Pension funds are on the
hunt for risk diversification and in the process are driving
significant growth for alternative asset managers. Indicating
pension funds’ enthusiasm, research by Towers Watson reveals that
alternative assets managed for pension funds is now within striking
distance of $1trn.
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With their confidence in more
traditional investments, particularly listed equity, shaken pension
funds are increasingly turning to alternative asset classes. For
managers of alternative assets this has created a growth market,
reveals a study by Towers Watson.
The professional services
firm found that in 2010 alternative assets under management (AuM)
on behalf of pension funds increased by a hefty $135bn (16%)
compared with 2009 to $952bn. Overall, total AuM by alternative
asset managers increased by 12% to $1.904trn. By far the largest
alternative asset manager in 2010 was Macquarie Group of Australia
with AuM totalling $92.2bn of which $60.3bn was on behalf of
pension funds.
AuM analysed included real
estate, private equity fund of funds (PEFoF), fund of hedge funds
(FoHF), infrastructure and commodities; but excluded direct
investment in single strategy private equity funds and hedge
funds.
Towers Watson Investment
global head of research Craig Baker commented: “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.”
Well entrenched
trend
Baker continued that 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.
“Indeed, according to our
research, allocations to alternative assets have continued to rise
and now account for 19% of all pension fund assets globally, up
from 5% fifteen years ago,” Baker stressed.
Tower Watson’s analysis of
the top-100 alternative asset managers revealed that real estate
managers dominate in the pension fund market, accounting for some
55% of AuM (up from 52% in 2009). Real estate was followed by PEFoF
at 18% (down from 21% in 2009), FoHF at 12% (down from 13%),
infrastructure at 12% (unchanged) and commodities at 3% (up from
2%). Notably, real estate assets invested on behalf of pension
funds in the Asia-Pacific region doubled in 2010 to account for 14%
of the total. The major investment regions remained North America
(46%) and Europe (35%).
Commenting on these findings,
Baker observed: “During 2010, pension funds renewed their interest
in real estate which, together with asset growth, resulted in a 21%
increase.”
He added that infrastructure
and commodities managers also significantly increased their pension
fund AuM during 2010 as investors have become more comfortable with
these asset classes.
Commodities find
favour
“Commodities managers have
almost doubled their pension assets under management in the last
year, as suitable vehicles are developed as diversifiers and hedges
against inflation,” said Baker.
According to Towers Watson,
the top-20 commodities managers increased their pension fund AuM by
$16bn in 2010 to $44bn.
On infrastructure as an
alternative asset class, Baker said that concerns still exist about
it as a proposition net of fees. Infrastructure managers grew their
pension funds AuM by around a quarter last year, he added. At the
end of 2010, the top-20 infrastructure managers had pension fund
AuM of $128bn, up $19bn compared with 2009.
Baker concluded: “The case for diversity has been
thoroughly tested recently, but those investors that had
diversified away from simply holding equities as their main growth
asset in the last five years generally performed better than those
that hadn’t. Given the ongoing economic uncertainty it is likely
diversity will become even more important in the
future.”
