The Financial Times recently reported the results of a survey indicating an interesting shift toward alternative investments on behalf of pension funds. The Global Alternatives Survey 2012, conducted by the US consultancy Towers Watson (TW) in conjunction with the Financial Times, found that pension funds were continuing to increase their exposure to alternative investments.
As noted in the FT article, there has been such a permanent shift in the investment landscape that Towers Watson decided to expand its analysis so as to include insurance companies, sovereign wealth funds, as well as endowments and foundations. In addition, the consultancy also added direct investments in private equity funds and hedge funds to its alternative investment categories which prior to the new survey included real estate, private equity fund of funds, fund of hedge funds, infrastructure and commodities.
According to the survey results, as reported by the FT, real estate is the preferred alternative investment choice for pension funds. Craig Baker, Towers Watson’s global head of investment research, points out that although the share of real estate of total pension fund assets under management held by the 100 largest managers surveyed shrank in 2011 to 52 percent from 55 percent in 2010, the actual dollar amount nevertheless increased. Commodities, on the other hand, accounted for the smallest proportion of the alternative investment allocations on account of their volatility, as pointed out by Mr Baker.
!m(/uploads/story/194/thumbs/pic1_inline.png)The observed shift to alternative investments is also growing in the UK, with Financial News reporting on 16 July 2012 that the pension fund of the UK’s Environment Agency is set to invest into farmland and commercial timberland. As noted in the Financial News article, consultants and asset managers have been turning to farmland and forestry for several years. The reason behind these particular alternative investment choices is the rising global demand for food and building materials, combined with limited supply which is only going to become more constrained due to climate change.
The FT also notes in its article that infrastructure is a popular alternative investment category in the UK, with the government wishing to encourage pension funds to invest in infrastructure projects. At a broader level, however, the Towers Watson survey showed that on a comparative basis, excluding the new asset classes, the share of infrastructure shrank to 11 percent from 12 percent in the previous year.
And yet, despite those figures, infrastructure seems to be a popular category in Denmark as well. Recently, Bloomberg reported that PensionDanmark A/S, a Danish retirement fund with more than a half-million members and €16.8 billion (£13.2 billion) in assets last quarter, was planning to turn to onshore wind power as a way to counter underperforming equities. Investments in both onshore and offshore wind energy offer steady gains for institutions with long-term savings, since wind farms in Europe are key to achieving EU’s climate goals and are therefore supported by subsidy programmes.
“European banks are in a situation where it’s not profitable for them to keep long-term credit on their books,” notes Torben Moger Pedersen, CEO of PensionDanmark, as quoted by Bloomberg. “We have a need to find alternative sources of capital both on the equity and debt side if ambitious plans for transforming the European economy to a green one are to be realised.”