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Allocations to alternatives triple over past 10 years

Date: Tuesday, July 13, 2010
Author: Jonathan Stapleton, Global Pensions

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out more!  Scheme allocations to alternative assets have increased almost three-fold over the past 10 years, Towers Watson research has revealed.
The consultant's analysis of the top 100 alternatives managers showed allocations to these asset classes have continued to rise and now account for 17% of all pension fund assets globally, up from 6% ten years ago.

It showed that real estate managers dominate - accounting for around 52% of assets, down from 58% in 2008; followed by private equity fund of funds on 21%, up from 20% in 2008); fund of hedge funds on 13%, the same as in 2008; and infrastructure on 12%, up from 9% in 2008; and commodities on 2%, up from 0.5% in 2008.

Towers Watson global head of investment Carl 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."

Hess explained infrastructure and commodities had become increasingly popular over the past year as schemes became more comfortable with the asset classes.

He 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."

Hess added: "Investment in commodities is becoming more commonplace, as suitable vehicles are developed, resulting in their increasing use as a diversifier and hedge against inflation. Significant assets are now flowing into these strategies, but mainly in North America which accounts for 77% of commodities assets."

Towers Watson said it continued to believe in the ability of highly skilled hedge fund and private equity managers to adapt to changing and increasingly volatile market conditions - but added that larger schemes would invest directly in future, rather than through fund of fund vehicles.

Hess said: "We believe that more larger investors will invest directly in future rather than through funds of funds, particularly due to positive developments on fees, which are increasingly better aligned with investors' interests.

"This, and liquidity factors, would account for static fund of hedge fund AuM last year and only modest AuM growth in private equity fund of funds."

Towers Watson said the majority (51%) of alternative assets managed on behalf of pension funds are invested in North America, while a third are invested in Europe and 9% in Asia-Pacific. In terms of domicile, two-thirds of managers are based in the US, while a quarter are based in Europe with the remainder being based in Asia-Pacific.

Carl Hess said: "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."

The research found Macquarie Group is the largest infrastructure manager of pension fund assets with $51.6bn (34.4bn) up from $44.4bn in 2008, while HarbourVest Partners once again heads the private equity fund of funds table with $21.0bn ($22.4bn in 2008).

It said Blackstone Alternative Asset Management again manages the largest proportion of fund of hedge funds assets on behalf of pension funds, with a total of $14.3bn ($13.5bn in 2008). And it explained ING Real Estate Investment Management tops the real estate table with $32.4bn ($40.9bn in 2008).

PIMCO retains the leading pension fund commodities manager position with $ 8.5bn ($3.4bn in 2008).


Top 10 global alternatives managers

Rank Name of parent organisation Main country of domincile Pension AuM ($m) Total AUM ($m) Asset Class
1 Macquarie Group Australia 51,632.00 92,671.00 Infrastructure
2 ING Real Estate Investment Management Netherlands 32,363.50 92,692.60 Real Estate
3 JP Morgan Asset Management United States 27,771.50 32,431.50 Real Estate
4 AEW Capital Management United States 26,003.30 42,915.70 Real Estate
5 Morgan Stanley United States 25,759.00 64,419.00 Real Estate
6 CB Richard Ellis Investors United States 24,850.00 34,716.00 Real Estate
7 LaSalle Investment Management United States 23,670.00 39,900.00 Real Estate
8 RREEF Alternative Investment United States 23,339.02 53,883.49 Real Estate
9 HarbourVest Partners United States 21,002.10 31,924.60 Private Equity Fund of Funds
10 Prudential Financial United States 20,884.20 22,878.00 Real Estate

Source: Towers Watson