The 20 largest retirement plans in the world increased their holdings of alternatives and cash in 2015, bypassing bonds and, in some cases, equities, in their search for returns.
These funds represent $5.93 trillion of a total $14.83 trillion of assets analyzed in the annual Pensions & Investments and Willis Towers Watson PLC survey of the world's largest 300 retirement funds. There were no new entrants to the top 20 funds.
On a weighted average, the top 20 funds invested 43.3% in equities, vs. 43.1% in 2014. Alternatives and cash climbed to 16.8% from 15.7%. Those increases came at the expense of bonds, which fell to 40% weighted allocation from 41.2% in 2014.
“We have record-low interest rates, and therefore it is not a surprise to see that funds in stretching to meet their actuarial targets are employing both diversified strategies, and being more innovative to achieve growth,” said Roger Urwin, global head of investment content at Willis Towers Watson in Reigate, England.
According to the simple average portfolio methodology of the survey, cash and alternatives were up 2 percentage points to 20.3%.
Mr. Urwin added: “Over time, the big change has been that the alternatives allocation has gone up, now at 20%,” while the bond allocation has fallen slightly, to 39% from 39.5% in 2014. Equities have decreased, to 40.8% from 42.2%.
However, the allocations to stocks and bonds are not surprising. “I would expect that and the reason is these big funds are in the hundreds of billions, and have the enormous problem of placing money,” said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England. “Stock and bond markets are obvious places to park big chunks (of assets).”
A decrease in equities and bond allocations to favor alternatives and cash was notable in the top 20 North America-domiciled funds. The alternatives and cash allocation grew to 34% in 2015, from 28.7% a year previous. That was at the expense of both bonds and equities, with allocations to bonds falling to 19.3% from 20.7%, and equities declining to 46.8% from 50.6%.
Outside the top 20, Mr. Clark said he would expect more diversification and nimbleness.
“They have a chance to do more interesting things in terms of investment strategies,” he said. “They are not nearly as dominated by the need to place money in conventional pockets - they can go into alternatives of all kinds. They are using those big markets - bonds and stocks - as a kind of bank account, from which they are withdrawing to place (assets) in specialized funds, either actively managed or alternatives to underpin their expected rates of return.”
The survey also showed that the smallest funds in the survey — retirement funds coming in at numbers 151 to 300 inclusive with assets ranging between $25.4 billion and $12.5 billion — as a group have experienced the largest rate of growth, an annualized 4.4% over the five years ended Dec. 31, 2015.
Mr. Clark noted that while smaller funds are perhaps afforded greater institutional flexibility, they “must nonetheless have tremendous expertise at hand.” n