Election not expected to slow move to alts

The election of Donald J. Trump as the next U.S. president has not changed economic or market expectations enough to slow the migration to illiquid assets by institutional asset owners searching for investment returns.

But it does appear to have pushed some investors to begin research into considering inflation-sensitive assets.

“We've seen investors stay the course. (Pension funds) are long-term investors that are very focused on their liability streams and their funded status. So they have investment policies built for the long term,” said Josh Levine, head of alternatives specialists for the Americas at BlackRock Inc.

Mr. Levine said the results of a survey of BlackRock's institutional clients are being compiled and will be released in January 2017, but he foresees institutional appetite for alternative assets will continue to grow.

A prior survey last January indicated a net 50% of BlackRock's clients would increase allocations to private credit, while a net 49%, 38% and 30% of respondents said they would increase allocations to real assets, real estate and private equity respectively in 2016.

That said, the BlackRock managing director noted he's seeing clients interested in exploring assets that are sensitive to inflation. “They're beginning to research some themes,” Mr. Levine said. “But we're in the first inning on that.”

In October, results of the third-quarter endowment and foundation poll by Boston-based investment consultant NEPC LLC indicated 43% of respondents would be increasing allocations to private equity while 53% would maintain their current exposure. Only 4% of respondents planned on a decrease.

“Investors have been going more into private markets to achieve returns. I don't think you're going to see that changing,” said Catherine M. Konicki, a partner and head of the endowment and foundation practice at NEPC in a phone interview. She added that because the lifespan of most private market investments averages 10 to 12 years, most investments in illiquid assets will outlast any short-term market volatility caused by a presidential administration of four to eight years.

A number of asset owners that Pensions & Investments contacted said Mr. Trump's win shouldn't change things — although they will be watching.

Theodore Eliopoulos, chief investment officer of the $299.5 billion California Public Employees' Retirement System, Sacramento, told the system's investment committee on Nov. 14 he saw no reason for further changes in the system's investment allocations and profile, which had been recently adjusted.

“Dramatic changes based on this election would be premature as there are too many questions left to be answered in the coming months and years,” he said.

Mr. Eliopoulos added: “It would be wise, however, to incorporate into our investment outlook higher potential volatility across many capital markets as a result of the increased uncertainty around economic policies going forward.”

He also noted CalPERS needs to prepare to address a much different policy environment, new economic and investment challenges and opportunities, and be ready to adjust, act and govern itself accordingly.

Mr. Eliopoulos also asked the retirement system's senior private equity staff to explore such options as cutting out general partners and making direct private equity investments.

In September, the Rhode Island State Investment Commission, Providence, increased exposure to private equity to 12% from 7% over the next five years as part of a new asset allocation for the $7.7 billion Rhode Island Employees' Retirement System.

Evan England, spokesman for Rhode Island state Treasurer Seth Magaziner, who chairs the commission, said Mr. Trump's win won't affect the broad strategy, but it's something the commission will continue to monitor.

“There's always concern of volatility. There's been greater concern in recent weeks,” he said. “When conducting this recent allocation, we took many factors into consideration, including market volatility.”

David Villa, chief investment officer of the $102 billion State of Wisconsin Investment Board, Madison, said in an e-mail: “The investment committee is following the transition process closely but the fund's investment horizon is long term. It is too early to be changing direction before the administration and Congress pass new legislation, tax policy and regulations.”

Mr. Villa added: “Even once the policy outlook is clarified, the asset allocation to illiquid assets is unlikely to change as the strategy is to maintain diversification across each vintage year through time.”

SWIB had 8% of its investment portfolio allocated to private equity as of Sept. 30, 2015, according to data from P&I's Research Center.

James Sinks, spokesman for Oregon Treasurer Ted Wheeler, chairman of the Oregon Retirement Savings Board, Tigard, which runs the $68.3 billion Oregon Public Employees Retirement Fund, Salem, said in an e-mail: “The election has had no impact on either our asset allocation or implementation strategies.”

Institutional investors began the move years ago toward illiquid assets such as private equity, real estate, hedge funds, private credit and infrastructure. And it's only going to grow as investment markets continue to offer relatively low returns.

“Larger institutions are getting more into illiquids,” said John Bilton, global head of multiasset strategy at J.P. Morgan Asset Management at a lunch briefing on 2017 long-term capital market return assumptions the asset manager hosed in New York on Nov. 1.

Jed Laskowitz, co-head of multiasset solutions at JPMAM, said in a phone interview that he didn't think a Trump victory has changed JPMAM's long-term outlook for volatility or the firm's other assumptions. Investors are still going to have to be creative in order to find returns.

“We think we're entering an environment that will offer lower return from beta than we saw in last 10 years,” he added.

Mr. Laskowitz noted that returns from a typical 60/40 equity/bond investment portfolio averaged a return of about 8% from 2004 to 2014. Over the next 10 years, that average return is expected to be about 5.5%. And a pension plan that needs a return of 7% to 8% annually is going to have to turn to illiquid assets in order to achieve such returns.