Public sector demand trends upwards for alternatives and EM

UK public sector pension funds have significantly increased their exposure to alternative investments and emerging markets over the past three years.

Exposure to alternatives was up 61% and emerging market investments increased 31% as a proportion of the portfolios of 105 pension funds studied by State Street.

The findings were taken as a sign of how the asset allocation of the UK’s 89-member Local Government Pension Scheme could change over the next few years as they move towards a ‘super pooling’ structure.

The increase in alternatives exposure represented £16.6 billion (€19.4 billion) in the three years to the end of 2016. The 33% exposure in emerging markets represented £446.5 million.

Other State Street main findings were:

  • A 31% increase in fixed income exposure (representing a £34.7 billion increase)
  • Overall exposure to equities increased 9% to £120.7 billion
  • Domestic equities allocation decreased by 5%, accounting for £37.9 billion

Andy Todd, head of UK pensions and banks, asset owner solutions at State Street, said: “This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities. These changes to the investment landscape are systematic, so we will likely see a continued trend toward such investments.”

Traditional asset classes such as equities and fixed income remain core holdings, with equities accounting for 48%, and fixed income accounting for 14% of the overall allocation.

Another finding was that the assets of the 105 schemes increased by 13% to £251.8 billion.

The 89 LGPS funds are preparing to transition into eight asset pools by April next year following government reform of the scheme.

©2017 funds europe

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