Pension funds around the world invested over US$62 billion in alternative asset classes during 2004, according to a new survey by Watson Wyatt.
This $62 billion was made up of US$30 billion in property, US$17 billion in private equity and US$16 billion in funds of hedge funds, according to the survey.
The survey also suggests that, of all the alternative assets managed for pension funds globally, 49 per cent is in property, 38 per cent is in private equity and 13 per cent is in funds of hedge funds.
“Pension funds continue to reduce their reliance on equities as they find suitable alternative sources of risk,” says Roger Urwin, global head of investment consulting at Watson Wyatt. “The message of diversification is definitely getting through.”
According to the survey, the most popular alternative asset class for pension funds in North America and Europe is property followed by private equity and FoHFs respectively. By contrast, in Asia Pacific there is little interest in property among pension funds, with fund of hedge funds in first position.
The survey identified net gains across funds of hedge funds, private equity fund of funds, property and commodities. It estimates these asset classes of attracted US$161 billion during the year and brings the total of alternative assets to around US$1 trillion.
In the survey, funds of hedge funds accounted for approximately half of all new money invested in alternative asset classes globally in the 12 months to December 2004, or US$81 billion (against US$41 billion in 2003). This constitutes a 24 per cent growth in fund of funds assets during the year, and brings total assets under management to US$338 billion.
The survey included data broken down into other types of investor. Especially noteworthy was the fact that funds of hedge funds obtained 82 per cent of alternative asset funds received from high net worth individuals during the year, 76 per cent of funds received from ‘other’ institutions (including governments, endowments, supra-nationals, Central Banks etc) but only around one third of the funds received from insurance companies and mutual funds.
“Fund of hedge funds have provided a useful addition to a number of our clients’ portfolios, giving them not only diversification and the prospect of added alpha, but al so flexibility in risk management,” says Urwin. “However, the capacity of some of the managers of these strategies to continue to deliver good performance is in doubt given the size of new money flows occurring.”
In the survey the asset class with largest percentage gain in 2004 was commodities, with a 52 per cent rise of US$5.6 billion, bringing total assets to US$11 billion, approximately 1 per cent of all total assets in the survey.
“Although commodities is not major asset class, interest from institutions, especially mutual funds, is steadily increasing,” say Urwin.
In the survey property managers account for the most assets, totaling US$457 billion and registered a 10 per cent growth rate during 2004. The asset class also accounts for 30 per cent of all new inflows, which stemmed mainly from European pension funds but also those in North America.
“Property endures as a popular alternative asset class despite illiquidity and cost issues,” says Urwin. “Indeed many property managers have adapted their offerings, including the introduction of indirect vehicles, to make it easier for pension funds to invest in them.”
In the survey, private equity managers accounted for US$193 billion, having grown their assets by 14 per cent during the same period. They were responsible for 17 per cent of new inflows mainly from North American pension funds.
“Private equity is slowly gaining acceptance among pension funds globally as a logical addition to their portfolios,” explains Urwin. “However, the governance budget required to be successful with private equity remains large.”
The survey included examination of regional trends. New inflows in 2004 in North America came mainly from pension funds investing largely in property, followed by private equity, then hedge funds. In Europe, pension funds also provided most of the new money through investment, again mainly in property. In Asia-Pacific, the biggest flows were into hedge funds from the other financial institutions category and into property from mutual funds.
According to the survey, Deutsche Real Estate remains the largest property provider in the world, with US$57.6 billion under management, while Man Investments continues to top the hedge fund of funds table with US$35.5 billion in assets, up from US$21.4 billion in 2003. The survey found Pacific Investment Management Company to be the top commodities manager, with US$6.7 billion.
The survey also revealed that Hamilton Lane Advisors holds the greatest amount of advisory assets in private equity, with US$39.3 billon, while Pacific Corporate Group manages the most in private equity fund of fund assets, with US$22 billion under management.