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Pensions Dive Into Alternatives
ai5000
reports, Pensions
Dive Into Alternatives:
Global research by Towers
Watson shows that around half of all assets managed by the world’s
largest alternative investment managers are managed on behalf of
pension funds, with funds beginning to favor infrastructure and
commodities.
According to the study, of the total
allocated to alternatives, pension fund assets run by specialist
infrastructure managers has risen from 9% in 2008 to 12% in 2009 while
commodities managers have seen their allocation rise from 0.5% in 2008
to 2% last year.
“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," said Carl
Hess, global head of Investment at Towers Watson, in a statement.
"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.”
The research also revealed that
alternative assets under management on behalf of pensions remained
unchanged in 2009 compared to the previous year of $817 billion.The Global Alternatives Survey spanned
five alternative 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. The
analysis of the top 100 alternatives managers revealed the following
percentages per sector:
- Real estate managers
accounted for around 52% of assets (down from 58% in 2008)- PEFoF
on 21% (20% in 2008)- FoHF on 13% (13% in 2008)
- Infrastructure
on 12% (9% in 2008)- Commodities on 2% (0.5% in 2008)
The survey showed Macquarie Group is
the largest infrastructure manager of pension fund assets, topping the
ranking, with $51.6 billion ($44.4 billion in 2008). Netherlands-based
ING Real Estate Investment Management, JP Morgan Asset Management, and
AEW Capital Management, LP, and Morgan Stanley followed.
Towers Watson's survey included 224
investment manager entries (up from 206 in 2008) comprising: 60 in real
estate, 60 in fund of hedge funds, 57 in private equity fund of funds,
22 in commodities and 25 in infrastructure.
A recent survey by Russell
Investments' on alternative investing supports these findings,
showing that institutional investors worldwide view alternative
investments as an effective way to diversity their portfolios, with
plans to boost their exposure to these investments in the years ahead.
The Russell survey of 119 organizations throughout North America,
Europe, Japan and Australia showed that over the next two to three
years, pensions
funds, endowments, foundations and insurance providers expect to
increase their allocation to alternative investments by more than a
third, to 19% of their total investment portfolios. While real estate,
private equity and hedge funds remain the preferred alternative types,
the study showed commodities and infrastructure are also expected to
make meaningful gains.
You can
download the Global Alternatives Survey 2010 by clicking
here. Not surprisingly, the top 10 managers are mostly in real
estate and infrastructure.
Pauline
Skypala of the FT reports, Pensions
enthusiastic but inflows are variable:
Many pension funds are keen to invest
more in alternative investments. And alternative investment managers
are usually keen to have such investors on board: they are seen as more
long-term and knowledgeable than the wealthy investors many managers
have focused on in the past. They are also less likely to panic and
demand their money back when the going gets tough, which makes life
easier for managers in the relatively liquid sectors such as funds of
hedge funds.(PDF
of top 100)
Against this background, it is perhaps
surprising that alternative assets managed on behalf of pension funds
globally by the top 100 managers barely registered any change in 2009, according to
a survey by Towers Watson in association with FTfm. Assets rose
from $817,002m (£538,477m, €649,657m) in 2008 to $817,090m for 2009.
That is down from $823,118m in 2007.
There
is a change in the way the assets are distributed between alternative
investment sectors though. The share of real estate has fallen, from 58
per cent to 52 per cent, while that of infrastructure and commodities
has grown. The former is now 12 per cent of pension fund assets under
management by the top 100 managers, up from 9 per cent, while
commodities have leapt to 2 per cent, from 0.4 per cent. Five
commodities managers now make it into the top 100, up from one in 2008.
Private equity fund of funds are up
slightly, from 20 to 21 per cent, but funds of hedge funds remained
steady at 13 per cent.
Carl Hess, global head of investment
consulting at Towers Watson, says in the less liquid alternative assets
there has been a catch-up in valuations. However, the rise in
commodity assets is real: “There have been substantial inflows into the
asset class,” says Mr Hess. It has the advantage of being relatively
liquid at a time when investors remain concerned about liquidity.
Provided US regulators, concerned about the link between commodity
price rises and speculative flows, do not make it difficult for
institutional investors to put money into commodities, he expects to
see pension funds allocate more to the sector.
He attributes the decline of the share of
real estate to falling valuations and unwillingness on the part of
investors to devote more money to illiquid strategies. “Flows into core
strategies slowed down, although there is still interest in
opportunistic strategies,” although the latter depends on the
availability of cheap leverage.
Infrastructure, while as illiquid
as real estate, is a less mature sector, says Mr Hess. The possibility
of more public spending on infrastructure is an attraction for
investors, although the fiscal austerity now being imposed across much
of the world may prove a dampener. However, Mr Hess expects the sector
to continue to attract flows, especially if the fee structure improves.
On the private equity front, Mark Calnan,
global head of private equity at Towers Watson, believes the fund of
funds model is “challenged” due to the fee structure and disappointing
returns. He expects investors increasingly to cut out the fund of funds
managers and go direct.
The same goes for funds of hedge funds.
“The model will come under pressure,” says Mr Hess. “The larger pension
funds should be able to build their own funds of funds.”Craig
Baker, global head of manager research at Towers Watson, reports a 10
per cent growth in the number of direct hedge fund mandates awarded by
the consultant’s clients in 2009, and a fall in demand for fund of
hedge fund mandates. Mandates for direct hedge funds now account for 85
per cent of all the consultant’s hedge fund searches, compared with
just over half in 2008.
Similarly,
direct allocations to private equity managers accounted for 80 per cent
of private equity mandates awarded in 2009, of which there were far
fewer than in recent years, with numbers down by 80 per cent,
reflecting the fact that far fewer funds came to market last year.
Funds
of hedge funds are the least oriented to institutional investors of
the five alternative investment sectors included in the survey.
Slightly more than a third (36 per cent) of the $355,435m assets under
management of the top 50 funds are accounted for by pension funds.
Private equity funds of funds are much more reliant on this source of
funding – with pension funds representing more than half (55 per cent)
of the $340,121 the top 50 funds have under management.
Infrastructure claims the highest proportion
of institutional investors, with 61 per cent of the top 20 funds’
assets of $179.198 coming from this source.
The overall
proportion of pension fund money for the top 100 alternative investment
managers is 48 per cent.
The future of alternative investments
with regard to pension funds will centre on the question of the
alignment of interests, says Mr Hess. “[Pension funds] are not yet
throwing their weight around on fees as much as they could do.
“You can look at how much of the returns
from funds of hedge funds, for example, were due to skill rather than
to market returns and make sure you only pay for skill.”
The
evidence shows skill exists, he adds, but that investors have overpaid
for it.
The
majority of investors have overpaid for the "skill" alternatives
managers claim to be delivering. I am also very
nervous about billions flowing into commodities.
So why are pensions diving back into
alternatives and more importantly, is it the right thing to do? From one
perspective, this is the right thing to do, especially if you think the
US economic recovery will proceed, even if it's at a muted pace.
Illiquid asset classes like Real Estate and Private Equity tend to
outperform once the economic recovery is well underway.
There is a lot of money on the sidelines
waiting to be deployed, but don't be fooled, the same structural issues
impeding these asset classes remain. For one, banks aren't willing to
finance mega buyout funds. Also, as one senior pension officer told me
today: "I believe in the governance model of private equity but it will
take years for the industry to work through its problems."
Maybe, but watching pensions flooding
alternatives with billions again, I think we're back to the good old days
where everyone is looking to these investments to get them out of their
pension jam. But alternatives are a double-edged sword. If everyone is
piling into them again, you can bet those pension dollars that returns
will be diluted. In effect, alternatives are drowning in a sea of
liquidity, so don't expect much from them over the next decade.
»
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I can't speak to whether there will be 8.5% returns in the bond & equity markets or not. However, believing that alternative investments will allow them to outperform the general market with $800b under management is magical thinking.
The only hope these guys have is to match the most liquid indices. They should focus on cutting expenses instead: indexing only (in instruments that can be bought and sold with a mouse-click), let the computers run it for 5 bp per year with zero human intervention if possible, eliminate all the parasites and their fees.
As far as real estate goes, a wise man once told me: If it flies, floats, rolls, fucks, needs painting or feeding, lease it.
Leo, it's obvious that pension plans have nothing to do with providing pensions. They are play things for managers and governments. How they piss the money away is almost irrelevant because if you have crap to sell you sell it to a pension plan. If you're fortunate enough to be a public sector worker or the member of a large enough union (voting block) your plan will be considered too big to fail and I (non-union private sector) will have my savings taxed away to support your pension. That's how the new capitalism works.
Private equity fund of funds? Holy illiquidity Batman. In a fund of hedge funds the lock-ups/withdrawal windows may be few but they should more or less line up once a quarter or whatever. Wouldn't a bunch of PE funds all have much longer term lock-ups that likely don't all match each other? Do you find the lowest common lock-up denominator? How do you sell out of a fund of PE funds position, even after a few years if one or more of those funds is not in a position to come up with the cash? Is there some vehicle to front the withdrawing client the cash?
I can only agree with commenters citing 'greed' and 'desperation'...
With such a high proportion of funds under management composed of pension funds, and with such funds constituting HUGE positions in many markets and asset classes, and bearing in mind their needs for outsize 6-8%+ returns...
does it not seem that "investments" are now largely mere BETS piggy-backed on prior and other "investments"...
to such an extent that they are in reality derivatives of derivatives of indexes of paper assets predicated on growth in some REAL asset class far, far down the line, far distant from connection with any of these "investments"?
What would happen, domino-like, should some of the multiplicity of debtors and counterparties in this gambling-masquerading-as-investing Ponzi scheme fail to pay out? Or pay out in value-debauched dollars?
This can ONLY lead to devaluations and exploding money supply-derived INFLATION. They've all shot themselves in the foot through sheer lack of imagination, unwillingness to cut payouts and swamping of the markets.
I don't need graphs, charts or diagrams to see this, and I'm no economist. Just calling it as I see it.
The only thing that will SAVE ("grow" is out of the question) anyone's capital in the years to come is the still insignificantly small GOLD MARKET. Buy it.
Pensions are stupid. They are blinded by a "too big to fail" mindset just like the subprime addicted banks.
"but watching pensions flooding alternatives with billions, I think we're back to the good old days where everyone is looking to these investments to get them out of their pension jam."
OK, man this time we double down FOR REAL! SERIOUSLY FOR REAL!
Honestly, that was the first, second and third thought that popped into me wee little brain when I read the headline. I loved this line though:
"Many pension funds are keen to invest more in alternative investments. And alternative investment managers are usually keen to have such investors on board: they are seen as more long-term and knowledgeable than the wealthy investors many managers have focused on in the past. They are also less likely to panic and demand their money back when the going gets tough, which makes life easier for managers in the relatively liquid sectors such as funds of hedge funds."
Thanks for the honest appraisal from the fund managers. Let's just crank the Blatant Syllabacation Translator to filter self serving horse shit and we get:
Many pension funds are so beyond desperate to hit 8.5% returns forevermore in order to save there miserable asses, that they were keen to invest in magic beans after being shown a prospectus called "Jack and the Beanstalk", before they were reminded that it was a nursery rhyme. And alternative investment managers drool uncontrolably on themselves when the scent of such investors pass by their bone strewn layers: they see them as easy, fat, lazy, ignorant prey that can be bled dry for decades, unlike the more nimble agile prey that typically dare their snares. Since these slobs are ultimately addled by OPM, they are completely unaware when it's time to panic, which makes it easier for these predators to pay out redemtions to their other clients.
Cheers,
Buy and hope. Yeah, that'll work out.
98% of the whole alternative business is a sham. Yes, you can look at results from the prior period, say the '70's to the early '00's and suggest that they have 'market-beating' returns. How much of that was skill and how much just timing/cyclical? Anyone could make money in the '80's/'90's, especially with a nice dose of leverage. I'd be willing to bet the REIT's have beat MSREF III on, Lehman REF, etc. And you can sell at any time and avoid 2/20 fees. Ask Harvard how their PE liquidation went. Still can't get out.
It's a roach motel, but everyone playing is the winner - the consultant who gets paid to shill some basic advice with some nice asset allocation charts showing correlation/expected returns, the pension fund manager who gets to argue this stuff is "hard", Wall Street, the politicians who can now model 8% returns and promise the world, and the unions who can argue sustainability.
This is just another nail in the coffin to the whole system when PE can't make any alpha and simply drags returns down further.
Leo, I get your point (in other comments/stories) that the PTB won't let things go without a fight. It'll be interesting to see what they do to try to fix their oh-so-flawed system. I have my PM's, my supplies, etc...
Someone wake me when they start buying into gold & silver.