Fears that the high-flying stock market will soon come down to earth has institutional investors looking to alternative investments as a prime source of portfolio return.
Most of the alternative asset classes represented in Pensions & Investments' annual survey of the largest U.S. retirement plans showed assets invested by defined benefit plans grew in the year ended Sept. 30. Among DB plans in the largest 200 retirement systems, private equity investments rose by 10.4%; real estate equity was up 6%; energy grew by 5.6%; and infrastructure was up 19.1%. This was a sharp contrast to the findings of the 2016 data, in which private equity and real estate equity assets had fallen.
However, there were a few exceptions to the general trend of increasing alternatives assets during the 2017 survey period. Distressed debt assets fell 7.4% and real estate investment trusts were down 2.6% for the top 200 plans. Both asset classes also had fallen in the year-earlier survey, slipping 0.3% and 0.8%, respectively, in the year ended Sept. 30, 2016.
Despite projections of lower returns in most alternative investment asset classes, investors are taking on more illiquidity because they don't think the public market outperformance is sustainable, said Sona Menon, Boston-based managing director and head of North American pensions for Cambridge Associates LLC.
"We have seen a trend toward growing allocations" to alternative investments, including private equity, venture capital, private credit, real estate, and oil and gas, Ms. Menon said. "First and foremost in the last few years, the public equity markets have done very, very well, much more than anyone had anticipated … and there is an acknowledgment that it's not sustainable."
Cambridge Associates executives are encouraging clients to determine how much illiquidity they can tolerate. Many investors are underallocated to alternative investments, especially because the high-performing stock market is skewing asset mixes, pushing down the percentage of alternative investments in portfolios, Ms. Menon said.
Across P&I's largest 200 plans, private equity accounted for 8% of the aggregate defined benefit allocation as of Sept. 30 from 8.2% as of Sept.30, 2016. Broken out by type of plan, private equity's average share of public pension plans' portfolios dipped to 8.8% as of Sept. 30 from 9% and among corporate plans, to 5.7% from 5.8%, P&I's survey data show.
Private equity assets of the top 200 defined benefit plans were up 10.4% to $331.7 billion. Three out of the four private equity sectors P&I tracks also showed gains — venture capital was up 8.8% to $35.9 billion, buyouts were up 13.3% to $189.9 billion and mezzanine was up 9.8% to $4.5 billion. Distressed debt dropped to $23.7 billion.