Survey: Alternatives in Vogue for US Institutional Investors

(August 30, 2011) — A recent survey by Keefe, Bruyette & Woods (KBW) has found that alternatives have remained a popular investment choice among US institutional investors.

The survey of 37 chief investment officers or other institutional investment executives with asset allocation responsibilities discovered that alternatives are expected to gain more attention, with close to 40% saying they’re seeking to increase allocations to hedge funds and commodities. Additionally, more than 30% of respondents said they are looking to add to their real estate, infrastructure, and energy investments.

Furthermore, the firm noted that the uptick in interest in alternatives will drive greater interest in money managers such as Franklin Resources, BlackRock, Affiliated Managers Group, and T. Rowe Price.

The study by KBW follows a poll earlier this month by SEI — completed by 106 pension executives overseeing assets ranging in size from $25 million to over $1 billion — that revealed that an increasing number of pension funds are using alternatives as funded status volatility continues to be a primary concern.

More plans are using alternatives, but there has been a decrease in the number of pension plans allocating more than 10% of the portfolio to alternative asset classes, SEI found. In addition, use of liability-driven investment (LDI) strategies is completely inconsistent — especially among the well funded plans — according to the firm.

“Alternative investments continue to be integrated into pension portfolios as another channel for mitigating risk, while providing additional return apparently. However, ongoing volatility of interest rates continues to put liability risk as a primary concern for plan sponsors,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group, in a statement. “The poll results show numerous inconsistencies in the use of various investment strategies, including alternatives, over the past year as plan sponsors appear to be uncertain of what’s most appropriate. This might also explain an increased interest in outsourcing as now, more than ever, plan sponsors need to maximize the benefits of external resources and the expertise they provide.”