Pension Funds Retain Faith In Alternative Investments
Wednesday, July 14, 2010

Alternative assets under management (AuM) on behalf of pension funds by the world’s largest alternative investment managers remained unchanged in 2009 compared to the year before at USD817bn, according to global research produced by Towers Watson in conjunction with the Financial Times.

The research also shows that around half of all assets managed by these alternative investment managers are managed on behalf of pension funds. 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.

Carl Hess, global head of Investment at Towers Watson, said: “Institutional investors continue to diversify into the full range of alternative assets, encouraged by the way these strategies have performed. 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 17% of all pension fund assets globally, up from 6% ten years ago.”

An analysis of the top 100 alternatives managers shows that real estate managers dominate, accounting for around 52% of assets (down from 58% in 2008), followed by PEFoF on 21% (20% in 2008), FoHF on 13% (13% in 2008), infrastructure on 12% (9% in 2008) and commodities on 2% (0.5% in 2008).

Hess said: “Infrastructure and commodities managers have significantly increased their pension fund assets under management during the past year, as investors have become more comfortable with these asset classes and while others have continued to opportunistically add to their allocations. However, investors should be very wary of the structure of some of these mandates with careful attention being paid to the ‘net of fees’ proposition, in particular for infrastructure.”

Data from the wider survey shows that at the end of 2009, the top 50 real estate managers, FoHFs and PEFoFs managed USD439bn (USD485bn in 2008), USD127bn (USD123bn in 2008) and USD187bn (USD177bn in 2008) respectively. Infrastructure and commodities remain smaller, but are becoming easier for pension funds to access with assets of the top 15 commodities managers more than tripling in 2009 compared with 2008.

Hess continued:

“Investment in commodities is becoming more commonplace, as suitable vehicles are developed, resulting in their increasing use as a diversifier and hedge against inflation. Significant assets are now flowing into these strategies, but mainly in North America which accounts for 77% of commodities assets."

"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 for our clients. However, we believe that more larger investors will invest directly in future rather than through funds of funds, particularly due to positive developments on fees, which are increasingly better aligned with investors’ interests. This, and liquidity factors, would account for static fund of hedge fund AuM last year and only modest AuM growth in private equity fund of funds."

"We are also seeing greater interest in the new alternative beta opportunities for improving investment efficiency that are now more widely available.”

According to broader research, the majority (51%) of alternative assets managed on behalf of pension funds are invested in North America, while a third are invested in Europe and 9% in Asia-Pacific. In terms of domicile, two-thirds of managers are based in the US, while a quarter are based in Europe with the remainder being based in Asia-Pacific.

Hess added: “The theory of diversity has faced its sternest test in a generation but those investors that had diversified their assets have made a strong case for it. Going forward it is likely to become even more important given the ongoing economic uncertainty and new opportunities will continue to help build more efficient portfolios. While this could lead to a requirement for higher governance than for a simple equity/bond portfolio, it doesn’t necessarily have to and we think the effort to diversify is worthwhile.”

Macquarie Group is the largest infrastructure manager of pension fund assets with USD51.6bn (USD44.4bn in 2008) and also tops the rankings, while HarbourVest Partners once again heads the PEFoF table with USD21.0bn (USD22.4bn in 2008). Blackstone Alternative Asset Management again manages the largest proportion of FoHF assets on behalf of pension funds, with a total of USD14.3bn (USD13.5bn in 2008). ING Real Estate Investment Management tops the real estate table with USD32.4bn (USD40.9bn in 2008) while PIMCO retains the leading pension fund commodities manager position with USD 8.5bn (USD3.4bn in 2008).