Pensions funds’ global alternative assets close in on $1 trillion mark

Alternative assets managed on behalf of pension funds by the world’s largest managers grew 16% in 2010 to US$952bn (from US$817bn in 2009), according to global research produced by Towers Watson in conjunction with the Financial Times. At the same time total assets under management (AuM) for these managers increased by 12% to US$1,904bn; and the research shows that half of their assets are now pension fund assets. The Global Alternatives Survey covers five alternatives asset classes: real estate; private equity fund of funds (PEFoF); fund of hedge funds (FoHF); infrastructure and commodities and includes rankings of the top managers in each area. 

Craig Baker, global head of research at Towers Watson Investment, said: “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. 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.” 

An analysis of the top 100 alternatives managers shows that real estate managers dominate, accounting for around 55% of assets (up from 52% in 2009), followed by PEFoF on 18% (down from 21% in 2009), FoHF on 12% (down from 13% in 2009), infrastructure on 12% (12% in 2009) and commodities on 3% (up from 2% in 2009).

According to the research, real estate assets invested by pension funds in the Asia-Pacific region doubled in 2010 and now account for 14% of the total, while most of the rest is invested in Europe (35%) and North America (46%). 

Craig Baker said: “During 2010, pension funds renewed their interest in real estate which, together with asset growth, resulted in a 21% increase. 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. 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. While concerns about infrastructure’s net-of-fees proposition still continue, these managers grew their pension funds assets by around a quarter last year.” 

Data from the wider survey shows that at the end of 2010, the top 50 real estate managers, PEFoFs and FoHFs managed US$532bn (up from US$439bn in 2009), US$209bn (up from US$187bn in 2009)  and US$150bn (up from US$127bn in 2009) respectively.  The top 20 infrastructure and commodities managers now manage US$128bn (up from US$109bn in 2009) and US$44bn (up from US$28bn in 2009) of pension fund assets respectively. 

Craig Baker said: “Regarding hedge fund and private equity investing, we believe in the ability of highly skilled managers to adapt to changing and increasingly volatile market conditions and to generate good performance. We expect larger investors to continue investing more capital via direct funds.  In the hedge fund area smaller investors continue to find fund of funds more suited to their governance arrangements, whereas in private equity they might be questioning the whole net-of-fees proposition. In addition, we are also seeing greater interest in the new alternative beta opportunities for improving investment efficiency that are now more widely available.” 

According to the broader research, 46% (51% in 2009) of alternative assets managed on behalf of pension funds are invested in North America, while 37% (35% in 2009) are invested in Europe and 13% (9% in 2009) in Asia Pacific. In terms of domicile, 50% of European managers are in the UK; 24% are in Switzerland and 12% are in France. The Asia-Pacific region is represented in the research by 34 managers from Australia, Hong Kong, India, Japan, New Zealand and Singapore and of the North American managers in the research, the majority (88%) are domiciled in the US. There are also two South African domiciled managers in the research. 

Craig Baker said: “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.  While in some cases this could lead to a requirement for higher governance, we think the effort to diversify is worthwhile; while not forgetting the increasing number of lower governance routes to diversity in the market.” 

Macquarie Group is once again the largest infrastructure manager of pension fund assets with US$60.3bn (US$51.6bn in 2009) and also tops the overall rankings, while HarbourVest Partners once again heads the PEFoF table with US$21.7bn (US$21.0bn in 2009). Blackstone Alternative Asset Management again manages the largest proportion of FoHF assets on behalf of pension funds, with a total of US$15.9bn (US$14.3bn in 2009). Prudential Financial Inc. tops the real estate table with US$42.0bn (US$20.9bn in 2009) while PIMCO retains the leading pension fund commodities manager position with US$11.1bn (US$8.5bn in 2009).