Big push into alternative assets

Date: Monday, November 26, 2007
Author: Steve Johnson, Financial Times

Institutional investors across Europe plan to pump more than €100bn (£72bn) into alternative assets in the next two to four years.

But not everyone is being swept off their feet by the charms of alternative asset managers, with half of all institutions having no interest in investing in hedge funds or private equity, according to a survey by JPMorgan Asset Management.

Nevertheless, the bank's 2007 Alternative Asset Survey found that the push into a broader range of asset classes was being driven by a desire for diversification rather than an expectation of lucrative returns, with institutions expecting returns to decline from current levels.

The 280 institutions surveyed, speaking for €1,900bn of assets, expect annual returns from real estate to decline from 12.2 per cent to 8.1 per cent and returns generated by hedge funds to fall from 8.9 to 8 per cent, although private equity is forecast to be able to continue to match historic returns of 12.3 per cent a year.

In spite of this forecast slowdown, the surveyed institutions plan to invest a further €27.2bn in real estate, €17.1bn in hedge funds and €16.3bn in private equity in the next two to four years. Extrapolating for institutions not included in the survey, the real totals are likely to be much higher.

Perhaps more notable still is the enthusiasm for a "second wave" of alternative asset classes. Those surveyed plan to pump €14.5bn into infrastructure assets by 2011, almost doubling their current holdings of €15bn. Dutch, Nordic and Italian investors plan to go further still, upping their strategic allocation to infrastructure, which is forecast to produce annual returns of 10 per cent, to 4 per cent of their portfolios.

"The flows that are expected into infrastructure are enormous," said Karin Franceries, head of the client solutions team at JPMAM and co-author of the report. "It is something we see almost every day with our clients; they have a real interest in this asset class."

An even larger sum, €28.4bn, is expected to be invested in still newer alternative asset classes such as commodities, particularly popular in Italy, Belgium and the Netherlands, active currency, which almost half of UK institutions plan to invest in, shipping, timber and clean energy.

The survey also pointed to a sharp divide in institutions' perception of alternative investments. While half of the respondents have absolutely no interest in alternative assets with the exception of real estate, most of the institutions that had dipped their toes in the water as of JPMAM's previous survey in 2003 are now keen to increase their allocation.

While 63 per cent of existing hedge fund investors plan to increase their exposure, fewer than one in eight of those yet to invest have any intention of doing so, a pattern broadly repeated for other alternative asset classes.

Ms Franceries said of those who had not taken the plunge: "It's not that they don't trust the capacity of these asset classes to deliver high returns in a risk-managed way. It's more the particular aspects of investing in these asset classes, such as having access to the top managers who will achieve superior returns and the liquidity aspect. Both hedge funds and private equity are difficult to get in and out of.

"They are really convinced that these asset classes have too many issues for them to invest in them."

The survey was conducted in June and July, before the dislocation in credit markets. Simon Chinnery, client adviser in the UK institutional team, believed that this gulf would be wider still as a result.

"It wouldn't surprise me if the institutions standing on the shore said the waters are even more choppy now, but those that were already in alternative assets said they were aware of the risks and thought there would be lots of opportunities now."