- U.S. allocation higher than other nations’
- Pensions seek to bolster returns
- Stocks and bonds diminished
Carl Hess, the global head of investment at Towers Watson, thinks that alternative allocations will grow even more in coming years, pointing to likely increases from both traditional pensions as well as defined contribution schemes.
He outlined a couple of reasons that the appetite for alternatives has increased so much in recent years. First, among pensions, there was “too big of a bet on public equities to generate returns… Second, pensions were dealing with deficits and needed outsized returns to help fill that gap, so they looked to private equity and other assets to enhance their returns.”
Private equity, in particular, has seen enormous allocation growth among state pension systems, according to another survey, this one by the National Institute of Retirement Security. That study indicated that private equity allocations more than doubled over ten years, to 8.2 percent in 2011 from just 3.9 percent in 2001.
And as alternative assets have taken a bigger slice of the pension pie, stocks and bonds have seen their weightings diminish. The NIRS study shows that in the decade that between 2001 and 2011, increases in alternatives like private equity at U.S. pension funds were offset by a 29 percent decrease in U.S. public equities. Meanwhile, fixed-income investments decreased by 31 percent over the same time period.
And there is much more to invest, which bodes well for private equity fundraising trends. U.S. pension assets nearly doubled over the last 10 years, according to Towers Watson. In 2012, there were $16.9 trillion in pension assets, compared with just $9 trillion in 2002. That’s an annual growth rate—including both investment returns and net new contributions—of 6.5 percent.