Overview
U.S. defined benefit plans have significantly increased their investments to real assets over the past 15 years, driven by infrastructure allocations. Investments in real assets are now $164.7 billion, up from $10.3 billion in 2006.
Allocations to the various types of real assets have varied widely. For instance, the peak allocation to commodities was in 2012.
Infrastructure
Infrastructure investments totaled only $18 million in 2006, the first year Pensions & Investments' Top 1000 survey asked the question. In 2023, assets soared to $100 billion. Assets invested in infrastructure grew steadily to $35.9 billion in 2019, jumping significantly since then.
Twenty-one Top 1000 plans have more than $1 billion invested in infrastructure. CalPERS and CalSTRS both have more than $10 billion invested in the asset class. A September 2024 report from Meketa Investment Group Inc., said CalPERS' 10-year return for infrastructure was 9.5%.
Energy
For many years, defined benefit plans in P&I's Top 1000 universe have invested in the fossil fuel ecosystem as a matter of course given its estimated risk and return. Assets steadily climbed to $34.6 billion in 2018 from $1.5 billion in 2006.
Increased attention on fossil fuel divestment by non-U.S. pension funds and U.S. endowments seems to have slowed the interest by U.S. pension funds. Negative oil prices in 2020 driven by the COVID-19 pandemics also hurt valuations and investment into fossil fuels. Energy assets have been relatively unchanged over the past few years at around $30 billion. P&I added a survey question in 2023 about the amount of fossil fuel investments and renewable energy investments, with 83.6% in traditional energy and 16.4% in renewable energy investments.
Master limited partnerships were another area of active investments by U.S. defined benefit plans at the start of the last decade. There were more than $3 billion in net mandates for MLPs between 2010 and 2016. In hindsight, pension plans timed the market poorly twice, buying at the highs and terminating many of the mandates during the bear market of 2014-2020. The
Commodities
U.S. pension funds have invested in commodities since at least the early 1990s. With academic research and strong returns before the global financial crisis, pension funds started to pile into the assets class. Allocations soared to $27.3 billion in 2012 from $4.1 billion in 2006. Oil prices reached a long-term peak before the demand shock of the GFC, resulting in the U.S. congress thinking about banning pension fund investing in commodities.
Unfortunately, after U.S. pension funds ramped up their investments, commodity returns suffered a significant bear market in 2013-2015 as measured by the UBS CMCI index falling for three straight years, including a -24.2% negative return in 2015.
It was not until 2022 when the Indiana Public Retirement System made a significant commodity allocation. The plan committed $2.9 billion, with $1.9 billion of that specifically for gold strategies.
Timber and farmland
Top 1000 investments in timber and farmland remain tepid. Timber investments reached around $10 billion in 2013 and have remained largely flat since then. A similar pattern of investment can be seen more broadly when looking at worldwide data from the P&I real estate money manager survey.
Farmland has seen modest allocation from Top 1000 plan sponsors. As of Sept. 30, 2023, $7.4 billion was allocated to farmland, with the
Conclusion
With the recent bout of inflation globally, asset owners will most likely continue to have an interest in real assets. U.S. pension funds seem very keen on infrastructure and energy investments and less interested in other real assets such as commodities.
One wonders whether there is some recency bias given how dramatically interest rates have changed, which historically were a key component of commodity returns. Certainly there is plenty of capital pursuing quality infrastructure assets.