Over the next three years, 77% 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 – particularly in a low interest rate environment, according to a report from State Street.
One in five (20 percent) of the asset owners surveyed expect their risk appetite to increase significantly during this period.
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As part of this shift, pension funds intend to increase their exposure to alternatives. Some 60 percent intend to increase their exposure to private equity, with the corresponding figures for real estate and infrastructure at 45 percent and 39 percent respectively.
For hedge funds, 29 percent of pension funds intend to increase their exposure to single managers and only three percent plan to reduce their allocation. For fund of hedge funds, 20 percent plan to increase their allocation, three percent will reduce it and 27 percent will invest for the first time.
Key regional findings include:
- Private equity is of the greatest interest to respondents in the Americas, with 68 percent planning to increase their allocation, compared to 60 percent in Europe, Middle East and Africa (EMEA) and only 45 percent in the Asia Pacific region (APAC)
- APAC respondents show high levels of interest in expanding their investment in hedge funds, with 57 percent planning to increase their allocation. This compares to 21 percent in both the Americas and EMEA who say the same
- APAC is also ripe for growth in real estate allocations, with 57 percent of respondents in the region planning to increase their allocations, compared to 45 percent in the Americas and 40 percent in EMEA
Commenting, Oliver Berger, senior vice president and head of strategic market initiatives for EMEA at State Street said, "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."
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By GlobalData"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 percent of respondents were from the Americas, 36 percent from Europe, Middle East and Africa (EMEA) and 22 percent from Asia Pacific. Just over half (52 percent) of respondents came from public sector pension funds, 31 percent from private sector pension systems and 16 percent from superannuation funds.
