Globalalternativessurvey Pensionfunds...
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FINANCIAL TIMES MONDAY JULY 14 2014 9 FT fm Global alternatives survey Pension funds seek ‘sweet spot’ in alternatives T he titans of the hedge fund, private equity and real estate indus- tries are poised for signifi- cant asset growth as money from a growing range of institutional investors pours into alternative funds. Assets managed by the 100 biggest alternative fund groups rose by 6 per cent last year to $3.3tn, accord- ing to the latest annual sur- vey by Towers Watson, the investment consultancy, analysing the global alter- native asset management industry. The sharp increase has been to the benefit of many of the largest alternative fund companies, including the likes of infrastructure house Macquarie, hedge fund giant Bridgewater and real estate specialist Black- stone. Amin Rajan, chief execu- tive of Create Research, the asset management consul- tancy, believes these alter- native fund houses largely have the pension fund industry to thank for the big influx of money. Pension funds remain the most important source of capital for alternative asset managers, accounting for $1.3tn of the money invested in the largest 100 fund houses. The importance of pen- sion fund money to the alternative fund industry is unlikely to subside, Mr Rajan believes. He points out that more than a quarter of European pension schemes are cur- rently cash flow negative, and this number is likely to double in the next five years as the largest genera- tion of postwar baby boom- ers reaches retirement. This phenomenon is pushing pension funds around the world towards alternative funds that occupy the “sweet spot” between volatile equities and overvalued bonds – equity-like returns with bond-like features, accord- ing to Mr Rajan. He says: “Ageing demo- graphics are driving ever more pension plans into the off phase, where their needs extend well beyond getting shoot-the-lights-out returns. “Hedge funds and private equity are seen as providing low volatility absolute returns, and property and infrastructure are seen as delivering regular income and inflation protection.” The rapid rise in global equity markets since the financial crisis has also pushed some investors towards alternatives as con- cern builds about public equity markets’ ability to continue to produce attrac- tive returns. “Institutions have increasingly looked for strategies that can provide some protection when mar- kets turn – and turn they will,” says David Walker, senior analyst at Cerulli Associates, the research group. Anthony Tutrone, global head of private equity at Neuberger Berman, adds that new investors putting money in alternatives for the first time has helped fuel asset growth. He says: “[A] very powerful source of increased investment in alternative assets is sover- eign wealth funds, pensions and financial institutions from developing markets that have very little or no exposure to alternative investments and are seek- ing to bring their alterna- tive allocations on par with similar institutions in the US and Europe.” Large sovereign wealth funds in the Middle East, China, southeast Asia and Latin America are begin- ning to invest with alterna- tive fund managers, while conservative institutions in some developed markets, such as Japan and South Korea, have upped their exposure to alternatives, according to Mr Tutrone. The biggest 25 alternative fund companies participat- ing in the Towers Watson survey, for example, have seen allocations from sover- eign wealth funds rise by 10 per cent year-on-year to $143bn, with the bulk of this money going to real estate and private equity funds. While pension funds increased their allocations to alternatives by 5 per cent last year, endowments and insurance companies raised theirs by 10-11 per cent, according to Luba Nikulina, head of private markets research at Towers Watson. Within alternatives, real estate funds continue to command the bulk of assets, with property- focused managers account- ing for more than a third of the $3.3tn of assets man- aged by the 100 largest alternative fund houses. But interest in real estate funds has begun to slip, in part due to the surge of interest in hedge funds and private equity funds, which now account for $724bn and $753bn respectively of assets managed by the 100 largest alternative fund groups. The decline of interest in real estate funds, which now account for 37 per cent of pension fund assets in the Towers Watson rank- ing, down from 41 per cent last year, is also to the ben- efit of niche but growing areas within the alterna- tives sector. Illiquid credit and real assets, for example, were included as standalone asset classes in the Towers Watson survey for the first time this year in response to growing investor demand in these asset classes. Ms Nikulina says Towers has encouraged its clients to look at funds investing in real assets such as timber and agriculture as they are “linked with the long-term theme of resource scarcity, [with] less land available for growing crops and tim- ber”. “There are links with inflation in these asset classes, but [they provide] a strong cash yield and have performed well with low correlation to equities and bonds,” she adds. Although the future seems bright for alternative fund providers across most asset classes, there are risks on the horizon. Philip Masterson, a man- aging director at fund house SEI, says investors and managers are “keenly monitoring” regulators’ approach to the shadow banking industry, which could impact allocations to alternative funds in areas such as direct lending. Ms Nikulina adds that while the surge in alloca- tions towards alternatives is good news for fund man- agers, “from the investment side of this equation, it may not be as good news as there is more competition”. Neuberger’s Mr Tutrone, meanwhile, acknowledges that rapid asset growth throughout the alternatives industry could lead to bub- bles forming. He believes, however, that this risk is mitigated by the memory of the last crisis being fresh in inves- tors’ minds, and banks being more conservative with their underwriting pol- icies. Credit defaults, mean- while, are close to all-time lows: non-sponsored lever- aged loans’ default rates hit a peak in 2009 at 16.3 per cent, but are currently at approximately 0.8 per cent, according to Mr Tutrone. Many alternative fund managers, meanwhile, are confident that the big influx of money witnessed last year is part of a sustainable trend. Andy Stewart, co-head of BlackRock Alternative Investors, predicts that glo- bal alternative assets under management will increase to $8tn by 2016, up from $6tn today. He says: “The rise of alternatives since the finan- cial crisis is only the begin- ning of a long-term shift in investor behaviour. As investors continue to expand their use of alterna- tives, it is our view that ‘alternatives’ will in fact become mainstream.” Overview Investors look for strategies that can provide protection when markets turn, writes Madison Marriage Top 20 managers of alternative investments for pension funds Source: Towers Watson Parent company Pension AUM ($bn) Total AUM ($bn) Pension AUM (as a % of total) Macquarie Group Bridgewater Associates Carlyle Solutions Group CBRE Global Investors JPMorgan Asset Mgmt TIAA-CREF Blackstone LaSalle Investment Mgmt Blackstone Partners Group Pantheon HarbourVest Partners Prudential Real Estate Investors Kohlberg Kravis Roberts Blackstone CVC Capital Partners Hamilton Lane Bentall Kennedy Credit Suisse Asset Mgmt BlackRock 63,460.5 52,120.0 47,044.2 38,500.0 35,617.7 34,766.0 34,458.4 27,562.0 25,148.2 23,110.0 22,112.0 21,333.0 21,131.3 20,944.0 19,928.2 19,619.7 18,984.1 18,184.0 18,133.6 17,866.8 96,347.9 87,108.0 47,759.9 53,700.0 41,615.7 35,926.0 70,405.3 47,989.0 54,292.9 23,110.0 26,933.0 34,065.0 35,774.6 54,845.0 42,401.0 42,478.3 29,521.7 18,668.0 41,178.1 24,721.7 65.9 59.8 98.5 71.7 85.6 96.8 48.9 57.4 46.3 100 82.1 62.6 59.1 38.2 47.0 46.2 64.3 97.4 44.0 72.3 Alternative asset managers investments by region % of assets Assets under management by alternative investment managers End 2013 ($bn) Hedge funds Fund of hedge funds Private equity Private equity fund of funds Real estate Commodities Infrastructure Total Top 100 pension assets under management 162.8 94.1 199 264.8 478.4 16.6 108.5 1,356.30 Top 25 wealth managers AUM 65.4 39 43.4 n.a. 191 59.9 26.9 425.6 Top 25 sovereign wealth funds AUM 23.9 17.3 37.1 7.9 51.6 na 11 153.1 Top 100 institutions AUM 723.9 172.5 752.6 321.6 1,020.60 78.6 120.6 3,268.20 Source: Towers Watson 0 20 40 60 80 100 Hedge funds Fund of hedge funds Private equity Private equity fund of funds Real estate Infrastructure All North America Europe Asia Pacific Other
Transcript of Globalalternativessurvey Pensionfunds...
FINANCIAL TIMES MONDAY JULY 14 2014 9
FTfm Global alternatives survey
Pension fundsseek ‘sweet spot’in alternatives
The titans of the hedgefund, private equityand real estate indus-
tries are poised for signifi-cant asset growth as moneyfrom a growing range ofinstitutional investorspours into alternativefunds.
Assets managed by the100 biggest alternative fundgroups rose by 6 per centlast year to $3.3tn, accord-ing to the latest annual sur-vey by Towers Watson, theinvestment consultancy,analysing the global alter-native asset managementindustry.
The sharp increase hasbeen to the benefit of manyof the largest alternativefund companies, includingthe likes of infrastructurehouse Macquarie, hedgefund giant Bridgewater andreal estate specialist Black-stone.
Amin Rajan, chief execu-tive of Create Research, theasset management consul-tancy, believes these alter-native fund houses largelyhave the pension fundindustry to thank for thebig influx of money.
Pension funds remain themost important source ofcapital for alternative assetmanagers, accounting for$1.3tn of the moneyinvested in the largest 100fund houses.
The importance of pen-sion fund money to thealternative fund industry isunlikely to subside, MrRajan believes.
He points out that morethan a quarter of Europeanpension schemes are cur-rently cash flow negative,and this number is likely todouble in the next fiveyears as the largest genera-tion of postwar baby boom-ers reaches retirement.
This phenomenon ispushing pension fundsaround the world towardsalternative funds thatoccupy the “sweet spot”
between volatile equitiesand overvalued bonds –equity-like returns withbond-like features, accord-ing to Mr Rajan.
He says: “Ageing demo-graphics are driving evermore pension plans into theoff phase, where their needsextend well beyond gettingshoot-the-lights-out returns.
“Hedge funds and privateequity are seen as providinglow volatility absolutereturns, and property andinfrastructure are seen asdelivering regular incomeand inflation protection.”
The rapid rise in globalequity markets since thefinancial crisis has alsopushed some investorstowards alternatives as con-cern builds about publicequity markets’ ability tocontinue to produce attrac-tive returns.
“Institutions haveincreasingly looked forstrategies that can providesome protection when mar-kets turn – and turn theywill,” says David Walker,senior analyst at CerulliAssociates, the researchgroup.
Anthony Tutrone, globalhead of private equity atNeuberger Berman, addsthat new investors puttingmoney in alternatives forthe first time has helped
fuel asset growth. He says:“[A] very powerful sourceof increased investment inalternative assets is sover-eign wealth funds, pensionsand financial institutionsfrom developing marketsthat have very little or noexposure to alternativeinvestments and are seek-ing to bring their alterna-tive allocations on par withsimilar institutions in theUS and Europe.”
Large sovereign wealthfunds in the Middle East,China, southeast Asia andLatin America are begin-ning to invest with alterna-tive fund managers, whileconservative institutions insome developed markets,such as Japan and SouthKorea, have upped theirexposure to alternatives,according to Mr Tutrone.
The biggest 25 alternativefund companies participat-ing in the Towers Watsonsurvey, for example, haveseen allocations from sover-eign wealth funds rise by 10per cent year-on-year to$143bn, with the bulk ofthis money going to realestate and private equityfunds.
While pension fundsincreased their allocationsto alternatives by 5 per centlast year, endowments andinsurance companies raised
theirs by 10-11 per cent,according to Luba Nikulina,head of private marketsresearch at Towers Watson.
Within alternatives, realestate funds continue tocommand the bulk ofassets, with property-focused managers account-ing for more than a third ofthe $3.3tn of assets man-aged by the 100 largestalternative fund houses.
But interest in real estatefunds has begun to slip, inpart due to the surge ofinterest in hedge funds andprivate equity funds, whichnow account for $724bn and$753bn respectively ofassets managed by the 100largest alternative fundgroups.
The decline of interest inreal estate funds, whichnow account for 37 per centof pension fund assets inthe Towers Watson rank-ing, down from 41 per centlast year, is also to the ben-efit of niche but growingareas within the alterna-tives sector.
Illiquid credit and realassets, for example, wereincluded as standaloneasset classes in the TowersWatson survey for the firsttime this year in responseto growing investor demandin these asset classes.
Ms Nikulina says Towers
has encouraged its clientsto look at funds investing inreal assets such as timberand agriculture as they are“linked with the long-termtheme of resource scarcity,[with] less land availablefor growing crops and tim-ber”.
“There are links withinflation in these assetclasses, but [they provide] astrong cash yield and haveperformed well with lowcorrelation to equities andbonds,” she adds.
Although the futureseems bright for alternativefund providers across mostasset classes, there are riskson the horizon.
Philip Masterson, a man-aging director at fundhouse SEI, says investorsand managers are “keenlymonitoring” regulators’approach to the shadowbanking industry, whichcould impact allocations toalternative funds in areassuch as direct lending.
Ms Nikulina adds thatwhile the surge in alloca-tions towards alternativesis good news for fund man-agers, “from the investmentside of this equation, it maynot be as good news asthere is more competition”.
Neuberger’s Mr Tutrone,meanwhile, acknowledgesthat rapid asset growth
throughout the alternativesindustry could lead to bub-bles forming.
He believes, however,that this risk is mitigatedby the memory of the lastcrisis being fresh in inves-tors’ minds, and banksbeing more conservativewith their underwriting pol-icies.
Credit defaults, mean-while, are close to all-timelows: non-sponsored lever-aged loans’ default rates hita peak in 2009 at 16.3 percent, but are currently atapproximately 0.8 per cent,according to Mr Tutrone.
Many alternative fundmanagers, meanwhile, areconfident that the big influxof money witnessed lastyear is part of a sustainabletrend.
Andy Stewart, co-head ofBlackRock AlternativeInvestors, predicts that glo-bal alternative assets undermanagement will increaseto $8tn by 2016, up from$6tn today.
He says: “The rise ofalternatives since the finan-cial crisis is only the begin-ning of a long-term shift ininvestor behaviour. Asinvestors continue toexpand their use of alterna-tives, it is our view that‘alternatives’ will in factbecome mainstream.”
OverviewInvestors look forstrategies that canprovide protectionwhen markets turn,writes MadisonMarriage
Top 20 managers of alternative investmentsfor pension funds
Source: Towers Watson
Parent companyPension AUM
($bn)Total AUM
($bn)
PensionAUM
(as a %of total)
Macquarie GroupBridgewater AssociatesCarlyle Solutions GroupCBRE Global InvestorsJPMorgan Asset MgmtTIAA-CREFBlackstoneLaSalle Investment MgmtBlackstonePartners GroupPantheonHarbourVest PartnersPrudential Real Estate InvestorsKohlberg Kravis RobertsBlackstoneCVC Capital PartnersHamilton LaneBentall KennedyCredit Suisse Asset MgmtBlackRock
63,460.552,120.047,044.238,500.035,617.734,766.034,458.427,562.025,148.223,110.022,112.021,333.021,131.320,944.019,928.219,619.718,984.118,184.018,133.617,866.8
96,347.987,108.047,759.953,700.041,615.735,926.070,405.347,989.054,292.923,110.026,933.034,065.035,774.654,845.042,401.042,478.329,521.718,668.041,178.124,721.7
65.959.898.571.785.696.848.957.446.3100
82.162.659.138.247.046.264.397.444.072.3
Alternative asset managers investments by region% of assets
Assets under management by alternative investment managersEnd 2013 ($bn)
Hedge funds
Fund of hedge funds
Private equity
Private equity fund of funds
Real estate
Commodities
Infrastructure
Total
Top 100 pensionassets under
management
162.8
94.1
199
264.8
478.4
16.6
108.5
1,356.30
Top 25wealth
managers AUM
65.4
39
43.4
n.a.
191
59.9
26.9
425.6
Top 25sovereign wealth
funds AUM
23.9
17.3
37.1
7.9
51.6
na
11
153.1
Top 100institutions
AUM
723.9
172.5
752.6
321.6
1,020.60
78.6
120.6
3,268.20
Source: Towers Watson
0 20 40 60 80 100
Hedge funds
Fund of hedge funds
Private equity
Private equityfund of funds
Real estate
Infrastructure
All
North America Europe Asia Pacific Other
10 FINANCIAL TIMES MONDAY JULY 14 2014
FTfm – Global alternatives survey
Funds get biggeras market grows
Investors are often accusedof having short memoriesand, when it comes tohedge funds, many marketcommentators believe theaccusation holds true.
Little more than fiveyears ago the hedge fundmarket was one character-ised by dwindling returns,plummeting assets andhedge fund companiesgoing out of business.
In 2012, the number ofhedge funds disappearingfrom the market rose forthe third year in a row to873, according to HFR, adata provider. During thesame year, while the aver-age hedge fund again lostmoney for investors, thecollective pay of the 25 rich-est managers fell by morethan a third to $14.4bn.
The days were dark post2008. Fast forward to 2014,however, and the latest fig-ures from the annual Tow-ers Watson/Financial TimesGlobal Alternatives surveypaint a significantly rosierpicture for the hedge fund
industry. The survey, whichcovers seven asset classesand seven investor types,shows that total assetsmanaged by the world’s top100 alternative asset manag-ers rose to $3.3tn last yearfrom $2.9tn in 2012, on theback of a marked increasein money flowing intohedge funds.
The largest slice of this$3.3tn, some 32 per cent,was allocated to real estatefunds but hedge fundsaccounted for 28 per cent,with both pension fundsand insurance companiesincreasing their exposure tothe sector.
Damien Loveday, globalhead of hedge fund researchat Towers Watson, says:“The results show an ever-expanding market, which isphenomenal really giventhe grilling hedge funds gotjust a few years ago. At onetime you literally couldn’tmove for negative head-lines, but the industry haschanged a lot since 2008.”
The recent spike inassets, however, comesamid concerns that hedgefunds’ correlation with theequity market has risenback to pre-financial crisishighs, raising fears that themarket could again suffersharp losses in the event ofa market slide.
Data compiled by AQR, a$105bn hedge fund house,show the three-year rollingcorrelation of the HFRI
Fund Weighted Compositeindex, a broad industrymeasure, with equity mar-kets is at a near-record highof 0.93, comfortably abovethe highs seen before thefinancial crisis.
Some large investors havetaken flight, including Calp-ers, the $288bn Californiapublic employees fund,which was one of the firstUS public pension plans toinvest in hedge funds. Itsportfolio managers havebegun cutting the fund’s$5.3bn hedge fund alloca-tion in half.
“I think this is a yellowflag being signalled now,”David Kabiller, foundingprincipal of AQR, toldFTfm. “A lot of hedge fundmanagers are putting a lotof beta in their portfoliosbecause it is what hasworked.
“Investors are gettingscrewed because they havebeta elsewhere and nowthey are paying 2 and 20 [2per cent of assets and a 20per cent performance fee]for it.”
Mr Loveday recognises
the problem. “Investorswant double digit returnsbut in an environment oflow volatility and low cashrates hedge fund managersare struggling to meetexpectations.
“As a result it is true thatsome hedge funds are tak-ing directional bets on themarket but are dressing uptheir funds as somethingelse. I am definitely para-noid about that. Investorsneed to do their homeworkand drill down into what isreally going on with somestrategies.”
Away from the fearsabout correlation, theTowers Watson/FinancialTimes survey shows thatthe big hedge fund manag-ers continue to get bigger,with Bridgewater Associ-ates, Brevan Howard,BlackRock, Och-Ziff andBlueCrest Capital Manage-ment managing the lion’sshare of assets on behalf ofpension funds.
Figures from Preqin, aresearch house, confirmthis. Its analysis finds the
500 largest hedge fund man-agers control 90 per cent ofindustry assets, with the505 hedge fund managersthat run at least $1bnresponsible for $2.39tn ofthe industry’s $2.66tn totalassets.
“The $1bn club is onewhich many emerginghedge fund managersstriveto be a member of,” saysAmy Bensted, head ofhedge fund products at Pre-qin, adding that public pen-sion funds represent thelargest chunk of capitalinvested by $1bn-plus hedgefund investors (25 per cent),followed by sovereignwealth funds (16 per cent,up from 7 per cent a yearago) and private sector pen-sion funds (15 per cent).
Ms Bensted suggeststhere are some key ingredi-ents needed for a hedgefund to grow to this $1bn-plus level.
“The largest managershave typically shown con-sistent performancethrough many marketcycles and demonstrated
that they can outperformcompetitors. They have alsosettled on two approaches –specialisation in a corestrategy or diversificationacross several differentstrategies,” she says.
According to Preqin, NewYork is home to the largestnumber of $1bn-plus manag-ers (174) while London issecond with 80.
“With large investors,such as public pensionfunds, allocating approxi-mately $650bn to hedgefunds – an 18 per centincrease from this time lastyear – it will become evermore important for hedgefund managers to attractinflows from these promi-nent institutions,” says MsBensted.
“Big managers are defi-nitely getting bigger,” addsMr Loveday. “But thatposes its own problems. It’smuch harder for a fund tobe a creator of value whenit’s $50bn in size comparedto $5bn. And that’s some-thing investors must beaware of.”
Hedge fundsCorrelation withequity markets isat precrisis highssparking concernabout losses, writesChris Newlands New York is home to 174 $1bnplus managers while London is second at 80 AP
‘Investors wantdouble digit returnsbut hedge fundmanagers arestruggling to meetexpectations’
Top 25 fund of hedge funds managers ranked by pension fund AUM Top 25 fund of hedge funds managers ranked by pension fund AUM
Source: Towers Watson
Management group 2013 2012
Pension AUM($m)
Total2013AUM
($m)
PensionAUM
(as a %of total)
Bridgewater AssociatesBrevan Howard Capital ManagementBlackRockOch-Ziff Capital Management GroupBlueCrest Capital ManagementPIMCOOak Hill AdvisorsGoldenTree Asset ManagementBrigade Capital ManagementNephila CapitalLyxor Asset ManagementD. E. Shaw groupBeach Point Capital ManagementLansdowne PartnersMan Group CevianMKP Capital ManagementWinton Capital ManagementTwo SigmaAngelo, Gordon & Co. Anchorage Capital GroupCredit Suisse Asset ManagementOdey Asset ManagementCamden Asset ManagementMillennium Management
Maincountry ofdomicile
%change
USUKUSUSUKUSUSUSUS
BermudaFrance
USUSUKUKUKUKUKUSUSUSUSUKUSUS
52,120.015,378.014,777.812,992.012,200.011,276.08,324.88,054.07,837.07,702.06,291.05,833.05,420.05,207.05,065.05,032.04,625.04,512.04,300.04,286.03,988.63,965.43,472.03,427.03,210.0
50,658.012,308.812,132.0
n.a.13,332.06,198.0
n.a.6,900.04,908.36,018.65,275.05,296.05,139.34,147.03,713.03,230.02,632.14,428.02,753.23,374.03,679.2
n.a.610.0
3,153.02,700.0
2.924.921.8new
-8.581.9new
16.759.728.019.310.15.5
25.636.455.875.71.9
56.227.08.4new
469.28.7
18.9
87,108.039,906.031,934.440,600.032,600.015,974.015,054.314,938.014,837.09,987.0
12,009.019,934.06,837.0
14,700.026,141.013,071.08,396.0
24,641.013,100.013,143.010,333.024,674.612,305.03,612.0
20,080.0
59.838.546.332.037.470.655.353.952.877.152.429.379.335.419.438.555.118.332.832.638.616.128.294.916.0
2013 2012
Pension AUM($m)
Management group
PensionAUM
(as a %of total)
BlackstoneGrosvenor Capital ManagementMesirow Financial HoldingsUBS Global Asset ManagementThe Rock Creek GroupPacific Alternative Asset MgmtThe Permal GroupMan Group Carlyle Solutions GroupK2 AdvisorsEnTrustThe Goldman Sachs GroupKohlberg Kravis Roberts & Co.BlackRockJPMorgan Alternative Asset MgmtAXA Investment ManagersGottex-EIMMorgan Stanley Inv’t MgmtLGT Capital PartnersLyxor Asset ManagementHermes Fund ManagersCrestline InvestorsUnion Bancaire PrivéeRamiusABS Investment Management
Maincountry ofdomicile
USUSUS
SwitzerlandUSUSUSUKUKUSUSUSUSUSUSUK
SwitzerlandUS
SwitzerlandFrance
UKUS
SwitzerlandUSUS
25,148.212,485.48,679.47,740.67,530.07,180.07,030.56,285.06,061.95,925.05,435.65,311.45,206.45,050.24,978.04,308.93,633.93,469.03,175.03,043.02,426.62,375.02,189.02,117.02,100.0
21,973.211,366.58,915.27,870.66,250.06,809.48,644.9
n.a.1,963.15,552.04,603.84,678.34,500.04,961.63,976.5
321.55,312.02,299.02,250.02,600.22,386.51,835.0
n.a.223.2
1,804.0
46.351.064.327.878.480.031.650.489.160.154.621.351.530.546.732.045.018.645.432.593.842.920.472.447.7
%change
14.49.8
-2.6-1.720.55.4
-18.7new
208.86.7
18.113.515.71.8
25.21,240.3
-31.650.941.117.01.7
29.4new
848.516.4
Total2013AUM
($m)
54,292.924,457.913,508.627,886.49,600.08,980.0
22,230.912,480.06,805.39,862.09,954.1
24,977.310,104.616,567.310,664.013,448.38,080.0
18,654.07,000.09,377.02,587.65,540.0
10,734.02,924.04,400.0
FINANCIAL TIMES MONDAY JULY 14 2014 11
FTfm – Global alternatives survey
Once again, direct realestate is by some distancethe dominant alternativeasset class held by institu-tional investors, which ownsome $1.02tn of property.
Pension funds, insurancecompanies and wealth man-agers are particularly keenon the asset class, withtheir investments in realestate amounting to multi-ples of most other alterna-tive assets, reflecting thehigh value they place on areliable income stream.
By contrast, endowmentsand sovereign wealth funds,which tend to have a lesspressing need for income,are less enthusiastic aboutreal estate. Endowmentsare the only investor typefor which it is not the big-gest alternative asset.
Despite this popularity,the proportion of portfoliosallocated to real estate isdecreasing, albeit slowly, asinvestors become comforta-ble with asset classes suchas hedge funds, infrastruc-ture and private equity.
“Real estate is a hugeasset class, but if you goback a decade, real estatewas the easy way into alter-natives,” says Paul Jayas-ingha, head of real estatemanager research at Tow-ers Watson. “As the indus-try evolved, as a proportionit has declined slightly.”
Based on just therespondents included in thesurvey this year and lastyear, that proportion hasdipped to 32 per cent from35 per cent, even though inabsolute terms the amountof money in real estate rose.
It is likely to rise furthernext year, as the Norwegiangovernment pension fund isadvertising for the teamthat will help it allocate upto 5 per cent of its $825bncapital pool to property.
Within the global realestate market there aremany segments andapproaches. The core sec-tor, comprising well-occu-pied properties in popularlocations, has performedstrongly as investors lookfor alternatives to low bondyields. There is still a usefulspread between core prop-erty yields and those ongovernment bonds, soinvestors are expected tocontinue to allocate moneyto core holdings.
In some markets, how-ever, investors are lookingfor enhanced strategies toguard against the effects oflikely interest rate rises. Inthe US and UK, the mostpopular method is the “coreplus” or “value add” strat-egy, says Mr Jayasingha.This is where the investorbuys an underperformingasset, for example a build-ing with empty space, andfocuses on improvingreturns, for instance byincreasing occupancy.
Other markets outsidetraditional core commercialreal estate include studenthousing, medical offices,storage and even socialhousing.
In the continental Euro-pean market, things look alittle different. Because theprimary concern there isdeflation rather than risinginterest rates, investors are“looking for stability in theincome stream, hoping tolock in a reasonable rate”,says Mr Jayasingha.
Although most of the realestate managers that makeit into the biggest 100 alter-native managers by AUMare divisions of larger gen-eralist asset managers,there are exceptions. Themost noteworthy of these iserstwhile private equityspecialist Blackstone.Blackstone’s real estateassets put it at numberthree on the list, while it isalso number 10 with itsfund of hedge funds busi-ness and 17 with its privateequity division.
According to Mr Jayas-ingha, Blackstone is uniquein being a large manager
offering higher risk prod-ucts, which are usually thepreserve of small, niche pro-viders. For larger managersscale is important; this canmost efficiently be built andkept diverse by focusing oncore property with a widegeographic spread.
Blackstone may be able toachieve its position bydrawing on its private
equity expertise to assessthe creditworthiness of keytenants in its investmenttargets, says Mr Jayasingha.
Specialist real estate man-agers CBRE and LaSalle arewithin the top 15, althoughboth are outshone by UBSGlobal Asset Managementand Axa Real Estate.
Future trends predictedby Towers Watson include
rising investment in Asia,in the wake of economicgrowth; more real estatedebt products, especially inthe US where they arealready growing in popular-ity; and countering the lat-ter, the cautious re-entry ofbanks into the market.
The big challenge for realestate managers in the nearfuture is how to manage
their portfolios in a risinginterest rate environment,where what looked like agood yield one year startsto look shabby the nextbecause fixed incomeinstruments are offeringhigher yields.
“We haven’t been testedlike this for a while,” saysMr Jayasingha. “The indus-try can forget things.”
Investors look beyond core propertyReal estateAsset class populardespite loominginterest rate rises,says Sophia Grene
Top 10 real estate managers rankedby pension fund AUM
Source: Towers Watson
Management group
PensionAUM
(as a %of total)
CBRE Global InvestorsJPMorgan Asset MgmtTIAA-CREFBlackstoneLaSalle Investment MgmtPrudential Real Estate InvestorsBentall KennedyCredit Suisse Asset MgmtBlackRockHeitman
71.785.696.848.957.459.197.444.072.388.3
2013 2012
Pension AUM($m)
38,500.035,617.734,766.034,458.427,562.021,131.318,184.018,133.617,866.817,226.0
44,400.029,442.032,086.324,739.126,450.032,516.817,815.018,352.07,504.5
15,449.0
12 FINANCIAL TIMES MONDAY JULY 14 2014 FINANCIAL TIMES MONDAY JULY 14 2014 13
Euan Munro, the mainarchitect of Standard LifeInvestments’ giant Garsfund, has unveiled his bidto replicate the success ofthe best-selling product athis new fund house AvivaInvestors.Mr Munro, who joined
Aviva Investors as its chiefexecutive in January, plansto launch three multi-assetfunds that he wants to seebecome “the biggest thing”the company does.He says the range will
debut with a Multi-StrategyTarget Return fund, aimingto outperform Bank of Eng-land base rates by 5 per-centage points a year over arolling three-year periodwhile displaying low volatil-ity levels.A second fund launch will
follow later this year andthe range will be completedwith a further offering in2015, he says.Gars – short for Global
Absolute Return Strategies– was originally an internalStandard Life pension fundbut in 2005 the group’s mul-ti-asset team, led by MrMunro, converted it into asophisticated “absolutereturn” strategy. The con-cept aims to deliver positivereturns regardless of thedirection of global markets.The Gars fund draws on
ideas from across StandardLife’s investment teams tomake a vast number ofsmall investments under aseries of roughly 30 “strat-egy” brackets, each ofwhich aims to deliver asmall amount of positiveperformance.The net result has been
steady positive returns forthe fund’s investors andGars has taken the Euro-pean market by storm,building up assets of more
New Aviva headsets standard
than £20bn in the six yearssince it opened up to exter-nal investment in 2008.Mr Munro’s high-profile
departure from StandardLife Investments last yearafter a 17-year career at theEdinburgh-based fundhouse led to expectations hewill try to repeat the Garsfund’s success at Aviva.“If we execute this well,
and I am confident that wewill, these outcome-orien-tated funds will becomeamong the biggest thing wedo,” he says.The fund, which will have
a capped ongoing charge of0.85 per cent, will be man-aged by Peter Fitzgerald,the group’s head of multi-asset, and Dan James, headof global rates.Mr Munro says Aviva
Investors runs roughly£240bn, so if the range ofmulti-asset funds raisedjust £10bn-15bn it would be“transformational” for thecompany and would “dou-ble profitability”.“I believe I can commit
all of our broad range ofcapabilities into this pro-gramme,” he says.He also says Aviva has
expertise in areas thatStandard Life did not, sug-gesting the Aviva Multi-Strategy Target Returnfund will have a deeper wellof ideas to draw from in itsquest for positive returns.“When you are building
client solutions it is impor-tant to have . . . differentcapabilities,” he says.“If you have really strong
expertise in rates, credit,equities, infrastructure andreal estate you are startingto have the capabilities thatyou need to put together agreat solution.“But we didn’t have [eve-
rything at SLI]. Converti-bles are unusual, and alsoareas like infrastructureand mortgage-backed secu-rities. In North America wehave MBS experts and wehave people making invest-ment decisions across Asiaand Europe.”
Bradley Gerrard is newseditor at Investment Adviser
Fund focusEuan Munro wantsto replicate thesuccess he had withGars fund, writesBradley Gerrard
Smaller def icits causefor covenant concernsIn a year when equities have hitrecord highs, yield compressionhas powered the corporate bondmarkets and volatility in financialmarkets has plunged, deficits atmany defined benefit pensionfunds are shrinking. De-riskingtargets are being triggered here,there and everywhere.So much the better for the
beneficiaries, you might think,since they are de facto unsecuredcreditors of the sponsoringcompany. Smaller deficits shouldmean that the quality of thesecurity backing the pensionpromise has improved, whileincreased liability matching intheory provides a better guaranteeof prompt payment of pensions asthey fall due. There is nonethelessan important caveat.An improvement in funding may
come at the cost of a decline inthe quality of the covenant – thatis, the support provided by thesponsoring employer for thesolvency of the fund.There has, in fact, been a
secular decline in the quality ofcovenants since the early 1980s. Itwas then that companies in theUS started to return very highlevels of cash to shareholdersthrough dividends and sharebuybacks. Buybacks, which entailincreased borrowing, or leverage,also caught on in the UK.This was chiefly a function of a
growing bonus culture in theEnglish-speaking world. With topexecutive rewards geared tobenchmarks such as earnings pershare, return on equity and shortterm share price movements,boards had a powerful incentive toshrink the number of shares inissue. An important result was aweakening of balance sheets and amarked decline in thecreditworthiness of the quotedcorporate sector. The existence ofa principal-agent problem wherebythe interests of managers andshareholders were poorly alignedoften resulted in companiesoverpaying for expensive shares.The trend towards increased
leverage gained furthermomentum thanks to theenthusiastic efforts of academicfinance experts to promote“efficient” balance sheets. Relyingon the Modigliani-Miller theoremwhich asserts that the value of acompany is unaffected by capitalstructure, they encouragedmanagers to take on more debt,partly because debt can act as agovernance discipline onmanagement, but also becausedebt interest is tax deductible.The same experts also argued
that pension liabilities should bematched by risk-free governmentbonds to reduce the risk toshareholders, pension schememembers and creditors of thecompany.
Come the financial crisis so-called balance sheet efficiencyproved to be horrendouslyimprudent. Everyone had forgottenthe caveats that Franco Modiglianiand Merton Miller attached totheir theorem, which only held inthe absence of taxes, agency costsand bankruptcy costs. At the sametime, the notion that governmentbonds were risk free was exposedas a nonsense, not for the firsttime, by Greece’s default onsovereign debt. Yet the bonusculture remained intact.Last year US companies
authorised a phenomenal $600bn-plus of buybacks. This was bad
news for pension schemebeneficiaries because of the impactof leverage on covenants.It was also of questionable
benefit for the wider economy,since managers appear to preferinvesting in their own equityrather than in plant andmachinery. Today many economicforecasters expect an upturn ininvestment in fixed capital. Thereis a growing expectation, too, thatthe tide is turning for the level ofbuybacks. With equities lookingincreasingly expensive, investmentin the real economy ought to bemore attractive relative to stocksand shares. The next 18 monthswill provide a testing ground forwhether the bonus culture willprevail over the business case forinvestment in new plant.
Yet from the point of view ofpension scheme members,covenant worries remain relevantbecause we are at the point in thecycle where merger andacquisition activity is hotting up.Since borrowing costs are low,
courtesy of the central banks’intervention in the markets,acquisitions are being financedmainly by debt rather than paper.More leverage is thus in prospect.And with pension funds moving togreater liability matching, there isa strong possibility thatsponsoring companies willconclude that the resultingreduction in risk in the pensionfund will make it logical to takemore risk on to their own balancesheets.In the case of banks, which
constitute a big chunk of thedefined benefit pension universe,there is also potential for aweakening of covenants as aresult of the regulatory responseto the financial crisis. If efforts toaddress the too big to fail problemin banking were to succeed andorderly resolution of insolventbanks became easier, there wouldbe a significant weakening ofcovenants among the larger banks.The irony here is that pension
funds themselves have the abilityto improve the quality of corporatecovenants. They could use theirvoting power to launch a morepowerful assault than they havedone so far on the bonus cultureand to curb executives’ desire tobuy back their ownshares regardlessof price.Somehow I donot think it willhappen. Concernabout covenantswill remaineverpresent.
Sponsoring companiesmay conclude that thereduction in risk in thepension fund will make itlogical to take more riskonto their balance sheets
Financial experts ignored caveats Franco Modigliani, pictured, and MertonMiller attached to their theorem on the value of a company Time Life/Getty
Standard Life Global Absolute Return Strategies
Source: FE Analytics
Total return (rebased)
2008 09 10 11 12 13 14-20
-10
0
10
20
30
40
50 Standard Life GlobalAbsolute Return Strategies6 month Libor
News analysis/opinion
The last wordJOHN PLENDER
FTfm – Global alternatives survey
Commodity markets havesuffered massive financialoutflows over the past 18months as investors, disap-
pointed with poor returnsin recent years, headed forthe exit.Last year, investors with-
drew a net $47.1bn fromcommodity markets, Bar-clays says. The bulk of theredemptions, some $40.7bn,were gold related but thebase metal, agricultural andenergy-related commoditysectors also saw withdraw-als. Outflows have contin-
ued this year, albeit at aslower pace, with a further$8.6bn being withdrawn asof the end of May, $8bn ofwhich was from gold.Banks such as JPMorgan,
Barclays and Deutsche havescaled back commodity-re-lated operations and manyhedge funds have beencaught up in the exodus.Clive Capital, once one of
the world’s biggest com-
modity hedge funds, closedlast year, while Arbalet,BlueGold, Centaurus, For-tress and Higgs Capitalwound up commodity vehi-cles and Schroders’ Opusfund, which managed $2.3bnat its peak, shut in June.The top 10 commodity
managers saw a 3 per centdecrease in pension fundassets under managementto $40.4bn in 2014, accord-
ing to Towers Watson.However, commodity
managers argue that aninflection point has beenreached and improving fun-damentals will draw inves-tors back to the asset class.Robert Balan, senior mar-
ket strategist at Diapason,says manufacturing surveysare pointing to strongereconomic growth in the US,China, Japan and Europe,the first time these coun-tries together are seeingmore rapid economic activ-ity since 2010.“This should be positive
for demand for cyclicalcommodities such as basemetals and energy,” saysMr Balan.Diapason also expects to
see real US interest ratesand the dollar decline in thesecond half of 2014, factorswhich have historically pro-vided support for commod-ity markets.Hakan Kaya, who man-
ages $400m in commoditiesfor Neuberger Berman, sayscommodity markets nowoffer better relative valuethan stocks and bondswhich are trading on expen-sive valuations.The diversification bene-
fits of commodities havealso improved, according toMr Kaya, who points outthat commodity markets’correlations with stocksand bonds have fallen alongwith correlations betweenindividual commoditiessuch as gold and oil.Supply has tightened in
markets such as coffee,nickel, platinum and leanhogs that have notattracted sufficient invest-ment over the past fiveyears, says Mr Kaya, addingthat investors only realisehow tight these marketshave become when there isa shock and prices react.Jonathan Berland, man-
aging director at Gresham,a specialist commoditiesmanager with $15bn inassets, says investors real-ise that quantitative easingby the US Federal Reserveis approaching its conclu-sion and are positioningtheir portfolios accordingly,shifting from equities into
commodities as an assetclass that has performedwell previously in thisphase of the business cycle.“In three out of the last
four episodes of monetarytightening by the Fed, com-modities have outperformedequities and bonds by morethan 1,000 basis points,”says Mr Berland.But Alasdair MacDonald,
head of investment strategyat Towers Watson, is muchmore cautious, arguing thatprospects for future com-modity price gains do notappear encouraging.He says a lot of additional
supply has come on streamin commodity markets eventhough economic growthglobally remains weak. Healso maintains that thearguments for investing incommodities as a hedgeagainst rising inflation haveweakened as the world ismoving through a disinfla-tionary phase.Index-linked bonds appear
relatively more attractiveas an inflation hedge asexpected future returnsfrom commodity marketshave declined, says Mr Mac-Donald.Mr Balan disagrees, argu-
ing that multiple factors,including an upswing inglobal manufacturing activ-ity, the resumption of strikeaction in South Africa’splatinum industry, the highlikelihood of an El Niñoweather event and the cri-sis in Ukraine will providesupport for commodity mar-kets for the rest of the year.He warns that investors
are too blasé regarding theinsurrection in Iraq and thepossibility of fighting affect-ing the south of the countrywhere the bulk of Iraqi oilassets are located.Mr Kaya also warns that
oil markets remain vulnera-ble with Opec operatingwith thin levels of sparecapacity. US shale oil andgas production is notenough to keep pace withrising global demand.“In this tight supply
regime, geopolitical issuesare likely to provide sup-port for oil prices for sometime to come,” he says.
Managers argue tide of outf lows is turningCommoditiesInvestors withdrewa net $47.1bn fromthe market last year,writes Chris Flood
Top 10 commodities managers ranked by pension fund
Source: Towers Watson
Management group
PensionAUM
(as a %of total)
PimcoGresham Investment MgmtSchroders Investment MgmtBlackRockCoreCommodity MgmtWellington Management CompanyDiapason Commodities MgmtCredit Suisse Asset MgmtTIAA-CREFInvestec Asset Mgmt
34.953.059.46.4
64.853.051.828.899.033.6
2013 2012
Pension AUM($m)
8,788.07,816.54,457.33,413.33,364.03,281.03,108.43,029.51,915.01,217.2
11,775.77,597.94,678.23,330.92,646.02,273.03,235.02,897.81,546.21,679.7
