Alternatives overtake equities as schemes diversify

Schemes have been driven to alternative sources of income that can offer inflation-linked returns by low yields on government fixed income and volatility in equity markets.

Alternatives had more inflows – including awarded mandates and asset reweightings – than equities and fixed income, according to data from Financial Times service MandateWire (see graph).

This was a substantial shift from the first three months of the year, which saw inflows into equities exceed other asset classes.

Some schemes have sought to reduce equity-related volatility by varying their sources of investment growth. 

“People believe equities are too risky and don’t believe they will offer the returns they historically have, so they are looking for more diversified sources of return,” said Mark Nicoll, partner at consultancy LCP.

Schemes are looking to assets that might deliver real returns and growth over the medium and long term, he added.

Schemes hunt real asset income

Property and infrastructure remained clear leaders among alternative assets, with schemes attracted to the long-term, inflation-linked income.

“Unlike previous years, [schemes] are happier and more comfortable to employ capital for the medium and long term. That may be a sign of reduced uncertainty in the markets,” said Ingo Heinen, European head of BlackRock’s alternative investment strategy group.

A lot of demand is for assets that can help schemes address their significant exposure to low-yielding fixed income, he added.

There was also an increase in alternative asset mandates awarded by local authority schemes, with 28 per cent of all mandates going to alternatives in Q2 compared with 14 per cent in Q1 2013.

But John MacDonald, head of manager research at Hymans Robertson, said these data were not consistent with the experiences of the consultancy’s local authority clients.

“In terms of infrastructure and property, a lot of clients did it a year or two ago,” he said. 

Croydon Pension Fund is one local authority that has considered infrastructure as an alternative to poor-performing fixed income. But others have put infrastructure investments on hold until the Pensions Infrastructure Platform is viable. 

“There is probably a lot of pent-up demand for infrastructure, which will be realised once the Pip is finalised or when people begin to get frustrated with the perceived lack of progress with it,” MacDonald said.

He added that this earmarked money would probably be invested in infrastructure, whether or not the platform comes to fruition, as there are other managers offering similar products.

“This is a relatively recent phenomenon. Managers are seeing what schemes want and are coming out with products, or tweaking products in terms of lowering fees,” he said.