UK pension funds are set to boost their allocations to alternative income assets by more than 50%, according to research by Aviva Investors.
In a bid to secure greater downside protection, diversification and illiquidity premia, UK schemes said they are planning to increase their allocation from an average 4.3% to 6.5% of portfolios.
British insurers will also increase these investments, raising their portfolio holdings from 7.3% to 8.3%, a 14% growth. Many schemes and insurers expect the best opportunities in these assets to come from outside their home markets, the asset manager said.
The findings come from a survey of 252 schemes and insurers in the UK and Europe, conducted in the last quarter of 2017, which also discovered continental European schemes are seeking similar growth, with their planned allocation rising to 7.3% from a current level of 5.2%.
Across Europe, 42% of insurers and 26% of schemes are seeking to increase exposure to private corporate debt, while 31% of insurers plan to increase holdings of infrastructure debt.
A third of respondents cited the increased downside protection offered by alternative assets as driving the shift, while another third said diversification benefits, and 30% were prompted by illiquidity premia.
However, another 31% said illiquidity was a common barrier to investing, while the high costs were decried by 29%. Difficulty finding suitable opportunities, and regulations, were cited by 27%.
Aviva Investors chief investment officer Mark Versey said the benefits were clearly becoming more appealing to investors.
"The appeal of the alternative income sector has grown significantly among European pension schemes and insurers over the past decade," he said. "Institutional investors have been lured by the illiquidity premium provided by private assets, as well as other benefits such as diversification and downside protection.
"As the era of quantitative easing finally winds down and interest rates rise, the survey highlights that investors are venturing into new sectors and geographies. This has also been borne out in our conversations with clients."
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