We use cookies to support features like login and allow trusted media partners to analyse aggregated site usage.
To dismiss this message and allow cookies to be used, please click "Continue".

Continue

Features

Twitter board

Follow us
  • Plane thinking: Should trustees take a leaf out of the aviation industry’s book to help avoid schemes joining the P… https://t.co/JVoRimIocM5 days ago
  • Portfolio Prepared? We are hosting an exclusive, pension fund only afternoon 4th July 2018 with @AonRetirementUK .… https://t.co/utQf7b8DYv5 days ago
  • Our Cover Story: ESG: A Just reward - With research claiming that better behaved companies make superior investmen… https://t.co/7VqbSkuEvz16 days ago
  • Our March/April issue is available to view now! https://t.co/d4iYIbsnjH https://t.co/EFO6RlYgkB16 days ago
  • Picking a winner - The multi-asset success story has led to the birth of an array of funds under the same all-encom… https://t.co/kTmIsg9DQS27 days ago
  • @NewtonIM – Renewables Revolution ''In this Newton white paper, we discuss the ability of renewables to deliver wha… https://t.co/NtUk6OB6v427 days ago
  • RT @portfolio_inst: @NewtonIM - ESG Investing: Buzzwords or Better Investment? ''is responsible investment simply a passing trend or a mean…30 days ago
  • @NewtonIM - ESG Investing: Buzzwords or Better Investment? ''is responsible investment simply a passing trend or a… https://t.co/K299tUsPOy30 days ago
  • Fools Gold - Bitcoin: An investor’s new friend or a threat to financial stability? Lynn Strongin Dodds takes a look… https://t.co/VKenEj6LQ730 days ago
  • @NewtonIM Sustainable Bond Investing Newton’s Scott Freedman and Victoria Barron review some of the developments in… https://t.co/6woi4Dfqjc34 days ago
  • RT @portfolio_inst: @InvescoUKinsti whitepaper: Sustainable factor investing ''The advent of what might be called sustainable factor invest…36 days ago
  • @InvescoUKinsti whitepaper: Sustainable factor investing ''The advent of what might be called sustainable factor in… https://t.co/rPdm94o9yU36 days ago
  • Old Money: Forget millennial's, pension funds looking for growth should be targeting cash-rich retirees.… https://t.co/TfPklO4QPr36 days ago
  • RT @MSCI_Cudworth: MSCI in the News. EM governance: Breaking through. Michael Cheng discusses the influence of corporate #governance in #…36 days ago
  • Our cover story: CDC: A step into the unknown. Is CDC an unnecessary policy change when effort would be better spen… https://t.co/QGHfTkiPP240 days ago
  • Newton – Trend Setting: The Year Ahead in ESG ''We have seen notable client interest for sustainable products over… https://t.co/OoXVLJ1BMp41 days ago
  • Our Latest ESG feature: EM governance: Breaking through. ''Those calling for better governance in emerging markets… https://t.co/qk0vJpfpJL44 days ago
  • The February Issue is available online now! Our Cover Story - CDC: A Step in the wrong direction. Read more here:… https://t.co/8xwHL9Nd2z44 days ago
  • RT @AonRetirementUK: What do we expect to see in the #ESG market over the next 12 months? Read the results of the @portfolio_inst panel of…44 days ago
  • RT @PensionsSion: What are the pros and cons of building a global #equity portfolio? Find out by reading the @portfolio_inst Global Equitie…50 days ago

Alternatives

Alternatives: Losing their shine?

Alternatives: Losing their shine?

Charlotte Moore
Tuesday 3rd April 2018

Has the rising popularity of alternative assets damaged the investment case? Charlotte Moore takes a look.

"There are measurement issues surrounding some alternative assets."

Tapan Datta, Aon

The popularity of alternative investments shows no sign of abating. Seven out 10 investors told a recent survey that it is essential to invest in these assets to diversify portfolio risk, while more than half of those questioned (57%) believe they are necessary to outperform the broader market.

The appeal of these assets is being driven by a number of trends. The survey indicates that some want to diversify their portfolios to better manage risk. Others are looking for assets which could provide income-like returns so they can move away from a portfolio segregated between liability-matching and growth assets. And some are simply looking for assets which provide superior returns than equities or bonds.

But the popularity of alternatives among institutional investors is altering the investment characteristics of these assets. There is already evidence this is becoming a sellers’ market: yields on infrastructure debt look lacklustre and loan covenants have been weakened.

The distortions of the private debt market are particularly important because this has been such a popular asset class. Aon global head of asset allocation Tapan Datta says: “Not only have returns been weakened but the risk characteristics of this investment have also changed.” A pension scheme financing loans today needs to be much more careful than one allocating to these markets five years ago, he adds.

A sovereign market

Rising prices also mean investors need to pay more attention to valuations. The cardinal rule still applies: no matter how attractive an opportunity appears, if the price isn’t right, it will not be a good investment. It appears occupational pension funds are in danger of making this mistake, especially when compared with sovereign wealth funds’ (SWF) activity in this sector.

State Street Global Advisors head of policy & research Elliot Hentov says: “SWFs have allocated to these assets on a fairly consistent and rapid basis over the past decade.”

Hentov and his team estimate they have invested around $1.6trn in alternatives and the total market is around $10trn. In other words, SWFs hold around 15% of the global market.

“We do not expect to see significant additional in-flows of capital from these investors: allocation has now peaked.” The average SWF has an asset allocation of 30% to alternatives, he adds.

The investment activity of SWFs is significant because these large institutional investors are often trend-setters. Hentov says: “These funds can be more nimble because they have fewer governance and balance sheet restraints than pension funds.”

As first movers, a halt in significant SWF allocations to a particular asset class is an important message for other institutional investors: it signals that these investors have reached their allocation peaks.

But it might still be worthwhile for pension schemes to allocate to alternatives. For example, a pension scheme might want to match a 20 or 30-year liability with a real asset. “This is still an appropriate investment even if valuations are somewhat excessive because it would at least provide a predictable income stream,” Hentov says.

He adds that valuations may not be the primary concern for a pension fund. “Depending on the scheme’s strategic goals, different asset classes in different proportions can play a valuable role in a portfolio.” Alternatives might, for example, mitigate the risks in a fund through diversification.

Page: 1 2 3
0

Leave your comment

View our comments policy

Please login or register with us to leave a comment. It's completely free!

Friday View

Friday View

How investor action helps cut CO2 emissions