UK Pension Funds Turning to Alternative Asset Classes

on Jul 11, 2012
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Investments in commodity assets, such as mines, timberland, farms, agriculture and energy projects, are gaining popularity amongst UK pension funds seeking portfolio diversification, Simon Fox, a principal in Mercer’s investment consulting business, said for Reuters. According to him, the global financial crisis in 2008/2009, which caused significant losses in equity-heavy portfolios, marked the turning point for pension funds and spurred them to seek portfolio diversification. Seeking alternative investment options, clients of the consultantcy firm were introduced to real assets and commodities which have since started increasing in popularity.

According to a survey of clients conducted by Mercer, one of the biggest investment advisers for UK pension funds, alternative investments made up 15 per cent of UK pension schemes’ assets this year. This figure shows a five per cent increase from last year, when alternative assets, ranging from hedge funds to commodities, made up 10 per cent. Compared to the 2003 results, this year’s figure is even more impressive, as then alternative investments accounted for only one per cent.

!m[](/uploads/story/158/thumbs/pic1_inline.png)When it comes to commodities, in particular, although the figure is not that impressive, it also shows a significant increase from previous years. About 2.1 per cent of the UK pension funds surveyed had exposure to commodity assets. In Europe that figure is 8.9 per cent, while in both the average allocation of commodity assets by funds active in the sector is pretty much the same — 3.0-3.3 per cent. Explaining the recent surge in commodity asset investments amongst pension funds, Fox said that diversification is the main reason why pension funds opt for commodities.

Pension funds also have some exposure to commodities through managed futures funds, also known as commodity trading advisers (CTAs) because they started off by trading commodities but have since expanded into futures for any asset class. In the UK, 13.6 per cent of funds surveyed by Mercer already invest in CTAs, many of which are funds driven by computer programmes and offer an alternative diversification from equities. And while the majority of UK clients still rely on the equity markets, the average allocation to equities by UK pension funds has dropped to 43 per cent of assets this year from 68 per cent in 2003, Mercer’s survey showed.

The UK-based investment adviser recommends choosing commodity assets that are set to show long-term growth based on rises in global population and in per capita commodities demand in emerging markets to the higher levels seen in the developed world. Mercer also recommends exposure to commodities through real assets rather than through index products, such as the Dow Jones UBS or S&P GSCI. According to Fox, those pension funds that opt for real assets could find their allocation making up a quarter of their growth portfolios.

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