Asian alternatives grab $124 billion of pension allocations

Asia accounted for 13% – or $123.76 billion – of pension investments in alternatives, which totalled $952 billion last year, according to the latest Global Alternatives Survey by consultancy Towers Watson.

That is a 60% increase from the region’s 8% share in 2009, and puts Asia as the third largest recipient of pension assets in alternatives, following North America and Europe. The rise comes as allocations to North America fell to 47% in 2010, from 53% the previous year.

Infrastructure was the most popular alternatives segment in Asia, receiving 19% of global pension allocations to the sector, up from 16% in 2009. It was followed by real estate (14%), funds of hedge funds (13%), private equity funds of funds (8%) and commodities (1%).

Investors have become more comfortable with infrastructure as an asset class, says Mark Brugner, head of manager research for Asia at Towers Watson in Hong Kong. They are also increasingly allocating to the sector in Asia at the apparent expense of North America, where infrastructure investments by pensions dropped to 30% in 2010 from 36% the previous year.

On a global basis, real estate was the most popular alternative asset class for pensions, accounting for 55% of investments. Europe and North America collectively comprised more than 80% of property allocations, although Asia is quickly growing as a proportion of the global total, accounting for 14% last year, up from 7% in 2009.

The global data shows that pension allocations to alternatives were up 16% from the $817 billion in 2009. Alternative assets now account for 19% of all pension fund assets worldwide, up from 5% in 1995, according to the survey.

“Institutional investors continue to diversify into the full range of alternative assets, as the benefits of diversification become apparent and certain asset classes become more accessible,” says Brugner. He adds that investors “acknowledge the risks associated with an undiversified approach, particularly in light of ongoing economic uncertainty”.

Indeed, several surveys over the past year or so have found that Asian investors are boosting their alternatives allocations. The surveys were carried out by organisations including Greenwich Associates, Datamonitor, Russell Investments, and the Entrepreneurs’ Organization and Standard Chartered Private Bank.

The Towers Watson survey of 197 asset managers is an important indicator of institutional allocation trends, as pension funds represent 64% of total assets under management globally.

The data excludes direct investments in single-strategy private-equity funds and hedge funds, measuring only fund-of-fund investments in the two asset classes.