After pausing to reassess their portfolios in 2009, North American institutional investors are again continuing their “steady march” toward alternative investments, with the Asia Pacific region standing out as a top destination in their journey, according to a survey by JPMorgan Asset Management.
The survey of 349 North American investors from 325 institutions indicate an increase from year-end 2009 actual alternative allocations of 16 percent to a strategic target of 20 percent over the next to three years.
We're seeing real commitments made to these strategies
At 24 percent each, real estate and hedge funds tied as offering the greatest investment opportunities over the next three to five years, followed by private equity (21 percent), commodities (16 percent) and infrastructure (9 percent).
And no matter what the asset class, investors were most bullish on the Asia Pacific region, which was favoured by 56 percent of investors as the area of greatest opportunity for alternative investments in the next three to five years.
Real Estate and Hedge Funds: Big opportunity over next three to five years.
These preferences are not “all talk”, according to Mark Weisdorf, chief investment officer of JPMorgan Asset Management’s infrastructure investment group.
“We’re seeing real commitments made to these strategies,” Weisdorf said.
In 2006 and 2007 JPMorgan Asset Management held final closes on Indian and Chinese property funds on $350 million and $600 million, respectively. And in January 2010, the firm held a final close on $858.6 million for its Asian Infrastructure and Related Resources Opportunity Fund.
In the wake of the financial crisis, 2009 saw arguably the worst fundraising climate in recent memory.
“Public equity portfolios declined pretty dramatically between the summer of 2008 and March or so 2009. So institutional investors all around the world, and certainly in the US had less liquidity and had less ability to commit to alternatives,” Weisdorf said.
But now, thanks to the recovery in fixed income and equity markets, “we’re seeing actual growth in commitments being made,” Weisdorf said. And that growth is coming at the expense of fixed income and public equity parts of institutional investors’ portfolios, Weisdorf added.
Within alternatives, infrastructure allocations are expected to experience the single largest increase, according to the survey. The asset class will go from an average allocation of 4.3 percent of survey respondents’ portfolios in 2009 to an expected 5.7 percent over the next two to three years.
“If we can extrapolate from the responses to this survey to the broader pension, endowment and foundation universe in the US . . . that’s a huge potential increase in allocations,” Weisdorf said.
Albeit starting from a higher base than infrastructure, real estate allocations are also expected to grow, going from 6.3 percent in 2009 to 7.2 percent over the next two to three years.
“We’re seeing tremendous interest in private real estate, which is a dramatic change from 12 or 18 months ago,” Weisdorf said. That may be because “the one sector that hasn’t really rebounded much at all is direct private investment in real estate”, so “what we’re sensing in conversations with clients is . . . there may be opportunity in that space”, Weisdorf added.
Investors also see significant interest in private equity, where they will look to grow allocations from 7.6 percent to 8.5 percent, according to the survey.
“It’s one of the most positive outlooks of all the sectors,” Weisdorf said.
That outlook is positive for the Asia Pacific region, where current allocations are expected to grow 5 percent within the next 12 months.
Weisdorf ascribed the interest in Asia Pacific to the region’s “greater growth potential and therefore greater return potential – but with greater risk.”