Over the next three years, 77 per cent of pension funds expect their appetite for investment risk to increase to enable them to meet long-term liabilities and deliver optimal value for members.
That’s according to a new report from State Street, which also reveals that one in five (20 per cent) of the asset owners surveyed expect their risk appetite to increase significantly during this period.
As part of this shift, pension funds intend to increase their exposure to alternatives. Some 60 per cent intend to increase their exposure to private equity, with the corresponding figures for real estate and infrastructure at 45 per cent and 39 per cent respectively. For hedge funds, 29 per cent of pension funds intend to increase their exposure to single managers and only three per cent plan to reduce their allocation. For fund of hedge funds, 20 per cent plan to increase their allocation, three per cent will reduce it and 27 per cent will invest for the first time.
Private equity is of the greatest interest to respondents in the Americas, with 68 per cent planning to increase their allocation, compared to 60 per cent in Europe, Middle East and Africa (EMEA) and only 45 per cent in the Asia Pacific region (APAC).
APAC respondents show high levels of interest in expanding their investment in hedge funds, with 57 per cent planning to increase their allocation. This compares to 21 per cent in both the Americas and EMEA who say the same.
APAC is also ripe for growth in real estate allocations, with 57 per cent of respondents in the region planning to increase their allocations, compared to 45 per cent in the Americas and 40 per cent in EMEA
Oliver Berger, senior vice president and head of strategic market initiatives for EMEA, says: “Pension funds are under huge pressure at the moment. With increased market volatility, they are faced with challenging and complex liabilities. To achieve the returns they need, they have to take on more risk. However, they are better equipped than ever before to do this. With improvements in data mining and management and reporting, fund managers and asset owners have a better understanding of the risk reward profile of investments.”
On behalf of State Street, the EIU conducted a global survey of institutional asset owners during July and August of 2014. The survey garnered 134 responses from pension fund executives, spanning both defined contribution and defined benefit assets. Forty-two per cent of respondents were from the Americas, 36 per cent from Europe, Middle East and Africa (EMEA) and 22 per cent from Asia Pacific. Just over half (52 per cent) of respondents came from public sector pension funds, 31 per cent from private sector pension systems and 16 per cent from superannuation funds.
