By increasing the number of alternative products and strategies it offers, Mellon Capital Management Corp. has generated inflows in the past three years, despite difficult market conditions.
Since 2005 assets under management at the San Francisco quantitative investment management unit of Bank of New York Mellon Corp. have grown 62.3%, to $204.2 billion as of June 30. The percentage of its assets in alternative investment strategies has nearly doubled, to 13.3%.
Jim Tufts, an executive vice president and head of client service and marketing for Mellon Capital, said in an interview Tuesday that he expects alternative assets to continue to expand as plan sponsors become more comfortable investing in such products.
"We think that the level of popularity of alternative assets hasn't even reached maturity yet," he said. "We expect that alternative investments will become an even bigger part of the average institutional investor's portfolio over time."
Mellon Capital, which was launched in 1983, has navigated difficult economic cycles by offering unique strategies to institutional customers, including foundations, endowments, and retirement plan sponsors, Mr. Tufts said. In the past three years it has introduced a variety of alternative products, including country-specific 130/30 funds for the United States, the United Kingdom, and Australia.
On Tuesday the unit launched its Advanced Beta Strategy. The portfolio invests in a range of global asset classes "to enhance performance regardless of the economic climate," the company said. It takes long positions in global equities, global fixed-income products, global inflation-linked securities, commodities, and global real estate investment trusts.
Alternative products like the Advanced Beta Strategy have allowed Mellon Capital "to do pretty well, despite the market cycle, because we were not as heavily involved in traditional long-only products," Mr. Tufts said. "We have developed a longer track record with alternative products and 130/30 funds, and investors are responding to that."
Institutional customers, specifically endowments and foundations, are altering their investment strategies in favor of alternative products, including 130/30 funds and long-short strategies, he said.
"Some are less aggressive; some are more aggressive," Mr. Tufts said. "Some investors are putting more than 50% of their assets into the alternative bucket."
David Bailin, the president of Bank of America Alternative Investment Solutions, agreed that investors need to invest more in alternative strategies.
B of A's advisers are "tilting" investors more toward alternative products, he said. Typically an investor's portfolio will have anywhere from 10% to 40% in alternative investments. "In this current environment, we are increasing the allocation but staying in that range."
Analysts said Mellon Capital, like most of Bank of New York Mellon Corp.'s asset management units, have gathered assets over the past three years, because the parent company, which has $1.1 trillion of assets under management, has allowed each unit to remain relatively autonomous, despite an industry trend toward consolidation.
Mellon Capital's immediate parent, BNY Mellon Asset Management, has a multiboutique strategy similar to the one at Wachovia Corp.; both have a collection of asset managers who specialize in different sectors.
"BNY Mellon has tried since the merger to ensure that its asset management companies were able to continue with business as usual," said Burton Greenwald, an analyst with BJ Greenwald Associates in Philadelphia.
Mr. Tufts confirmed that the strategy of letting each investment unit run independently has not changed since Bank of New York Co. bought Mellon Financial Corp. in July of last year.
Mr. Greenwald said this has allowed Mellon Capital to focus on expanding its array of products and to add alternative products while some competitors have focused on safer investments, including money market funds and fixed-income products.
Mr. Tufts said Mellon Capital has had some growth from its equity and bond strategies, but in the past year the majority of the inflows into alternative investments have come from traditional asset classes, particularly domestic long-only equity products and bonds — both from within Mellon Capital and from other firms.
He expects strong growth in Mellon Capital's alternative investment products to continue.
"We have seen a lot of interest in our new strategies, and there is a lot of excitement from institutional investors," Mr. Tufts said. "We expect the new strategies we are developing to fuel strong asset growth over the coming months and years."
Growth could be challenging; the alternative investment market has been experiencing some growing pains this year. Overall hedge fund asset inflows declined to $29 billion in the first half of this year after reaching a record level of nearly $200 billion in all of last year, according to Hedge Fund Research Inc. of Chicago.