CIO Survey: While Alts Gain Traction, Have Flows to Passive Run Its Course?

While many respondents continue to expect their allocations to long-only equities to moderate, a large proportion of respondents suggest active domestic equity strategies will continue to find it difficult to pick up market share, a newly released survey by Keefe, Bruyette & Woods (KBW) shows.

(February 28, 2012) — While assets seem poised to continue to flow to alternatives, have the flows to passive run their course?

That is a question posed by Keefe, Bruyette & Woods (KBW) research.

According to the firm — which questioned approximately 42 decisionmakers at corporate and government pension plans, endowments, foundations, and investment managers in order to garner insight into institutional investors’ asset allocation and manager selection process — respondents generally expected to increase their allocations to passive and alternative strategies. In particular, respondents seemed interested in various hedge fund strategies and specialized strategies, such as real estate, energy, and infrastructure.

However, only a minority of respondents expected to increase their passive allocations, the survey found.

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Meanwhile, the study found that among CIOs, fees on alternatives are important but take a back seat to performance. “A large minority or respondents indicated that the level of fees, while important, take a back seat to performance. This suggests that while fee pressure exists, it may be at the margin and better performing managers will be in a better position to maintain pricing,” the survey said.

The study singled out BlackRock, noting that among publicly traded traditional managers, the firm appears particularly well positioned. The study stated: “The trends identified in our report should be generally favorable for the alternative managers we follow, including Apollo Global Management (APO), Blackstone Group (BX), Fortress Investment Group (FIG), KKR & Co. (KKR), and Och-Ziff Capital Management Group (OZM).”

Furthermore, the study by KBW noted that while long-only strategies remain popular, a large proportion of respondents expect to increase global equity allocations at a faster pace, suggesting that active domestic equity strategies will continue to find it difficult to pick up market share. According to the study, this should benefit specific asset managers with large international equity businesses, such as Franklin Resources (BEN), BlackRock (BLK), Affiliated Managers Group (AMG), and T. Rowe Price (TROW).