Pension Funds Shift Gear, Go an Alternative Route

Date: Thursday, September 6, 2012
Author: Caroline Henshaw, The Wall Street Journal

Alternative assets classes aren’t looking so alternative these days.

J.P. Morgan JPM +2.13% expects pension funds will raise their allocation to investments such as infrastructure, property, private equity and natural resources to 25% over the next decade. Currently, just over third of international funds asked by the investment bank allocate 5%-15% to the asset class now.

In Australia’s superannuation industry, which is expected to grow to 2.8 trillion Australian dollars (US$2.85 trillion) by 2020, that would equate to more than A$700 billion.

“Low bond yields along with outsized equity market volatility and modest equity returns have brought us to a new asset allocation tipping point,” said New York-based Head of J.P. Morgan Asset Management Global Real Assets Joe Azelby.

“For Australia, this is particularly pertinent given the concentration of the local equities market and the shallow fixed income market,” added Mr. Azelby, who oversees more-than US$60 billion in real assets across the US, Europe, Asia and Australia.

To be sure, Australia is already leading the way in alternative investments with peers in Canada and Holland, particularly when it comes to local property.

As an example, Australia’s A$73 billion Future Fund made a A$2 billion bid for all of the assets of listed investment firm Australian Infrastructure Fund Ltd AIX.AU -0.33%., which includes minority interests in airports around the country and in Europe.

A J.P. Morgan survey of 125 Australia funds representing more than A$404 billion in assets found that almost half already allocate 15%-25% of their assets to the alternative class, compared to around 5% of global funds.

Mr. Azelby said he expects an increasing amount of this to be invested offshore as the size of Australia’s pension pool grows and the strength of the Australian currency makes overseas assets – especially in Europe – comparatively cheaper.

One challenge, however, could be the introduction of more stringent rules requiring lower fees, transparency and the need for more liquid assets under the government’s MySuper legislation.

This could make it more difficult for investors away from investing in infrastructure – ironically undermining one of the government’s key aims for the industry under the reforms, said Dragana Timotijevic, Mercer’s Global Investment Leader for Alternative Beta Investments.

“If you’re thinking about plain vanilla MySuper there’s not really a lot of room to accommodate much exposure to” alternative assets, she said.