Diversification away from equities continues, Towers Watson says

Institutional investors continue to diversify away from equities into the full spectrum of alternative investments, says Towers Watson.

In its latest global report the consultant suggests that alternative assets managed by the world’s biggest asset managers on behalf of pension funds grew 16% in 2010 to $952bn.

The research identifies alternatives as constituting five asset classes: real estate; private equity fund of funds (PEFoF); fund of hedge funds (FoHF); infrastructure and commodities.

Total AuM at the managers covered in the period grew 12% to $1.9trn, with half of that now constituting pension fund assets.

Craig Baker, global head of research at Towers Watson Investment, said: “Institutional investors continue to diversify into the full range of alternative assets, as the benefits of diversification become apparent and certain asset classes become more accessible. The trend away from equity-focused portfolios to more diversified structures is now well established as investors acknowledge the risks associated with an undiversified approach, particularly in light of ongoing economic uncertainty. Indeed, according to our research, allocations to alternative assets have continued to rise and now account for 19% of all pension fund assets globally, up from 5% fifteen years ago.”

“The case for diversity has been thoroughly tested recently, but those investors that had diversified away from simply holding equities as their main growth asset in the last five years generally performed better than those that hadn’t. Given the ongoing economic uncertainty it is likely diversity will become even more important in the future. While in some cases this could lead to a requirement for higher governance, we think the effort to diversify is worthwhile; while not forgetting the increasing number of lower governance routes to diversity in the market.”

Towers Watson says that an analysis of the top 100 alternatives managers shows that real estate managers dominate, accounting for around 55% of assets, then PEFoF on 18%, FoHF on 12%, infrastructure on 12%, and commodities on 3%. Real estate assets invested by pension funds in the Asia-Pacific region doubled in 2010 and now account for 14% of the total, while most of the rest is invested in Europe (35%) and North America (46%).

The research suggests that  46% of alternative assets managed on behalf of pension funds are invested in North America, 37% are invested in Europe and 13% in Asia Pacific.

Some 50% of European managers are in the UK; 24% are in Switzerland and 12% are in France.

The resarch found that Macquarie Group was the largest infrastructure manager of pension fund assets with $60.3bn under management on behalf of pensions. HarbourVest Partners heads the PEFoF table with $21.7bn. Blackstone Alternative Asset Management manages the largest proportion of FoHF assets on behalf of pension funds, with a total of $15.9bn. Prudential Financial Inc. was the biggest manager of real estate with $42bn. PIMCO was the leader in commodities $11.1bn.

 

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