bfinance Study: Dramatic Shift Underway In New Equity Mandates

Oct 30 2017 | 10:38pm ET

Equity mandates have dramatically shifted in the past year, with searches for emerging market and Asia-focused equity managers a high priority among pension funds and other investors while U.S. equity manager searches have declined significantly, according to a new study by investment consultancy bfinance.

Among the other key findings of the study: Smart beta contributed only 10% of new mandate activity in the past 12 months, while ESG is becoming increasingly relevant beyond the traditional developed markets, bfinance said in a statement. The study’s findings are summarized in the company’s latest whitepaper entitled New Equity Perspectives – Emerging markets, ESG and the Active/Passive Debate.

Other highlights:

  • 28% of all new equity manager selection projects over the past 12 months were for emerging markets, an increase of over 100% on the previous year and, although “Global Emerging Market” searches proved to be the most popular version, “Emerging Asia” also received significant attention. Asia proved to be the most popular regional choice, with not just the emerging economies but Japan equity and broad Asia equity proving attractive. This is a stark contrast with the previous year, when Global Equity Mandates made up almost 40% of the total number of new equity mandates (now 24%) and the U.S. dominated the regional picture.
  • The resurgence of investor appetite for emerging markets is proving to be the most significant allocation trend of 2017, with ESG seen as increasingly relevant in this area. The outperformance of certain ESG EM indices has received attention from the industry, but those results are influenced by recent commodity price trends. 2017 bfinance manager analysis also suggests a positive relationship between managers’ governance scores and investment performance in emerging markets, although this is only a preliminary finding to date. It was also interesting to note that some managers that scored well in bfinance’s ESG analysis had not received good scores from PRI (Principles of Responsible Investment).
  • There are a number of challenges for investors that seek to integrate ESG considerations in emerging market equities. One of the most significant obstacles is a lack of data, with less ESG-related information available from emerging market companies. Where scores are available, they are often based on less information and restricted to benchmark stocks, while EM managers tend to invest a significant proportion off-benchmark.
  • Emerging market equity manager fees have shown resilience overall in 2017. The median fee quoted for all global emerging market searches in 2017 so far has been 69 bps (pre-negotiation), while the median quoted fee for ESG-specific searches was just above 70bps, with other factors – such as mandate size and structure – having a more significant impact on fees than ESG.
  • Systematic managers with high exposures to particular equity risk factors have been under the most severe pricing pressures, with low volatility manager fees suffering from a 25% fee compression since 2010, while conventional active global equity management fees have only fallen by a modest amount.
  • Investors have increasingly sought to identify “real” active managers and avoid paying for “beta dressed as alpha” since 2009. This has driven the rising popularity of factor attribution analysis and measures such as active share. Such metrics have now become embedded in managers’ practices and in their sales and marketing activities directed towards institutional clients.

Yet investors should take care not to be misled by these potentially helpful metrics, bfinance said in the paper. Data should be handled with care: it does not give a true understanding of a manager’s approach, especially when viewed at a single point in time. Active share, style exposures, information ratio, turnover and tracking error are all useful but cannot, in isolation, determine what a ‘real active’ manager – much less a good active manager – looks like.

“The shift in new equity manager selection patterns among bfinance clients has really been very significant, particularly the move towards Emerging Markets, Asia and Japan,” said Justin Preston, senior director and head of equity, in a statement.  “The past few years have seen fundamental changes in the way that active equity managers are viewed and analyzed by investors, and by consultants such as ourselves.”

“Emerging markets, ESG and active vs. passive management are not just the three dominant equity themes of 2017,” added Kathryn Saklatvala, Director - Investment Content. “They’re also increasingly colliding, interacting and occasionally conflicting with one another.”

London-based bfinance is an investment consultancy providing specialist advisory solutions to institutional investors in 25 nations worldwide. These include strategic investment implementation, investment strategy design, investment manager search and selection, due diligence, analytics and monitoring.

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