Following a particularly difficult period, real estate is poised to be the main beneficiary of a major shift in global institutional investor allocations while other asset classes such as hedge funds and fixed-income elicit less excitement. This and other findings are based on a global pension fund asset allocation survey which confirms a number of trends bfinance uncovered in two previous polls of a similar kind six months and one year earlier. In our spring 2009 survey, almost half (46%) of polled pension funds expected an increase in their equity exposure, 35% planned a reduction and 19% had no intention to change their allocation. This represented a significant commitment to equity compared to our first survey in the fall of 2008 during the global stock market rout when only one-fifth (19%) expected an increase, 37% planned a reduction and 41% had no intention to change. The balance had no equity exposure.

Having warmed to equities following our spring survey, pension funds are now moving down the liquidity scale, investing in riskier asset classes and diversifying into alternatives. The clear winner this time around is property, the first among asset classes to generate strong excitement among investors. Twenty-seven percent (27%) of respondents now expect to increase their target allocation to property in the coming six months. This showing is at par with equity and followed by commodities (16%) and private equity (16%).

Source : bfinance Pension Fund Asset Allocation Survey_December '09

Research for the survey, which is the third in our asset allocation series, was conducted in November and December of 2009. Our questions were sent to a wide cross-section of pension funds, half of which are corporate pension schemes followed by public pension funds (37%). Fifty-four percent have more than €1bn in AUM and 14% more than €5bn in AUM. Of the respondents, 47% were CIOs, 34% pension fund portfolio managers, 11% trustees and 8% analysts. Sixty percent of the respondents are from Europe and the rest are in North America. The origin of European respondents is concentrated in the UK (45%), followed by the Nordic countries (34%), Germany/Netherlands/Switzerland (13%) and Italy (8%).

Source : bfinance Pension Fund Asset Allocation Survey_December '09

The tumultuous events of the past year have prompted investors to reassess their portfolios and take stock of their investments in hedge funds and fixed-income. A dizzying rally in government bonds, historically low yields and a winding down of quantitative easing measures seem to have convinced investors that the time may be on hand to move away from fixed-income. Only 13% of respondents plan to increase their exposure to fixed-income in the next six months. At the same time, nearly a quarter of investors (22%) plan a reduction in their bond allocation during the same period, representing the highest negative sentiment across all asset classes. The same is true when we look a year out. Twenty-three percent of respondents say they expect their target allocation to fixed-income to drop compared to 20% for equity and only 8% for property. While investors do not seem uniformly opposed to hedge funds and FOHFs, sentiment remains lukewarm. For hedge funds only 8% plan additions in the next six months, 6% intend to decrease, 30% plan no change while 56% have no exposure. For FOHFs, 5% plan additions, 8% intend to decrease, 42% plan no change while 45% have no exposure.

Apart from hedge funds, alternative asset classes seem to have made a strong comeback with pension funds returning to their pre-crisis strategy of increasing their target allocations to alternatives. In the long-term, this comes at a cost to core asset classes such as equity. When considering a three-year horizon, the expected reduction in equity seems to represent active investment choices unlike the results of our fall 2008 survey where expected reductions reflected a fall in equity values.

Source : bfinance Pension Fund Asset Allocation Survey_December '09

The main catalyst in favour of alternatives remains diversification, a staple of the hedge fund industry which has had the misfortune of being marred by a number of high profile scandals. Indeed, pension funds remain more committed than ever to diversifying across asset classes and geography. The perils of geographic concentration have been particularly painful for Irish and UK pension funds with historically high domestic equity holdings. Our results show 43% of respondents now plan a reduction in their domestic equity holdings compared to 40% in November 2008 and 34% in the spring of 2009.

As we mention above, the leading beneficiary of this continuing diversification process seems to be property. During 2008 and a good part of 2009, property investors saw their capital value drop and their equity in leveraged vehicles being wiped out. Today, certain sectors in real estate remain in deep freeze, characterised by a lack of transactions even as the stock market rally continues unabated with the S&P 500 up 65% between March 9 and December 23, 2009. “We are still down in a trough,” notes Christopher Ailman, CIO of the €81bn CalSTRS which announced a 40% write-down in real estate for the fiscal year ending in March. “We may be able to see the light at the end of the tunnel, but it is really far away right now. There is a lot of commercial real estate debt that will come due in 2010. It will be interesting to see if any of the banks or traditional debt providers will step into this market. There is a lot of uncertainty that they will.”

Source : bfinance Pension Fund Asset Allocation Survey_December '09

With unemployment rising and a weak occupier market, it is no surprise that office assets have suffered significant losses. Yet investors turned positive on the sector a number of months ago as a bfinance global property survey confirmed in August. Unlisted UK property funds drew £449m in net inflows in the third quarter of 2009, according to the Association of Real Estate Funds as financial markets switched from pricing in a great recession to a healthy economic recovery. Commercial property is looking more attractive than other asset classes as a secure, income-producing source of absolute return. In addition to property, our survey shows investors are also diversifying into commodities, infrastructure and private equity.

Our results indicate that unbiased and thorough due diligence is clearly back on the agenda given the emergence of more complex strategies, alternative products and increasingly crowded manager universe, not to mention the scale of fraud within the hedge fund industry, more sophisticated analytical tools and increasingly demanding investors looking for customised solutions. The primary reasons for manager changes, however, remain underperformance (69%) and review of strategic or tactical asset allocation (38%). The unprecedented volatility in financial markets has prompted a majority of investors to review their managers in the past six months. Only a minority (38%) have not done so. Of the 62% who have reviewed, 7% of their AUM has actually seen manager changes. We also asked if pension funds plan to increase their reliance on investment consultants in the coming months: more than one-fifth intend to, similar to the findings from our survey last spring.

Source : bfinance Pension Fund Asset Allocation Survey_December '09

Source : bfinance Pension Fund Asset Allocation Survey_December '09

In next six months, 22% plan to reduce their exposure to fixed-income, 13% intend to increase, 63% plan no change, 2% have no exposure. Sixty-three pension funds participated in the survey.