now, and questioned whether there was still room for industrialisation.

“There is still some premium in equities but it feels like the growth rate will be less than it has been historically. The equity risk premium has assumed a rate of growth in the developed economies that doesn’t look likely. So the equity risk premium will either be not as significant, or not in developed markets.”