Investors to crank up real asset exposure

A majority of European pension funds are looking to boost their exposure to real assets over the next three years, according to a study by Aquila Capital.

The London-based asset manager, which polled 54 pension funds on their investment strategy over the period, found that nearly 60 percent intend to increase their allocation to real assets.

Real estate was deemed the most promising among them over the next five years, winning a 33 percent share of the vote, with infrastructure coming second at 18 percent. Added to the share of respondents favouring renewable energy, which reached 15 percent, the votes earned by a more broadly defined infrastructure asset class placed it equal first among real assets, however.

Current allocations reflected a bias towards real estate, with 73.7 percent of respondents saying they were invested in property. Infrastructure came second with nearly 37 percent, while renewable energy totalled 21.1 percent.

Other real asset classes were seen as comparatively marginal: while a still-notable share of investors said they invested in timber (18 percent), shipping and farmland together reached just over 10 percent.

The study also found that more than half of institutional investors in Europe saw direct ownership as the best way to exploit opportunities in real assets. Only 43 percent said they had adopted this approach, however, with a majority of investors more inclined to invest in either specialised investment funds (38 percent), closed-ended investment funds (32 percent), or club deals, co-investments and managed accounts (16 percent).

Drivers behind a planned increase to real asset exposure included persisting appetite for investments offering long-term positive cashflows (56 percent), protection against inflation (56 percent) and portfolio diversification (42 percent).

Lack of liquidity was deemed the main drawback of investing in real assets, followed by institutional investors’ limited understanding of the underlying assets and the limited long-term performance history of related investment strategies.