Pension funds continue to allocate to alternative assets despite crisis

Global - July 6, 2009 - Alternative assets managed on behalf of pension funds* by the world’s largest investment managers diminished by around 1% to US$817bn in 2008 compared to the year before, according to global research produced by Watson Wyatt in conjunction with the Financial Times. This contrasts with a 40% increase in the amount of alternative assets pension funds invested with top managers during 2007, compared to 2006. The Global Alternative Survey covers five alternatives asset classes: real estate; private equity fund of funds (PEFoF); fund of hedge funds (FoHF); infrastructure and commodities and includes rankings of the top managers in each area.

Carl Hess, global head of investment consulting at Watson Wyatt, said: “In spite of poor short-term performance, the demand for alternative assets by pension funds aiming to diversify their portfolios and access skill remains. 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.”

An analysis of the top 100 alternatives managers shows that real estate managers dominate, accounting for around 58% of assets (down from 62% in 2007), followed by PEFoF, FoHF, infrastructure and commodities; they also dominate the top ten ranking with eight managers in that list. As with real estate, hedge funds assets (13% of assets) also diminished in 2008 with both private equity (20% of assets) and infrastructure (9% of assets) being the beneficiaries, while commodities assets remained relatively small (less than half a percent of assets).

Carl Hess said: “It is not all doom and gloom in the alternatives world and 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. 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.”

Data from the wider survey shows that at the end of 2008, the top 50 real estate managers, fund of hedge funds (FoHFs) and private equity fund of funds (PEFoFs) managed US$485bn (US$512 bn in 2007), US$123bn (US$146bn in 2007) and US$177bn (US$139bn 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 US$72bn (US$43bn in 2007) and US$9bn (US$16bn in 2007) respectively. 

Carl Hess said: “The travails of the hedge fund industry during 2008 are well documented and parts of the industry are still fighting for survival. 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.

Vehicles that facilitate pension fund investment in commodities are becoming more commonplace which is likely to increase their use as a diversifier and hedge against inflation. As a result, significant assets could start to flow into these strategies, but a lot will hinge on how the various inflation / deflation scenarios play out.”

According to the broader research, the majority (52%) of alternative assets managed on behalf of pension funds are invested in North America, while a third are invested in Europe and 11% 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: “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.”

At the top of the rankings ING Real Estate Investment Management is the largest real estate manager of pension fund assets with US$40.9bn, while HarbourVest Partners tops the PEFoF table with US$22.4bn. Blackstone Alternative Asset Management manages the largest proportion of FoHF assets on behalf of pension funds, with a total of US$13.5bn. Macquarie Group tops the Infrastructure table with US$44.4bn while PIMCO is the leading pension fund commodities manager with US$3.4bn. 

* Excludes direct investment in single strategy private equity funds and hedge funds, in other words only funds of funds in these areas have been included.

Notes to editors

Watson Wyatt conducted this survey for the year to December 2008 to rank the largest investment managers and includes 206 investment manager entries (up from 190 in 2007) comprising: 58 in fund of hedge funds, 59 in real estate, 52 in private equity fund of funds, 18 in commodities and 19 in infrastructure.  In the private equity and hedge fund area, this ranking is focused purely on fund of funds which have traditionally been of most interest to pension funds. For real estate, commodities and infrastructure, direct managers are included.

For further information please contact:

Paul Deane-Williams
Head of Public Relations - Investment
Watson Wyatt Limited
+44 (0)1737 274397
paul.deane-williams@watsonwyatt.com

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