Pension funds seek shelter in real assets

Forty-three percent of pension plans are now invested in real assets compared to only 5% a decade ago, study finds.

Demand for real assets – particularly real estate, infrastructure, and farm land – will continue to grow as pension funds look to shield their investments from inflation, according to a study conducted by asset manager Principal Global Investors and independent think tank CREATE Research.

“For example, some Canadian and Scandinavian plans have raised allocation [for real assets] to 25 percent,” wrote Amin Rajan, author of the study and chief executive of London-based CREATE Research.

“This rising interest in real assets is the single biggest change from last year’s survey,” he stated.

The 2013 survey – titled Investing in a Debt-Fuelled World – is based on interviews of more than 700 asset managers, pension plans, pension consultants, fund distributors, and fund administrators in 29 countries, with total assets under management of $27.4 trillion.

Protection from inflation is not the only driver towards real assets. “As the price of inflation-linked bonds has sky-rocketed, pension plans are looking for substitute assets in their hedging portfolios yielding 4-6 percent,” according to the report.

Further illustration of this trend, according to one executive, is that 43 percent of pension plans are now invested in real assets compared to only 5 percent a decade ago.

Overall, the combination of global economic uncertainty and losses resulting from the 2008 financial crisis will lead to a more balanced approach to investing, the study forecast.

“The chase for returns will prevail alongside the chase for other goals, for example: capital conservation, inflation protection and regular income,” Rajan stated.

The report is part of an annual research series started in 2009 by Principal Global Investors, a member of the US-based, global investment manager Principal Financial Group and CREATE Research.