Infrastructure and energy investments had the most growth among the alternative asset categories in investors' portfolios in the 12 months ended Sept. 30, albeit from small bases, the results of Pensions & Investments' largest U.S. retirement plans survey show.
Infrastructure assets were up 50.6% to $12.8 billion, surpassing the year-earlier survey's 6% growth rate.
Growth slowed in both of the previous survey's highest flying alternative investment asset classes — energy and distressed debt. Although energy was up 45.4% to $17.3 billion, that was down from the 59% growth in the year-earlier survey, while distressed debt assets declined 2.8% to $24.7 billion.
Real estate investment trust assets rose 12.6% to $23.3 billion, rebounding from the 7.58% drop in the year ended Sept. 30, 2013. The REIT growth rate also topped that of real estate equity, which was up 9% to $283.1 billion. (Real estate equity had increased 10.5% in the previous survey.)
Real estate equity and REIT assets both were buoyed by returns. For the 12 months ended Sept. 30, the NCREIF Property index was up 11.3% and the NCREIF Open-end Diversified Core Equity index return was 11.36%, net of fees. The FTSE NAREIT All REITs index was up 13.44% during the survey period, and the FTSE NAREIT All Equity REITs index returned 13.17%.
Among other alternatives investment asset classes, commodities investment rose 9.9% to $25.5 billion in the 12 months, and overall hedge fund assets grew 5.7% to $158.5 billion. (That hedge fund total however reflected double-digit growth in direct investment and a double-digit decrease in funds of funds.) Private equity increased 7.4% to $337.2 billion.
Low interest rates put a damper on outperformance, said Sanjay R. Mansukhani, senior manager research consultant in the New York office of Towers Watson Investment Services Inc., a subsidiary of Towers Watson & Co.
“In general volatility was low, and low volatility sets the stage for returns being more correlated across different asset classes,” Mr. Mansukhani said. “There's less scope for outperformance in an environment of low volatility. When volatility starts to go up, then investors have a clearer sense of winners and losers.”
Higher returns would have helped to boost assets.
Investors that had considered pulling back from private equity at the beginning of 2014 to reduce illiquidity in their portfolios kept their target allocations the same, he said. The reason is that distributions started rolling in because private equity managers sold off their holdings as valuations began to rise and interest rates remained at extremely low levels.
“Because they were getting a record number of distributions from their private equity managers, they (investors) were willing to reinvest in the asset class,'” Mr. Mansukhani said. ”They didn't make ... increased allocations but they did reinvest in the assets in the private equity.”
Indeed, the aggregate allocation to private equity among defined benefit plans in the top 200 stayed relatively flat at 8.7%, dipping from 8.9% a year earlier. Real estate was also about the same, at 7.2% vs. 7.3%.
Cambridge Associates LLC U.S. Private Equity index return for the year ended Sept. 30 was 18.09%, trailing the Standard & Poor's 500 index return of 19.73%.
The five top defined benefit investors in private equity held their positions from a year earlier, with assets dipping for the top two — the California Public Employees' Retirement System, Sacramento, and the California State Teachers' Retirement System, West Sacramento — and increasing for the remaining three.
CalPERS' private equity assets dipped 0.2% to $31.25 billion; CalSTRS' dropped 1.75% to $21.44 billion. Meanwhile, at the Washington State Investment Board, Olympia, private equity assets were up 9.2% to $16.42 billion; Teacher Retirement System of Texas, Austin, up 7.5% to $15.42 billion; and the Oregon Public Employees Retirement Fund, Salem, up 7.8% to $15.09 billion.
Investors were committing massive amounts of capital to infrastructure during the survey period, with the average size of a fund closing as of Sept. 30 rising to more than $1 billion from $697 million in 2013, according to London-based alternative investment research firm Preqin.