Pensions Say Goodbye Equities, Hello Alts

An annual poll by Baring Asset Management has revealed that about 50% of UK pensions have recently altered the allocations of their funds in favor of alternatives to reduce volatility and achieve greater diversification.

(November 17, 2010) — Half of pensions have recently altered the asset allocation of their investments, with the majority reducing exposure to equities in favor of alternatives, according to an annual poll of UK schemes.

The research by Baring Asset Management shows that of the 50% of pension professionals that shifted their asset allocations, 69% increased their exposure to alternatives while 61% decreased their exposure to equities. Baring’s research found that the main reason for the shift was primarily to reduce volatility of the fund (61%), followed by reducing the correlation of existing assets (54%). In an effort to achieve lower volatility, Barings found pensions also revealed a greater effort to review investment portfolios on a more regular basis.

Additionally, the research showed that almost two thirds (65%) of respondents believe that emerging Asia has the biggest potential for equity gains over the next 10 years, supporting the thesis that emerging markets will provide superior growth when compared to developed markets over the medium to long-term.

Looking at how institutional investors are planning for the months ahead, the survey found that the biggest macro-economic challenge facing pension funds in the next six months is the European sovereign debt issue, with a majority of respondents claiming it is of greatest concern.

Concern around the impact that further quantitative measures will have on investments is also worrying pension professionals, with 50% of respondents claiming it is the biggest challenge facing them in the next six months.

Further research pointing to the reduction of equity — both active and passive — by UK pensions comes from a 2010 survey by Greenwich Associates that included 331 UK pension fund professionals with total assets of about $1.45 trillion. The survey showed that just 2% of the respondents were planning to search for a UK equity manager in the following year, compared to 8% two years earlier, reflecting an effort among pensions to reduce domestic equity holdings in pursuit of a more global strategy.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742