Pension funds seek alternative asset classes

21 Mar 17

Public sector pension funds are increasingly investing in alternative asset classes, according to analysis by State Street.

Research published on 21 March examined asset allocation of 105 UK funds from 2014 through to the end of 2016.

This revealed a 61% increase in exposure to alternatives, representing £16.6bn in assets; and a 31% increase to fixed incomes, representing £34.7bn in assets.

Traditional asset classes, such as equities and fixed income remain core, however. The analysts noted that the asset allocation of the 89 funds participating in the Local Government Pension Scheme is going to change considerably as they transition into eight investment pools.

Andy Todd, head of UK pensions and banks at State Street, commented that persistent low yields had led investment committees to seek out alternatives in order to meet their investment targets.

“This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities. These changes to the investment landscape are systematic, so we will likely see a continued trend toward such investments,” he said.

JR Lowry, head of State Street Global Exchange EMEA, added: “LGPSs are in a period of extreme change and technology will be the next stage of their evolution.

“As they reshape to adapt to their new size and structure, they have a significant opportunity to overhaul outdated legacy systems and benefit from new economies of scale.

“If embraced and properly harnessed, technology has the potential to help them confront these challenges. For example, portfolio tools need to be highly effective in spanning the full range of asset classes a pooled pension scheme might consider, and better align asset and liability-related calculations.

Supporting these tools will create an accompanying need for data aggregation and management.”

The research found that scheme assets increased by 13% to £251.8bn and overall exposure to equities increased by 9% to £120.7bn. There was a significant increase in exposure to emerging market equities, up by a third to £446.5m. At the same time, there was a drop in exposure to domestic equities, which decreased by 5%, accounting for £37.9bn.

  • Vivienne Russell
    Vivienne Russell is managing editor of Public Finance magazine and publicfinance.co.uk

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