Chart: How Institutional Investors Are Changing Their Allocations to Alternatives in 2015

target allocations to alternative assets

Here’s a graphic that shows the percentage of institutional investors that are planning to change their target allocations to various alternative asset classes in 2015.

When it comes to increasing target allocations, 39 percent of institutional investors say they are going to increase their private equity investments in 2015.

Hedge funds may take the biggest hit; 34 percent of investors say they are decreasing their allocations to hedge funds in the coming year.

 

Chart credit: Coller Capital‘s Global Private Equity Barometer Winter 2014-2015

New Jersey Pension Investment Return Falls Short of Assumed Rate in 2014

New Jersey State House

New Jersey’s pension system earned a 7.27 percent return on its investments in 2014 – down from a 16.9 percent return in fiscal year 2013-14.

The growth fell short of the system’s assumed rate of return.

From NJ.com:

New Jersey’s pension fund earned 7.3 percent on its investments last year, which state officials said beat market expectations.

But those gains didn’t live up to the 7.9 percent annual rate experts say is needed to keep troubled pension fund from adding to its liabilities.

The investments returned 7.27 percent, but were hurt largely because of market volatility in the second half of the calendar year, said Tom Byrne, acting chairman of the State Investment Council.

“For that period of time we were ahead of our benchmark by just a tiny bit but behind the 7.9 percent bogey,” Byrne said. “One period of time only tells you so much.”

[…]

Byrne noted that the investment council’s role is only half the battle. While it manages the state’s investments, it doesn’t have any say in setting or making pension contributions.

“The pension is still underfunded, and we can only do what we can do,” Byrne said.

Governors from both parties have underfunded the pension system since 1996, shortchanging the annual payments or skipping them altogether.

Pension officials defended the system’s recent dive into alternative assets; officials said those investments have earned the system an additional $2.8 billion in returns since 2010.

 

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:New_Jersey_State_House.jpg#mediaviewer/File:New_Jersey_State_House.jpg

More European Pensions To Move Into Real Assets, Says Study

binoculars

The coming years will find European institutional investors increasingly turning to real assets, according to new research from alternative asset manager Aquila Capital.

The new paper, titled Real Assets – The New Mainstream, predicts that investors will turn to real assets and equities and bonds will become less attractive.

Details from a press release:

The research predicts that the Dow Jones Index will deliver average total returns of 4% per annum over the next 10 years, while real returns on German 10-year government bonds are set to be negative, even if interest rates were to reach 4% by 2024.

Alongside these estimates, 60% of institutional investors in Europe expect institutional allocations to real assets to increase over the next three years.

Oldrik Verloop, co-head of hydropower at Aquila Capital, says: “This unique investment landscape, for which there is no precedent in history, is giving rise to considerable challenges for pension fund managers struggling to fund deficits.

“Among these challenges is the need to assess the impact of today’s loose monetary policies on global interest rates and inflation tomorrow.”

He says that institutional investors seeking to future-proof their portfolios will be searching for new investment solutions, leading them to shift allocations towards real assets.

“Real assets are uniquely positioned to provide value and enhance overall risk-adjusted returns in a broad range of market environments. The powerful combination of market-independent stability and growth make them an attractive core holding for institutional investors,” he adds.

As part of the research, 50 institutional investors across Europe were surveyed.

 

Photo by Santiago Medem via Flickr CC

It’s Hard to Find a Good Deal When Everything is This Expensive, Says Ontario Teachers’ Pension CEO

sale

The CEO of the Ontario Teachers’ Pension Plan, Ron Mock, spoke at the World Economic Forum last week. One of the topics he touched on was how hard it is to find bargains in the current market, where “everything is expensive” and deals can turn into “non-stop auctions”.

More on his remarks from ai-cio.com:

The head of one of the world’s largest investors has told world leaders in Davos that finding a good deal in current markets has become increasingly tricky.

Speaking at the World Economic Forum in the Swiss ski resort, Ontario Teachers’ Pension Plan (OTPP) CEO Ron Mock said that across asset classes “everything is expensive,” according to a report from the Wall Street Journal.

“In the infrastructure space, there is so much money chasing these alternative assets, it’s turned into non-stop auctions,” said Mock. “Infrastructure yields have come down to the single digits, which ignore the regulatory risk.”

His comments echoed a study by Preqin last year showing infrastructure deals were 12% more expensive in 2014 than the previous record set in 2012.

“On the private equity side, there are deals at huge multiples of Earnings Before Interest, Taxes, Depreciation and Amortization [EBITDA],” said Mock, “and the spread between public and private yields are very narrow.”

The Ontario Teachers’ Pension Plan manages $140.8 billion in assets as of December 31, 2013.

 

Photo by  Timothy Sulllivan via Flickr CC License

Preqin: Hedge Funds Grew More Than Any Alternative in 2014

balanceHedge funds experienced the most asset growth of any alternative asset class in 2014, according to a Preqin report.

Despite scrutiny over low returns and high expenses, investors put more money into hedge funds in 2014 than private equity, infrastructure or venture capital.

More from Chief Investment Officer:

Despite a disappointing year for returns and some high-profile withdrawals from the sector, Preqin’s “2015 Global Alternatives Report” showed that hedge fund industry assets grew by roughly $360 billion during the year.

This accounted for more than half of the $690 billion increase in total assets invested across hedge funds, private equity, venture capital, private real estate, and infrastructure. In total, Preqin estimated $6.91 trillion was invested across these sectors.

“The recent news of CalPERS cutting hedge funds and reducing the number of private equity partnerships within its portfolio does not reflect the wider sentiment in the industry,” said Mark O’Hare, CEO of Preqin.

“From our conversations with investors, the majority of investors remain confident in the ability of alternative assets to help achieve portfolio objectives.”

However, Preqin predicted that investors would continue to scrutinise hedge fund performance and fees during 2015.

Preqin’s “2015 Global Alternatives Report” can be bought here.

Thailand’s Biggest Pension Looks to Slash Bond Allocation

Thailand

Thailand’s largest public pension fund is looking to slash its bond allocation (which currently sits at 77 percent of the fund’s assets) and invest a higher percentage of assets in equities and alternatives.

Yields on Thai government debt are at their lowest levels since 2009.

More from Bloomberg:

Thailand’s biggest government pension fund is seeking approval to reduce sovereign debt holdings as it buys local shares amid falling valuations.

The Social Security Office, which manages 1.2 trillion baht ($36.5 billion) in pension contributions from local workers, started boosting holdings of Thai shares last month after correctly predicting in October the market would retreat. The fund, which had about 77 percent of assets in local government bonds as of Sept. 30, is asking its board to approve a greater shift toward equity and alternative assets, said Win Phromphaet, the SSO’s head of investments.

Thailand’s benchmark equity index fell in December by the most in 16 months as oil’s retreat dragged down energy companies, while yields on government bonds sank to the lowest level in five years. The slump in shares has left valuations trading near the cheapest since August versus developing-nation peers, according to data compiled by Bloomberg.

“The SSO has an urgent need to boost investment in other assets than local bonds, whose returns keep falling,” Win said in a telephone interview yesterday. “The current correction in Thai equities makes them more attractive.”

The Social Security Office manages $36 billion in assets for the country’s public workers.

 

Photo by  Thangaraj Kumaravel via Flickr CC License

Ontario Pension Commits $200 Million to Infrastructure

Canada

The Ontario Pension Board has earmarked $200 million to AMP Capital for investment in global infrastructure.

Details from IPE Real Estate:

Launched in October, the strategy is aiming to raise CAD2bn (€1.57bn) for investments in OECD transport, communication and utilities.

AMP, which manages unlisted and listed infrastructure investments in Asia, Europe, North America, Australia and New Zealand, said the strategy currently holds a $750m portfolio of diversified European infrastructure equity assets.

Glenn Hubert, a private markets managing directors at OPB, said the pension fund was attracted by the possibility to gain exposure to multiple, high-quality assets.

OPB had a 3.2% allocation to infrastructure at the end of last year.

The commitment, he added, grows OPB’s presence in North America, a region that AMP has been building its presence in. The manager has an infrastructure equity team in New York.

AMP Capital global head of infrastructure equity Boe Pahari said growing numbers of institutional investors are seeking greater exposure to alternative assets such as infrastructure, attracted to ”predictable risk-adjusted returns, consistent yields and portfolio diversification”.

As reported in October, private equity firm Pantheon is among investors backing AMP Capital’s strategy.

The Ontario Pension Board manages more than $19 billion in assets.

Institutional Investors Bullish on Stocks, Alternatives in 2015

stock market numbers and graph

Institutional investors around the globe believe equities will be the best-performing asset class in 2015, according to a survey released Monday.

Investors are also bullish on alternatives, but not as thrilled when it comes to bonds, according to the survey.

The results summarized by Natixis Global Asset Management:

Forty-six percent of institutional investors surveyed say stocks will be the strongest asset category next year, with U.S. equities standing above those from other regions. Another 28 percent identify alternative assets as top performers, with private equity leading the way in that category. Only 13% predict bonds will be best, followed by real estate (7%), energy (3%) and cash (2%).

Natixis solicited the market outlook opinions of 642 investors at institutions that manage a collective $31 trillion. The survey found:

Realistic expectations of returns: On average, institutions believe they can realistically earn yearly returns of 6.9 percent after inflation. In separate surveys by Natixis earlier this year, financial advisors globally said their clients could anticipate earning 5.6 percent after inflation1 and individuals said they had to earn returns of 9 percent after inflation to meet their needs.2

Geopolitics leads potential threats: The top four potential threats to investment performance in the next year are geopolitical events (named by 17% of institutional investors), European economic problems (13%), slower growth in China (12%) and rising interest rates (11%).

– Focus on non-correlated assets: Just under three-quarters of respondents (73%) say they will maintain or increase allocations to illiquid investments, and 87% say they will maintain or increase allocations to real estate. Nearly half (49%) believe it is essential for institutions to invest in alternatives in order to outperform the broad markets.

Words of advice for retail investors: Among the top investment guidance institutions have for individuals in the next 12 months: avoid emotional decisions.

[…]

“Institutional investors have an enormous fiduciary responsibility to fund current goals and meet future obligations,” said John Hailer, president and chief executive officer for Natixis Global Asset Management in the Americas and Asia. “The current market environment makes it difficult for institutions to earn the returns that are necessary to fulfill both short-term and future responsibilities. Building a durable portfolio with the proper risk management strategies can help investors strike a balance between pursuing long-term growth and minimizing losses from volatility.”

[…]

“Institutional investors have an unusually good perspective about markets and long-term prospects,” Hailer said. “Like ordinary investors, institutions have short-term worries. They also feel the pressure to take care of current needs, no matter what the markets are doing. Because of their longer-term time horizon, they offer valuable perspective.”

The full results of the survey can be read here.

Pension Funds Look to Place Bets on Shipping Recovery

shipping boat on the water

Some pension funds are thinking of buying a boat.

More specifically, they are weighing investments in the shipping industry, which some observers say is due for a recovery. If the industry does rebound, pension funds want to be among the beneficiaries.

But they are treading these waters carefully.

Reported by Reuters:

Pension funds, squeezed by low interest rates, are exploring investments in shipping in their hunt for higher returns, hoping to benefit once this industry starts to recover from one of its worst ever downturns.

There are signs of a gradual pick-up in world trade and ship values for the first time since the financial crisis. Ship financier NordLB has said the market could see a broad recovery but not before 2016.

The industry’s revival could deliver double-digit returns for pension funds that decide to add shipping to their so-called alternative assets such as infrastructure, which can make up about 15 percent of a fund.

But they need to do their homework.

Some hedge funds and private equity firms have been burned by diving into shipping too early and have found the recovery they were betting on has taken longer to materialise.

So far only a few pension funds have taken the plunge, also partly because of the need for specialised knowledge on shipping, such as how to price vessels accurately.

One pension fund leading the way is Ilmarinen in Finland, which had 34 billion euros ($41.8 billion) in assets at end-September. Earlier this year, Ilmarinen acquired five oil tankers and three supply ships from Finland’s state owned refiner, Neste Oil.

Esko Torsti, head of non-listed investments at Ilmarinen, said the investment was for tens of millions of euros through a new joint-venture firm owned by the pension fund and Finland.

“Investing in ships is not the easiest area, it requires extreme carefulness and special expertise,” Torsti said.

Another potential driver for investment is the shipping industry’s growing funding gap that has opened up as banks scale back lending due to capital constraints.

The combined value of ships on the water is estimated at $1.25 trillion with a further $380 billion in ships on order.

Among the pension funds that have taken the dive: Canada’s OMERS, Britain’s Merseyside Pension Fund and Finland’s Ilmarinen.

 

Photo by  Louis Vest via Flickr CC License

CalPERS Commits $80 Million to Californian Private Equity

Flag of California

CalPERS announced Wednesday it had committed $80 million to a private equity fund focused on Californian companies. The commitment is part of the pension fund’s California Initiative program.

From a press release:

The California Public Employees’ Retirement System (CalPERS) has committed $80 million with GCM Grosvenor (Grosvenor) in a California-focused private equity fund. The new commitment will be deployed through a direct investment vehicle starting by the end of the current year.

The new fund will be known as California Mezzanine Investments and is the third phase in CalPERS’ California Initiative program. It will be managed by Grosvenor’s Private Markets team.

“CalPERS is committed to California,” said Ted Eliopoulos, CalPERS Chief Investment Officer. “It’s great to have a hand in stimulating job creation and economic growth in our home state as we seek the best risk-adjusted returns for the portfolio.”

The fund will seek to invest in Californian companies using mezzanine debt financing to assist in supporting their growth and expansion.

The California Initiative was established by the CalPERS Investment Committee in 2001 as a $1 billion private equity investment vehicle that invests in private companies in traditionally underserved markets, primarily, but not exclusively, located in California. The objective is to generate attractive financial returns. As an ancillary benefit, the California Initiative was designed to create jobs and promote economic opportunity in California.

Grosvenor is one of the world’s largest independent alternative asset management firms, with approximately $47 billion in assets under management. It manages multiple emerging manager programs for large institutional investors, including public pension plans and corporate plans. Grosvenor and its predecessors have been managing private equity investment portfolios since 1999.

CalPERS manages $300 billion in assets. The fund has a $31 billion private equity portfolio.