US institutions are increasing the share of their assets invested in
international equities, private equity, and other alternative asset
classes that they think have the potential to deliver robust returns.
While these investments have been funded in past months by shifting
assets out of fixed-income, new research from Greenwich Associates
suggests that US equities could be next to take a hit.
Among all US pension funds, endowments and foundations, the share of
total assets invested in domestic equities remained essentially flat
from 2004 to 2005, despite positive market performance. Looking ahead
however, 17% of US funds expect to make a “significant” decrease to
their allocations of active domestic stocks in the next three years, and
20% plan to make similar reductions to passive equity allocations.
These findings are taken from the 2006 Institutional Asset Allocation
Research Study, in which Greenwich Associates conducted in-person
interviews with fund professionals at 580 corporate funds, 225 public
funds, and 214 endowments and foundations in the United States.
Institutions might have difficulties putting their money to work in
private equity. In 2005, private equity made up 8.9% of the assets of US
endowments and constituted 4.0% of public pension assets and 2.3% of
corporate plan assets.
Looking out over the next three years, Greenwich Associates data show
that 30% of corporate pension plans, 41% of public plans and 48% of
endowments are planning to make “significant” increases to their private
equity allocations. “U.S. funds report that they expect private equity
to return 11.3% annually for the next five years,” says Greenwich
Associates consultant Dev Clifford. “That expected ROR is the highest of
any asset class and is sure to sustain strong demand for the foreseeable
future.”
However, the opportunities to invest in private equity may be somewhat
limited.
“At least on the venture side, there are a very small number of firms
that consistently generate superior returns,” notes Greenwich Associates
consultant John Webster. “New investors are unlikely to get the
opportunity to invest directly in funds offered by these firms and will
instead often have to rely on funds-of-funds for access.”
Although all types of fund have reduced their expected rates of return
on hedge funds, their diversification benefits and the potential stable
returns with less downside continue to attract institutional investment
dollars.
“Although corporate hedge fund allocations were unchanged at 0.9% of
assets from 2004 to 2005 and public allocations rose only slightly from
0.6% to 0.7%, all indications suggest that institutional investment in
hedge funds will continue to grow,” says Greenwich Associates consultant
William Wechsler. “Specifically, 34% of US pensions and endowments
expect to make significant new commitments to hedge fund allocations in
the next three years.”