Towers Watson: Institutional clients boost alts strategies 70% since 2010

Towers Watson's institutional investor clients worldwide allocated a record $12 billion to alternative strategies last year, a 70% increase from 2010.

Another area of strong interest in 2012 was smart beta strategies, which attracted another $5 billion in assets. The smart beta allocations were mainly in bonds, commodities and equities. Smart beta strategies allow investors to gain exposure to a number of asset classes in a “fairly passive way” with lower fees, said Zainul Ali, head of manager research, Americas.

“If a strategy can provide more diversity and liquidity, especially on the alternative side … then from a portfolio efficiency point of view, it makes a lot of sense for plan sponsors,” Mr. Ali said in a telephone interview.

The number of hedge fund allocations continued to increase last year, especially in the areas of fixed income, macro and reinsurance. Infrastructure was a very popular asset class last year with three times as many assets awarded to managers than in 2011, and Mr. Ali expects that interest to increase as governments look for private partnerships to fund needed infrastructure repairs.

“It's a nice proxy for matching pension liabilities” with a stable cash flow, Mr. Ali said about infrastructure investments. “There's a lot of money that needs to go into repairing bridges and road and levies.”

Towers Watson clients continued to move more toward global equity and bond allocations in 2012. Global bond mandates were the most popular last year in fixed income, doubling the amount of assets awarded compared to 2011. Global equity was the most popular allocation on the equity side.

Fixed-income allocations accounted for $24 billion in assets last year compared to $22 billion for equity. Mr. Ali said it was a combination of replacing managers and adding new allocations compared to alternatives, which were almost exclusively additional allocations.

Manager selection activity exceeded 900 selections in 2012, reflecting $76 billion of assets moved.