Equity-shy pensions embracing alternative assets

A shift in strategy by pension funds worldwide means they now comprise around half of alternative asset managers' investor base, according to a recent survey. The survey also shows pensions’ already strong appetite for real estate continuing to grow as they seek to diversify away from equities.

While total assets under alternative asset fund management grew 12 percent to $1,904 billion between 2009 and 2010, the amount of capital managed on behalf of pensions by alternative asset investors grew by 16 percent to $952 billion – meaning around half their capital is now sourced from pensions. This was one of the key findings of a survey conducted by professional services company Towers Watson and the Financial Times.

The Global Alternatives Survey – covering real estate, private equity funds of funds, funds of hedge funds, infrastructure and commodities – found that allocations to alternative assets now account for 19 percent of all pension fund assets globally, up from 5 percent 15 years ago.

“Institutional investors continue to diversify into the full range of alternative assets, as the benefits of diversification become apparent and certain asset classes become more accessible,” says Craig Baker, global head of research at Towers Watson Investment, in a statement. “The trend away from equity-focused portfolios to more diversified structures is now well established as investors acknowledge the risks associated with an undiversified approach, particularly in light of ongoing economic uncertainty.”

An analysis of the top 100 alternatives managers found that real estate managers dominate, accounting for around 55 percent of assets committed to alternatives by pensions in 2010 (up from 52 percent in 2009), followed by private equity funds of funds on 18 percent (down from 21 percent), funds of hedge funds on 12 percent (down from 13 percent), infrastructure on 12 percent (also 12 percent), and commodities 3 percent (up from 2 percent).

The research found that real estate assets invested by pension funds in the Asia Pacific region doubled in 2010 and now account for 14 percent of the total, with most of the rest invested in North America (46 percent) and Europe (35 percent).

“During 2010, pension funds renewed their interest in real estate which, together with asset growth, resulted in a 21 percent increase,” says Baker. “Infrastructure and commodities managers have also significantly increased their pension fund assets under management during the past year, as investors have become more comfortable with these asset classes.”

The survey also included a ranking of the top 20 alternative asset managers of pension funds assets. The list is headed by infrastructure giant Macquarie Group ($60.3 billion of pension fund assets), followed by real estate firms Prudential Financial ($42.0 billion), JP Morgan Asset Management – Global Real Assets ($35.0 billion) and ING Real Estate Investment Management ($30.8 billion).