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US DB plans 'fine-tuning' portfolios, says Mercer

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US - Defined benefit plan sponsors are fine-tuning their investment portfolios rather than making any dramatic changes, according to a survey by consultant William. M. Mercer.

The 2001 Market Trends Report, a study of 723 retirement plan sponsors conducted by Mercer Manager Advisory Services, found that more than a third of defined benefit plan sponsors (41%) had hired an investment manager in
the past year.

This level of hiring activity, Mercer says, is expected to continue during the next two years, albeit with particular growth in certain asset classes.

For the first time, the survey found that plan sponsors intend to hire managers for stand alone high-yield mandates.
Plan sponsors also have strong intentions to add/hire managers in active US small cap equity, active EAFE equity, and active core-plus-fixed-income roles, the survey says.

Significantly, Mercer finds that hiring activity will be most important in alternative products, primarily in private equity and hedge funds.
However, manager appointment activity is expected to slow in other asset classes, particularly active US growth and mid-cap equity, active emerging markets equity, private debt, and active global mandates.

Interest in alternative investments appears set to continue, says Mercer, with plan sponsors expressing the most interest and strongest hiring intentions in private equity and venture capital funds.
Overall, 23% of surveyed US plan sponsors said they used some form of alternative investment approach in their plan.

Says David Holmes, a senior consultant with Mercer Manager Advisory Services: “In other asset classes, hiring intention is not matched by a planned increase
in allocation to the asset class - meaning that sponsors are likely to replace an existing manager rather than committing additional assets."

Demand for hedge funds, particularly market-neutral funds is also strong: "We suspect that demand for hedge funds is in part due to the recent market instability," says Holmes.

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