Alternative Assets Continue Their Inexorable Rise

The research, which this year itemizes real assets* and illiquid credit for the first time, also includes the top-ranked managers, by assets under management (AuM), in each area. Data from the broader survey show that total global alternative AuM is now $5.7 trillion and is split between the asset classes in broadly similar proportions to the top 100 alternative investment managers – with the exception of real estate, which falls to 24%, and hedge funds, which increases to 27% of the total.

“For almost all of the past 11 years of this research, we have seen increasing allocations to alternative assets by a wide range of investors. Not only has the appeal of alternative assets broadened to include many more insurers and sovereign wealth funds, but the range of alternative assets has also increased beyond the likes of hedge funds and infrastructure to include real assets, illiquid credit and commodities,” said Brad Morrow, head of manager research, Americas. “So it is not surprising that allocations to alternative assets by pension funds, for example, now account for around 18% of all pension fund assets globally, up from 5% 15 years ago.”

The research – which includes data on a diverse range of institutional investor types – shows that pension fund assets represent a third (33%) of the top 100 alternative managers’ assets, followed by wealth managers (18%), insurance companies (9%), sovereign wealth funds (6%), banks (3%), funds of funds (3%), and endowments and foundations (3%).

“Pension funds continue to search for new investment opportunities, and alternative assets have been an area where they have made, and continue to make, very significant allocations. While remaining an important investor for traditional alternative managers, pension funds are also at the forefront of investing in new alternatives, for example, in real assets and illiquid credit. But they are by no means the only type of institutional investor looking for capacity with the top alternative managers. Demand from insurers, endowments and foundations, and sovereign wealth funds is on the rise and only going to increase in the future as competition for returns remains fierce,” said Morrow.

The research shows that for the top 100 managers, North America continues to be the largest destination for alternative capital (45%), with infrastructure as the only major exception (with more capital invested in Europe). Overall, 38% of alternative assets are invested in Europe, 7% in Asia Pacific and 10% invested in the rest of the world.

In the ranking of top 100 asset managers by pension fund assets, these increased by nearly 2% from the year before to reach nearly $1.4 trillion. Real estate managers continue to have the largest share of pension fund assets, with 35%, followed by PEFoFs (20%), private equity (15%), hedge funds (12%), infrastructure (8%), FoHFs (7%), illiquid credit (2%) and commodities (1%).

“Pension funds globally continue to put their faith in diversity via increasing alternative assets to help deliver more reliable risk-adjusted returns at the total fund level. This is evidenced by the growth, significant in some instances, in all but one of the asset classes in the past five years. Most of the traditional alternative asset classes are no longer really viewed as alternatives, but just different ways of accessing long-term investment themes and risk premiums. As such, allocations to alternatives will almost certainly continue to increase in the long term but are more likely to be implemented directly via specialist managers rather than funds of funds, although funds of funds will also continue to attract assets, as borne out by this research,” said Morrow.

Data from the wider survey show that at the end of 2013, the top 25 alternative asset managers of wealth management assets managed $426 billion (similar to 2012), followed by the top 25 managers of insurance company assets ($275 billion, up by 13%), the top 25 managers of sovereign wealth fund assets ($153 billion, roughly the same), the top 25 managers of bank assets ($124 billion, down by 23%), the top 25 managers of fund-of-fund assets ($100 billion, down by 16%), and the top 25 managers of endowment and foundation assets ($83 billion, up by 15%).

“Throughout the crisis, investors continued to move away from simply holding equities as their main growth asset and to make greater use of alternative assets. We expect this to continue in the future. We think the effort to diversify in this way is worthwhile, but investors need to be cautious about choosing the best and most efficient vehicles, not forgetting the increasing number of cheaper and lower governance routes for improving investment efficiency, such as using smart beta, notably in the alternatives space,” said Morrow.

According to the research, Macquarie Group is the largest infrastructure manager, with $96 billion, and tops the overall rankings, while Blackstone ($70 billion) is the largest real estate manager. The Goldman Sachs Group is the largest private equity manager in the ranking, with $60 billion, and Carlyle Solutions Group is the top PEFoF manager, with $48 billion. Blackstone is the largest FoHF manager, with $54 billion, while Bridgewater Associates is the largest hedge fund manager, with $87 billion. BlackRock is the largest commodities manager, with $53 billion; M&G Investments is the largest illiquid credit manager ($31 billion), and the largest manager of real assets is EII Capital Management, with $11 billion.

* Real assets strategies include a wide range of investment opportunities i.e. in agriculture, farmland, timberland, water (including water rights), natural resources, etc. The distinctive characteristic of real assets is tangible underlying assets and their connection to the food and resource-scarcity theme.

Macquarie Group

Australia

Towers Watson’s Investment business is focused on creating financial value for institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. It has over 800 associates worldwide, assets under advisory of over $2 trillion and over $60 billion of AuM.