Help wanted: Funds seeking skilled managers

Currency overlay attracted the greatest increase in interest from Mercer’s clients in 2004, with 28 searches and $10 billion US worth of assets placed. That’s a dramatic increase from 2003, when Mercer advised on just eight currency overlay searches accounting for $2.7 US billion worth of assets.

“U.K. pension funds, in particular, showed more interest in currency overlay, hiring managers both to reduce currency risk and to add value through active currency management,” said Bill Muysken, global head of research at Mercer.

Global equity mandates were most frequently sought in Europe. Mercer expects interest in similar international mandates from Canadian pension plans if the federal government follows through with plans to lift foreign investment restrictions. The company carried out 110 manager searches in Canada last year to place assets valued at $4.3 billion US.

Peter Muldowney, principal at Mercer Investment Consulting Canada, says activity in Canada was driven by new clients rather than existing clients.

“Certainly in Canada we’ve seen the challenges of what currencies can do, particularly to our U.S. equity returns if you’re not hedged,” he says. “But Europe and Asia, a lot of them are looking at currency hedging as well. It depends if you’re trying to manage for the short term risks as opposed to the very long term. Many people are concerned about the short as much as they are about the long term. I expect we’ll see a pickup in currency overlay too, if the foreign property rule goes through.”

Muldowney admits the gene pool for experienced currency hedging managers is not large, but he also points out that the currency markets themselves are huge and very liquid which reduces the risk of good managers getting too big to invest effectively.

He says in Canada specifically, balanced fund mandates were the most popular in 2004 and the trend could continue in the coming years because balanced options are popular with the growing number of defined contribution pension plans in the country. At the same time pension managers are reviewing their fixed income mandates and moving to longer bonds. Searches for Canadian equity managers were popular in 2003. Muldowney says he expects companies will consolidate those positions, especially if foreign content rules are dropped.

In selecting managers, Mercer looks at four key areas: how a manager generates their ideas and comes up with reasons why one stock is better than another; how well they are able to put those ideas on paper to construct a portfolio; how nimble and effective they are when implementing that plan; and their ability to recognize their own limits.

“We like it when a manager says ‘You know what? I’ve gathered quite a few assets, I’m going to close,”” he says. “We want to make sure that they have the fourth factor — good business management.”

Mercer has 40 full time researchers and 200 part time contributors involved at any given time to maintain lists of managers who are suitable for different risk profiles. The result of this year-long activity is published annually in the Mercer Manager Search Trends Report.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(04/20/05)