Pension fund assets allocated to infrastructure and commodities increased significantly between 2008 and 2009, although the aggregate number of allocations to alternatives remained the same.
A study by consultancy Towers Watson showed that infrastructure and commodities accounted for 12% and 2% of the US$817bn (€630bn) of alternative assets managed on behalf of pension funds. These figures represented a 3% and 1.5% increase respectively, over 2008.
Carl Hess, global head of investment at consultancy Towers Watson, 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.”
Towers Watson said that Macquarie Group is the largest infrastructure manager of pension fund assets with $51.6bn in 2009, having had $44.4bn in assets under management (AuM) in 2008. Pimco retained the leading pension fund commodities manager position with $8.5bn, as compared to $3.4bn in 2008.
Although infrastructure and commodities managers are increasing their pension fund assets, the study showed that real estate managers continue to dominate the alternatives space, accounting for 52% of the assets under management. Private equity fund of funds and funds of hedge funds represented 21% and 13%, respectively.
ING Real Estate Investment Management topped the real estate table with $32.4bn in pension fund assets, compared to $40.9bn in 2008.
So although overall pension fund assets in alternatives did not increase, Towers Watson said that this client base has continued to diversify its investments across the alternative asset classes.
Hess said: “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.
“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.”
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