GLOBAL - The use of alternative asset by pension funds grew by 16% to $952bn in 2010, according to research by Towers Watson.
At the same time total assets under management (AuM) of institutional fund managers increased by 12% to $1,904bn, with half of those assets now coming from pension funds.
The Global Alternatives Survey researches the use of five alternative asset classes including 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.
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."
An analysis of the top 100 alternatives managers found real estate managers dominate, accounting for around 55% of assets (up from 52% in 2009), followed by PEFoF on 18% (down from 21% in 2009), FoHF on 12% (down from 13% in 2009), infrastructure on 12% (12% in 2009) and commodities on 3% (up from 2% in 2009).
According to the research, 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%).
Baker said: "During 2010, pension funds renewed their interest in real estate which, together with asset growth, resulted in a 21% increase. Infrastructure and commodities managers have also significantly increased their pension fund assets under management during the past year, as investors have become more comfortable with these asset classes.
"Commodities managers have almost doubled their pension assets under management in the last year, as suitable vehicles are developed as diversifiers and hedges against inflation. While concerns about infrastructure's net-of-fees proposition still continue, these managers grew their pension funds assets by around a quarter last year."
The research found 46% of alternative assets managed on behalf of pension funds are invested in North America (51% in 2009), while 37% are invested in Europe (35% in 2009) and 13% (9% in 2009) in Asia Pacific.
At the end of 2010 the top 50 real estate managers, PEFoFs and FoHFs managed $532bn (up from $439bn in 2009), $209bn (up from $187bn in 2009) and $150bn (up from $127bn in 2009) respectively. The top 20 infrastructure and commodities managers now manage $128bn (up from $109bn in 2009) and $44bn (up from $28bn in 2009) of pension fund assets respectively.
Macquarie Group was once again the largest infrastructure manager of pension fund assets with $60.3bn ($51.6bn in 2009) and also topped the overall rankings, while HarbourVest Partners headed the PEFoF table with $21.7bn ($21.0bn in 2009).
Blackstone Alternative Asset Management again managed the largest proportion of FoHF assets on behalf of pension funds, with a total of $15.9bn ($14.3bn in 2009). Prudential Financial led the real estate table with $42.0bn ($20.9bn in 2009) while PIMCO retained the leading pension fund commodities manager position with $11.1bn ($8.5bn in 2009).
Baker said: "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."
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