A recent Watson Wyatt survey reveals that allocation to alternative assets by the top investment managers on behalf of pension funds took a slight dip of 1% to US$817 billion from the previous year. In 2007, it was a different story as a 40% rise in the total amount of alternative assets pension funds invested with the largest investment managers compared to 2006.
The survey covered five particular alternative asset classes, namely: real estate, private equity fund of funds (PEFoF), fund of hedge funds (FoHF), infrastructure, and commodities.
“In spite of poor short-term performance, the demand for alternative assets by pension funds aiming to diversify their portfolios and access skill remains,’ says Henry Ching, Manager Research Consultant specialising in alternatives at Watson Wyatt. ‘As a result, inflows continued last year which, combined with their illiquid nature and less negative performances than pure equity, resulted in only a marginal decline in assets. However, 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 7% ten years ago.”
Real estate managers lead the pack in the analysis of the top 100 alternatives managers, grabbing the lions share of assets with 58% (although down from 62% in 2007). This was followed by PEFoF, FoHF, infrastructure and commodities. Hedge fund assets (13%) took a nosedive in 2008 while private equity (20%) and infrastructure (9%) took in the gains. Commodities, meanwhile, remained relatively small (less than 0.5% of the assets).
Mr. Ching believes that it is not all doom and gloom in the alternatives world as long-term investors have been selectively investing in certain strategies, notably private equity, in the knowledge that in times of adversity good managers have made significant money for investors in the past and could well do so again. Infrastructure managers have also increased their pension fund assets under management during the past year. He cautions though that while there are certainly good investment opportunities in this area, investors should be very wary of the structure of some of these mandates with careful attention being paid to the net of fees proposition.
The survey further reveals that at year end 2008, the top 50 real estate managers, FoHFs, and PEFoFs managed $485 billion ($512 billion in 2007), $123 billion ($146 billion in 2007) and $177 billion (US$139 billion in 2007) respectively. Infrastructure and commodities remain smaller, but are becoming easier for pension funds to access with the top 10 managers in these areas being responsible for $72 billion ($43 billion in 2007) and $9 billion ($16 billion in 2007) respectively.
“The travails of the hedge fund industry during 2008 are well documented and parts of the industry are still fighting for survival,’ Mr. Ching continues. ‘Notwithstanding, we believe in the ability of highly talented investors to adapt to a changing environment and generate good risk-adjusted returns for pension funds. Change in this sector will continue as larger funds invest more assets directly and start to have greater influence on fees; the knock on effect should be a better deal all-round for investors.’
“As we move into a different and difficult market environment, we expect there will be more rapid developments around some emerging trends. One notable theme is transparency, particularly the separate identification of alpha and beta, as well as an increased focus on risk, both from investors and managers alike. Another is an increased appetite for direct investment in private equity and hedge funds, coupled with a greater focus by pension funds on the governance requirements needed to succeed in this area,” Mr. Ching concludes.
ING Real Estate Investment Management is the largest real estate manager of pension fund assets with $40.9 billion, while HarbourVest Partners tops the PEFoF table with $22.4 billion. Blackstone Alternative Asset Management manages the largest proportion of FoHF assets on behalf of pension funds, with a total of $13.5 billion. Macquarie Group tops the infrastructure table with $44.4 billion and PIMCO is the leading pension fund commodities manager with $3.4 billion.
