Large pension funds and public pension reserve funds have clearly increased their allocation to alternatives, especially the latter if they are free from investment restrictions, according to an OECD survey of nearly 100 funds.
An increase in green bonds investment was among other trends reported.
Every year since 2011, the Organisation for Economic Cooperation and Development (OECD) has carried out a survey of some of the largest institutional investors in the world.
Its 2015 survey reviews trends in assets and asset allocation by 99 large pension funds and public pension reserve funds with $10.3trn (€9.1trn) in assets under management in 2014.
Nearly two-thirds of the $10.3trn of assets covered by the survey were held by public pension reserve funds ($6.6trn), an increase of 6.2% on average between 2013 and 2014.
“Sovereign wealth funds (SWFs) and public pension reserve funds (PPRFs),” the OECD said, “are becoming major players in international financial markets.”
One of the survey’s findings is that, “although funds surveyed are of a different nature, [there is] a clear trend in alternative assets”.
Large pension funds’ allocation to alternatives, which includes infrastructure, increased on average from 14.3% of total assets in 2010 to 15.3% in 2014, according to the survey report.
“The trend in alternatives is even stronger among PPRFs,” it said.
On average, at the 19 funds that submitted data over the past four years, average allocations to alternatives increased from 11.2% in 2011 to 13.5% in 2014.
The report notes that some PPRFs can only invest in fixed income but says, “what is noteworthy is that, for those funds that have the ability to set long-term policy targets, portfolios have drifted towards alternatives”.
It adds: “Funds able to maintain a long-term view on liquidity of reserve assets have responded by increasing return-seeking assets.”
Indeed, France’s €36.3bn national pension reserve fund, the Fonds de Réserve pour les Retraites (FRR), is working hard to implement a fresh €2bn allocation to French illiquid assets after the government gave it permission to invest beyond 2024.
According to the OECD, the survey showed that large pension funds have lowered equity allocations in favour of alternatives, although PPRF allocations to equities increased alongside growth in alternatives allocations, while fixed income exposure declined.
Infrastructure, meanwhile, is drawing growing interest from pension fund managers, but the survey results show a low level of investment on average, according to the OECD.
For the 77 funds that returned questionnaires, infrastructure investment in the form of unlisted equity and debt was $85.6bn in 2014, representing 1.1% of the total assets under management.
The pace of the increase in infrastructure allocation has slowed over the past few years at 23 funds that reported their allocation over the 2010-14 period, according to the survey report, “indicating that funds have not been able to grow their infrastructure allocations”.
In terms of preferred strategies, the report notes that there is a preference for brownfield assets but also increased return appetite in relation to construction risk, pushing investors “to acquire the expertise to be able to provide creditor oversight on new-build construction”.
It also cites increasing interest among investors beyond core infrastructure, in what is considered value-added brownfield opportunities.
PGGM, the €183m Dutch asset manager, last year told IPE it would like to expand in the area between infrastructure and private equity if there is interest from pension funds; assets pursued under this strategy would likely be non-core infrastructure holdings.
Direct investment remains the most common method for funds to gain exposure to infrastructure, according to the report.
Another noteworthy trend, according to the OECD, is that, among the funds that reported green investments, there was “a general increase” in the amount of pension funds that invest in green bonds, as well as in the relative size of their allocations.
It said four pension funds in Sweden – Alecta, AP2, AP3, and AP4 – all increased allocations to green bonds in 2014 and that Spain’s Santander reported green bond exposure for the first time in 2015, amounting to 1.1% of the total portfolio.
AP2 recently announced it was going to establish a standalone green bond portfolio, saying the market had matured enough for the bond type to be declared an asset class.
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