GLOBAL - The sum of alternative assets managed on behalf of pension funds by the 99 largest investment managers shot up 40% in 2007, but managers need to adjust their “towering fees”, investment consultant Watson Wyatt has claimed.

A Watson Wyatt survey reveals the total of alternative assets managed by the investment managers for pension funds rose to $822bn (€in 2007 - up from $586bn in 2006 and a 40% growth in one year.

Roger Urwin, global head of investment consulting at the firm, puts the unabated movement of assets into alternatives mainly down to diversification and funds’ attempts to catch alpha returns through absolute return strategies, though they do so despite high fees, costs and the mixed ability of managers to deliver good performance, he warned.

“There are signs of change as we move into a different market environment where managers will have to work harder to justify their charges,” argued Urwin.

“The trends we see are: more need for transparency, particularly the separate identification of alpha and beta; an increased focus on risk; and the increased appetite for direct investment in private equity and hedge funds.”

According to the survey, real estate managers lead the ranking, occupying the top nine positions and accounting for 62% of the assets, while infrastructure managers were included in the research for the first time this year and all 10 new entrants were ranked in the top 99 and account for 5% of the assets.

Larger firms, in particular, have been the main beneficiary of the growth, as Urwin commented: “Changing pension fund needs and globalisation are forcing many asset management firms to innovate and refocus; larger firms, with more alternatives products, are proving to be more successful in this rapidly changing landscape.”

The consultant observed there was increased concentration and ongoing consolidation in the industry as well as the rise of infrastructure as an asset class.

According to the research, the majority (47%) of alternative assets managed on behalf of pension funds are invested in North America, while 39% are invested in Europe and 10% in Asia-Pacific.

In terms of the domicile, North American managers account for 63% of total assets, while UK and continental European managers account for 18% and 12% respectively. Asia Pacific is represented by 11 managers from Australia and Hong Kong and which account for 7% of total assets.

Among the managers included within this survey, AEW Capital Management is named as the largest real estate manager of pension fund assets in the world with US$47.4bn, while HarbourVest Partners tops the private equity FoF table with US$20.1bn.

The survey included 190 investment manager entries comprising: 57 in fund of hedge funds; 52 in real estate; 50 in private equity fund of funds; 14 in commodities and 17 in infrastructure.

Findings also showed Blackstone Alternative Asset Management managed the largest proportion of FoHF assets on behalf of pension funds in 2007, worth a total US$15.4bn.

Macquarie Group topped the Infrastructure table with US$20.1bn while Allianz SE was the leading pension fund commodities manager with US$7.0bn.

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