Pension executives and other institutional investors are split between raising allocations to real assets or maintaining their allocations amid concerns about equity market volatility and inflation, a Pensions & Investments' survey shows.
The survey of P&I's Research Advisory Panel showed 51% respondents plan to maintain their current target allocation to real assets in the next three to five years, while 46% plan to increase their targets. (The remaining 3% plan to decrease targets.)
The advisory panel consists of executives at pension, endowment and foundation funds.
Real assets are an untapped asset class for many pension funds, foundations, endowments and other asset owners.
Actual and target allocations to real assets ranged widely among respondents. Thirty-eight percent of respondents said they have no current actual allocation, while 36% have no target allocation. At the other extreme, 8% have more than a 10% actual allocation while 8% also have more than a 10% target allocation. The survey didn't single out real estate.
The attraction of real assets focuses on risk-protection characteristics. Among the respondents:
- 49% invest or would invest to provide an inflation hedge;
- 24% invest or would invest to decrease their portfolio's risk profile; and
- 12% invest or would invest to increase their portfolio's return profile.
For real assets investors, performance has been in line with expectations. But 10% said real assets have performed above expectations, while 21% said they have performed below expectations.
The P&I survey focused on real assets in commodities, energy, farmland, infrastructure and timber.
Money managers and consultants not involved with the survey said in interviews that they generally recommend raising allocations to real assets to meet a changing landscape of economic and market challenges.
Bernard McNamara, executive director, global real assets, J.P. Morgan Investment Management Inc., New York, predicts allocations to real assets “could rise to as high as 25% or more of overall portfolios,” which should be diversified over a wide swath of the real assets spectrum.
Michael Forestner, Atlanta-based partner and head of private markets, Mercer Investment Consulting Inc., said: “Because most of those strategies are illiquid ... pension funds tend to have less tolerance for illiquidity. So the portions of their portfolios that go into (real assets) strategies tend to shrink a bit” compared to endowments and foundations, whose allocations tend to be larger.
“I think in general (asset owners) are continuing to allocate to the space,” he added. “We haven't had a big fluctuation. Clients that have had a real assets allocation, those tend to be fairly stable. But there are clients who are putting (real assets) in for the first time.”
Searches for real assets for clients appear to have grown selectively, according to a companion P&I consultants survey. For this year, as of mid-October, five of 21 responding consultants had done between 10 and 50 searches each for real assets. Last year, five of 21 did between three and 30 searches each.
But most consultants report no real assets search activity among clients in either year.
Cori E. Trautvetter, Chicago-based senior consultant at Pavilion Advisory Group, said: “Over the last three or four years there has been a definite heightened interest in real assets.” But generally, investors aren't ready to raise or make first-time allocations to real assets, she added.
“I would say probably the two areas we see the most interest in real assets are commodities” and real estate, Ms. Trautvetter said.
Yet while “clients mostly have realized commodities would be the way to go to protect themselves against inflation, the risk profile of commodities is very frightening for a lot of clients,” Ms. Trautvetter said, referring to precious metals, oil and gas, livestock and agricultural commodities as examples of investible commodities.