The road to $1 trillion: Alternatives come of age

Pension funds have invested nearly $1 trillion in alternative assets with the world’s largest managers, with total investments in the asset growing by 12 per cent last year, research has revealed.

The Towers Watson research showed that half of the more than $952 billion of assets under management were now pension fund assets, with real estate dominating as the most popular way of gaining exposure to alternatives.

Tower Watson’s global head of research, Craig Baker, said the trend away from equity-focused portfolios to more diversified structures was now established.

“According to our research, allocations to alternative assets have continued to rise and now account for 19 per cent of all pension fund assets globally, up from 5 per cent fifteen years ago.”

The research also looked at the top 100 alternatives managers and found that real estate made up 55 per cent (up from 52 per cent) of assets under management, private equity fund of funds (PEFoF) accounted for 18 per cent (down from 21 per cent in 2009).

Also down was fund of hedge fund asset (FoHF) allocations which now make up 12 per cent (down from 13 per cent in 2009), infrastructure remained steady at 12 per cent and commodities accounted for 3 per cent (up from 2 per cent in 2009).

The continuing strength of real estate was underpinned by strong demand for real estate assets in the Asia-Pacific region, which saw a doubling of pension fund investment last year. Asia-Pacific real estate assets now make up 14 per cent of total real estate investments, with most of the rest invested in Europe (35 per cent) and North America (46 per cent).

The broader survey, which looked at 271 investment managers found that North America still had the biggest slice of investments in alternative assets (46 per cent). But that its popularity as a destination for alternative investment was waning, with its proportion of total of assets under management slipping 5 per cent from 2009.

Europe’s share of investment increased from 35 per cent in 2009 to 37 per cent last year, while Asia Pacific also grew from 9 per cent to 13 per cent of investment.

Baker said he expected the drive to diversify would continue, particularly in light of recent volatility on equity markets.

“The case for diversity has been thoroughly tested recently, but those investors that have diversified away from simply holding equities as their main growth asset in the last five years generally performed better than those that hadn’t,” he said.

“Given the ongoing economic uncertainty it is likely diversity will become even more important in the future.”

The research also ranked the biggest asset managers, with Australia’s Macquarie Group again the largest manager of pension fund assets ($60.3 billion) followed by real estate asset manager Prudential Financial ($42 billion) and JP Morgan Asset Management – Global Real Assets ($35 billion).

In terms of the leading managers within particular alternative asset classes, HarbourVest Partners were the leading (PEFoF) with $21 billion of assets under management. Blackstone Alternative Asset Management managed the largest proportion of FOHF assets on behalf of pension funds with a total of $15.9 billion.

Prudential and Macquarie were the leading managers in Real Estate and Infrastructure respectively.

PIMCO retained its position as the leading pension fund commodities manager with $11.1 billion of assets under management.