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Pension funds take to alternatives on global scale, says Watson Wyatt

Global assets managed by the world's largest 99 alternatives managers for pension fund clients stand at just under USD600bn, according to the latest Global Alternatives 99 ranking produced by Watson Wyatt Investment Consulting in conjunction with Global Investor magazine. The ranking does not include single-manager private equity and hedge fund managers.

According to the survey, the top 30 managers of pension fund money within the areas of real estate funds, funds of hedge funds, and private equity fund of funds managed USD380bn, USD105bn and USD80bn respectively at the end of last year.

Commodities remains a smaller alternatives play amongst pension funds, with the top 10 managers in this area being responsible for around USD12bn in assets. Within these totals, assets amongst the leading fund of hedge funds managers were substantially more equally distributed than among either the leading commodities or private equity fund of funds managers.

The survey, conducted by Watson Wyatt for the year to December 2006, ranked the largest managers of pension fund assets in the areas of real estate, funds of hedge funds, private equity fund of funds and commodities, comprising 150 distinct asset managers from 112 groups, comprising 57 fund of hedge funds, 45 real estate, 36 private equity fund of funds and 12 commodities managers.

In the private equity and hedge fund area, the ranking focuses solely on funds of funds, which have traditionally been of most interest to pension funds, while direct real estate and commodities managers are included.

Managers that could not be included in the survey because they were unable to disclose the volume of assets managed on behalf of pension fund clients included Lehman Brothers and Aberdeen in real estate, Citi Alternative Investments and Barclays Global Investors in real estate and commodities, and Newton in funds of hedge funds, while a handful of managers of significant pension fund assets failed to respond to the survey.

North American-domiciled managers accounted for 58 per cent of total assets under management for pension funds identified in the survey, while managers based in the UK and in continental European accounted for 23 per cent and 18 per cent of assets respectively.

'Pension funds around the world are now more prepared to increase the number of different alternative asset classes in their portfolios in recognition of some potential to enhance performance while reducing risk,' says Roger Urwin, global head of investment consulting at Watson Wyatt.

'In so doing, however, they must be aware of the need to compete with other sophisticated investors for manager skill and capacity within these diversification opportunities.'

He adds: 'As assets flow into these strategies at an ever quickening pace, the ability of some managers to continue to deliver good performance is in doubt. Once performance fees are included, investors will have to work hard to ensure that alternative assets remain a value creation proposition for pension funds.

'Indeed, some of our clients have been using the direct route successfully for investing in private equity and hedge funds to reduce fee levels. Put simply, it is imperative that the attached management and performance fees, which are significant, are correctly set and managed to ensure maximum benefit for the fund. Caveat emptor should be keenly observed in this area.'

In terms of managers included in the survey, Rreef is the largest real estate manager of pension fund assets in the world with USD38.9bn, while SGAM Alternative Investments is the leading fund of hedge funds manager with USD10.4bn of pension fund assets, and JP Morgan Asset Management manages the largest proportion of private equity fund of funds on behalf of pension funds with USD13.7bn. Allianz SE is the top commodities manager with USD7.2bn in pension assets.

Watson Wyatt Investment Consulting provides investment strategy advice based on expertise in risk assessment, strategic asset allocation, and investment manager selection to some of the world's largest pension funds and institutional investors, and has more than 380 staff in Europe, the Americas and Asia.

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