Alternative investments proving popular in light of low bond yields

Alternative investments are becoming increasingly sought after as a result of low yields across the bond market, with new research showing that private equity, property and hedge funds are now the primary choices of the institutional investor.

Research from pension fund consultancy Willis Towers Watson has revealed that the 100 largest alternative investment managers have been managing a far higher level of total assets, with the overall value sitting at $3.6 trillion at the start of 2016. This represents a rise of three per cent on the year prior, the consultancy reported, citing volatility in equity markets as a key reason behind the marked rise.

Luba Nikulina, global head of manager research at Willis Towers Watson, said that the Willis Towers Watson/FTfm Global Alternatives Survey also showed that the portfolios of institutional investors are becoming weighted far more heavily into assets such as infrastructure.

“The shift away from equities and bonds into alternatives has gained momentum among most institutional investors around the world,” Ms Nikulina said.

Ms Nikulina also went on to say that, in her opinion, allocations to alternative investment managers look set to grow even further over the coming months as government bonds continue to return poor yields and equity returns are predicted to remain far lower than usual.

Another shift is the level of scrutiny that alternative asset managers are finding themselves under from bodies such as sovereign wealth funds and pension funds. Ms Nikulina said that, while "investors have become more mindful of value for money", they now want alternative asset managers to be willing to take onboard a far greater share of risk should their investment plans go south.

This encouragement to shoulder more risk could well be linked to last year's warning from the OECD that pension fund managers were raising their chances of going bust should they move into the alternative assets arena in a bid to meet savers' expectations. Riskier alternative assets were also highlighted as being something that it was essential policymakers remained vigilant about.

The survey showed that total alternative assets under management globally sat at a level of $6.2 trillion at the start of 2016, shared out among 602 managers. By far the biggest allocator to alternative assets was pension funds, accounting for $1.5 trillion — 41 per cent — of the total assets managed by the top 100 managers.

Ms Nikulina said: "Alternatives managers continue to be remarkably reliant on pension fund money," adding that they were to lower their fees they would be able to attract far bigger inflows of capital from both insurers and sovereign wealth funds.

In terms of alternative asset management levels, JPMorgan was the largest manager on behalf of pension funds in the world, with the organisation's pension assets rising by 10.7 per cent to $75.6 billion last year.

Global co-head of alternatives at JPMorgan Asset Management Anton Pil said: "Alternative strategies take time to play out but it makes sense for long-term investors to take advantage of the illiquidity premiums offered by alternatives.”

The survey also highlighted strong inflows into the real estate sector, which remained the top asset class for institutional investors, accounting for over a third — $1,242 billion — of the total assets managed by the top 100 alternative asset managers.

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