Institutional investors in the UK and Continental Europe are boosting allocations to alternative income assets, such as infrastructure debt and equity, structured finance, real estate finance and private corporate debt, in the pursuit of stronger risk-adjusted returns and diversification.
That’s according to new research from Aviva Investors which surveyed over 250 pension schemes and insurers in the UK and Europe, and shows UK pension funds are planning the largest increase in allocations to alternative income, bringing their exposure closer in line with insurers in the UK, and pension funds and insurers in Continental Europe.
The study reveals that UK pension schemes plan to increase their allocation to alternative income assets by 51 per cent, from 4.3 per cent to 6.5 per cent. UK insurers meanwhile, intend to raise allocations by 14 per cent, from 7.3 per cent to 8.3 per cent.
In Continental Europe, insurers and pension funds are looking to increase allocations by over 40 per cent, while Continental European insurers plan to allocate 9.2 per cent of their portfolio to alternative income assets, up from 6.5 per cent, while pension funds plan to raise their allocation from 5.2 per cent to 7.3 per cent.
The expected increase in allocations is driven by the downside protection alternative assets can offer (34 per cent); diversification benefits (33 per cent); and illiquidity premia (30 per cent).
Most investors surveyed believe the best opportunities will be found outside their home markets.
Despite the trend towards increased allocations, common barriers to investment include: illiquidity (31 per cent), the high cost of investing (29 per cent), difficulty finding suitable opportunities (27 per cent) and regulation (27 per cent).
Private corporate debt is the most commonly-held alternative income asset class among insurers and pension funds, with 57 per cent and 55 per cent respectively. The appetite for the asset class shows no signs of waning, with 42 per cent of insurers and 26 per cent of pension funds planning to increase their allocations within the next 12 months. Meanwhile, thirty one per cent of insurers plan to increase the holdings of infrastructure debt within the next three years, perhaps encouraged by more favourable capital treatment under Solvency II.
Mark Versey (pictured), Chief Investment Officer, Real Assets, Aviva Investors, says: “The appeal of the alternative income sector has grown significantly among European pension schemes and insurers over the past decade. Institutional investors have been lured by the illiquidity premium provided by private assets, as well as other benefits such as diversification and downside protection.
“As the era of quantitative easing finally winds down and interest rates rise, the survey highlights that investors are venturing into new sectors and geographies. This has also been borne out in our conversations with clients.”