Global equities lose ground to alternatives

Allocations to alternatives worldwide are expected to increase by more than 5 per cent at the expense of global equities in the next two years, according to Russell Investments 2010 global survey on alternative investing.

Infrastructure allocations are expected to increase most meaningfully relative to the other asset classes, albeit from a very low base, the also survey found.

“Infrastructure and commodities are becoming more important to institutions around the globe. They are expected to represent an important share of overall growth in allocations to alternatives through 2012, though from a very low base,” the report said.

Private equity allocations are expected to increase, especially in North America, based on a combination of valuation improvements and new commitments.

The increase in allocation to alternatives will come at the expense of global equities because the crisis highlighted the systematic risk of global equities, the survey found.

“The higher correlations between global equity sectors, styles and regions since 2008 have increased interest in alternative strategies that can help to diversify portfolios and reduce equity beta exposure, the survey said.

Reducing volatility was the main motivation for increasing allocations, according to the survey of 119 institutional investors managing a total of $1.3 trillion in assets, followed by improving returns and better risk-adjusted performance.

The survey was conducted by Russell in conjunction with McKinsey & Company.

Alternative types as a percentage of total portfolio assets

Type  2009  expected by 2012

Private equity  3.1%  4.9%

Hedge funds  4.2%  5.7%

Real estate 4.1%  6.6%

Infrastructure  0.3% 1.4%

Commodities 0.7%  1.1%

Totals  12.4%*  19.7%

*Note: the 12.4 per cent total above is the sum of allocations to each type, and it is drawn from a different survey question than the 14 per cent ‘total allocation’. The 1.6% difference may be to un-categorised alternative allocations (not assigned to a specific type).

Source: Russell Investments