ALFI Report: Alts have room to grow as pensions worldwide search for yield

As low interest rates dominate the central bank agenda in many developed nations, leading pension funds are adapting their investment strategies to include alternative investments, according to a new report by the Association of the Luxembourg Fund Industry (ALFI) produced by PwC Luxembourg.

Pension assets are set to reach $61 trillion by 2025, according to the report with a 5.4% compound annual growth rate between 2018 and 2025.

Equities are expected though to continue to reign supreme in asset mixes in accounting for 38% of total pension assets at the end of 2018. In percentage terms equities have turned negative, however, with the allocation falling from 60% in 1998.

Meanwhile, officials at ALFI say that in absolute terms, pension fund alternatives assets under management has risen from $9.2 trillion in 2014 to $11.6 trillion at the end of 2018.

“In light of the current global investment environment, pension funds, with their ability to weather periods of market instability, are also upping their allocations to alternatives, including notably illiquid assets such as private equity and infrastructure,” commented Oliver Weber, head of asset and wealth management at PwC Luxembourg.

He added that pension funds are not only looking for diversification but are also looking beyond their borders in search for growth either through direct investments or using AIFs or UCITS.

Alternatives allocations vary widely by geography. Only 5% of Latin American pension fund assets, while North American pension funds hold 31% of their assets in alternatives, followed by Europe (27%) and Asia Pacific (8%).

Created under the Alternative Investment Fund Managers Directive of 2009, these AIF funds are subject to stringent reporting and regulatory requirements. While having less regulatory constraints than UCITS, the AIFMD provides investor protection, stability and a supervisory framework for AIFMs.

Pension funds already account for 26% of AIFs assets as of the end of 2017, but officials expect that more pension funds will turn to AIFs in the future.

Given the increased protection, on a vehicle and asset manager level, ALFI expects more pension funds will turn to AIFs, be they hedge funds, fund of funds, private equity, real estate or other funds, in the coming years.