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Pension funds continue to have "faith" in alternative assets

08 July 2013

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Pension fund alternative assets allocations now account for around 19% of all pension fund assets globally, a Towers Watson study has found.

According to the consultancy firm's 2012 Global Alternatives Survey, this figure is up from 5% 15 years ago.

The research, conducted by Towers Watson which includes a diverse range of institutional investors in association with FTfm, showed that pension fund assets represent 36% of the top 100 alternative manager's assets.

This figure is followed by wealth managers with 19%, insurance companies with 9%, sovereign wealth funds with 6%, banks with 5%, funds of funds with 3% and endowments and foundations with 2%.

Towers Watson Investment global head of research Craig Baker said that pension funds have always been, and will continue to be, a very large investor group for top alternatives managers.

Baker added: "For almost all of the past ten years of this research we have seen increasing allocations to alternative assets by a wide range of investors.

"Not only has the appeal of alternative assets broadened to include insurers and sovereign wealth funds, but the range of alternative assets has also increased beyond the likes of real estate and private equity to include direct hedge funds, infrastructure and commodities.

"It is therefore not surprising, that allocations to alternative assets by pension funds for example now account for around 19% of all pension fund assets globally, up from 5% 15 years ago."

In a ranking of top 100 asset managers by pensions funds, these assets increased by around 8% from last year to reach $1.3tr.

With regards to alternatives, the largest share of pension fund assets is held by real estate managers with 39%, followed by private equity fund of funds (PEFoFs) with 20%, private equity (14%) hedge funds (9%), infrastructure (9%), fund of hedge funds (FoHFs) with 7% and commodities (1%).

On a like-for-like basis, pension fund assets managed by infrastructure managers, private equity managers and PEFoFs managers increased by 14%, 12% and 7% respectively during 2012.

During the same period, pension fund assets managed by the top FoHFs and hedge fund managers grew by 13% and 12% respectively. Pension fund assets managed by real estate managers declined by 3% during 2012.

Geographically speaking, the research shows that for the top 100 managers, North America continues to be the largest destination for alternative capital (46%) with infrastructure as the only exception where more capital is invested in Europe.

Overall, 37% of alternative assets are invested in Europe, 10% in Asia Pacific and 7% is being invested in the rest of the world.

Baker said: "We continue to see pension funds globally putting their faith in alternatives assets to help deliver more reliable risk-adjusted returns at the total fund level, as evidenced by the growth, significant in some instances, in all but one of the asset classes.

"Further to the increased acceptance of alternative assets in their portfolios, we expect pension funds to continue making larger allocations, and to access these assets differently.

"In particular we expect a continuing shift towards investing via individual managers rather than funds of funds – particularly in hedge funds and private equity – as these managers improve their structures and are seen as a more efficient implementation route than fund of funds vehicles."

First published 08.07.2013

monique_simpson@wilmington.co.uk