Last updated: 20:04 / Monday, 5 January 2015
State Street Research

Pension Funds Bet Big on Alternatives

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Pension Funds Bet Big on Alternatives
  • Private equity emerges as a hot area for investment, with 60 percent of respondents anticipating increased allocations into this asset class
  • Globally, 29 percent of pension funds that already invest in hedge funds will increase their allocation

Pension funds are restructuring for a new investment climate. They are becoming more hands-on in the way they manage their investment portfolios. This proactive approach extends to all aspects of their operations and governance. New research from State Street reveals key trends that are radically reshaping almost every aspect of how pension funds manage their investments and deliver long-term value to their members. One of these trends is a “Big Bet on Alternatives”.

For pension funds, alternative investments have typically constituted a small part of the portfolio. This is changing. Pension funds are finding that a small allocation to alternatives is not sufficient to generate the required growth. This is forcing many of them to place bigger bets on alternatives.

Private equity emerges as a hot area for investment, with 60 percent of respondents anticipating increased allocations into this asset class. A significant proportion of pension funds also say they will invest more in direct loans (54 percent), real estate (46 percent) and infrastructure (39 percent).

Pension funds are also showing a greater appetite for hedge funds. Globally, 29 percent of pension funds that already invest in hedge funds will increase their allocation, while 25 percent will invest in this asset class for the first time. There have been some high-profile withdrawals from hedge funds in recent times. But our research reveals that many pensions will continue to seek out hedge fund strategies with the potential to deliver upside returns.

More than half of pension funds (53 percent) plan to make greater use of low-cost investment strategies. Many are adopting a “barbell strategy,” to blend the cost efficiencies of passive strategies with higher-growth/ higher-risk asset classes such as alternatives. The shift into alternatives may represent a real test of capabilities, as pension funds seek to manage risk and performance across complex portfolios.

To learn more, you may request the report: “Pension Funds DIY: A Hands-on Future for Asset Owners”, through this link www.statestreet.com/vision/assetowners

For your information...

This report is based on a State Street survey of 134 senior executives in the pension fund industry. The survey was conducted by the Economist Intelligence Unit in August 2014. Respondents from 15 countries participated, with the majority being drawn from the US, UK, Australia and Canada. Just more than half (52 percent) of respondents came from public sector pension funds, 31 percent from private sector pension systems and 16 percent from superannuation funds. Most respondents (62 percent) came from organizations that oversee both definedbenefit (DB) and defined contribution (DC) funds.

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