Institutional investors continue to diversify their investment portfolios into alternative assets, increasingly via direct funds rather than funds of funds, according to global data from Towers Watson.
The data shows that in 2012 its clients - which include pension funds, sovereign wealth funds and insurance companies - allocated 70 per cent more assets to hedge fund and private market strategies than in 2010, reaching USD12bn for the year.
Craig Baker (pictured), global head of investment research at Towers Watson, says: “Throughout the past five years the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances. Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures and greater transparency.”
In 2012 the number of hedge fund mandates awarded to direct funds continued to increase, especially in the macro, fixed income and reinsurance areas. Similarly within the private markets area, real estate, private equity and infrastructure, direct funds received the vast majority of assets. During the year there was particular interest in infrastructure globally, with three times more assets than in 2011 being awarded to investment managers by Towers Watson’s clients.
The data also shows that Smart Beta strategies - which capture a premium over time or improve portfolio efficiency through diversification – continued to attract a significant amount of assets (USD5bn) in 2012. These new Smart Beta mandates were mainly allocated in the bonds, commodities and equities areas, and to a lesser extent in the reinsurance, hedge fund and infrastructure areas. Towers Watson’s institutional investment clients have now allocated over USD20bn to Smart Beta strategies to date.
Baker says: “These Smart Beta strategies range from relatively simple ideas such as real estate securities and specialist infrastructure strategies to create liquid diversity to doing existing betas better, such as non-market cap weighted equities. They also include more specialist solutions with niche asset managers, such as reinsurance, currency carry and volatility premia. Smart Beta solutions have particularly wide applications for most of our clients - regardless of whether they are large or small or currently investing actively or passively - and having the ideas and the relationships in the industry, means we have been able to help investment managers design much better net-of-fees products for them.”
According to Towers Watson, institutional demand for global equity and bond mandates has remained high during the past five years, while demand for UK-focused equity and bond funds has fallen substantially during the same period.
US and emerging-market bond mandates continued to be popular in 2012, but global bonds were the most popular bond mandate among the company’s clients, almost doubling compared to the previous year. In total, bond mandate selections accounted for USD24bn in assets invested last year.
In equities, global mandates continued to be the most popular with Towers Watson's clients, closely followed in popularity by US equity and Global ex US equity mandates. In total, equity mandate selections accounted for USD22bn in assets invested last year.
Baker says: “These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally.”
Manager selection activity globally at Towers Watson exceeded 900 selections in 2012; reflecting around USD76bn of assets moved.