DC pension funds are looking to boost allocation into real assets, with almost seven out of 10 (69 per cent) expecting to increase exposure within the next two years.
This is a significant increase on the 51 per cent of DC pension funds that were looking to increase allocation 12 months ago, according to Aviva Investors latest research.
Conversely the study found just six per cent of DC funds anticipate decreasing allocations to illiquid asset classes over the same period. When the same question was asked in 2022, 29 per cent of respondents were looking to reduce these holdings.
Aviva’s Real Asset Study, published for the sixth time, collates responses from 500 institutional investors, including DB and DC pension plans, public pensions, insurers and financial institutions, from across the UK and Europe, Asia Pacific and North America, representing $3.8 trillion of assets under management.
Whilst 53 per cent of DC pension funds currently only offer access to real assets via allocations within default funds, 45 per cent of those surveyed expect members will be able to self-select their exposure to real assets funds in the future.
DC funds emphasise capital growth (50 per cent), diversification (49 per cent) and capital preservation (47 per cent) as key benefits from real assets.
Across the survey as a whole 64 per cent of institutional investors cited diversification as a primary reason for allocating to real assets today, up from 57 per cent in 2022. Aviva says this is likely due to the fact that the volatile market environment in 2023 reinforced the value of diversified portfolios that were invested in assets that offered returns that were uncorrelated to listed equity and bond markets.
Aviva Investors chief investment officer Daniel McHugh says: “The findings from this year’s study capture one of the most pertinent structural shifts taking place in real assets investment and retirement saving. DC pension funds represent an increasingly large portion of the pension market, yet this important group of investors have not been able to access – or allocate to – real assets as they would like, or to the extent that optimises investment outcomes. The emergence of Long Term Asset Funds (LTAFs) has lowered these barriers, giving better access to a more diverse range of investment opportunities and this has driven demand sharply upwards.”
Looking at broad allocations to real assets, one-third of institutional investors with an allocation to real assets now hold 10-20 per cent of their total portfolios in these investments.
Despite a significant repricing in the market over the last 12 months, real estate equity remains the most attractive proposition for investors, accounting for 27 per cent of real asset portfolios on average. Despite this, infrastructure debt (11 per cent) and infrastructure equity (14 per cent) now account for a larger share of real asset portfolios compared to previous years, whilst real estate debt (11 per cent) and real estate long income (12 per cent) have also risen since 2022.
More than one in two (51 per cent) of respondents see real assets’ ability to deliver long-term income as becoming increasingly important over the next two years, with expectations of lower interest rates and therefore lower levels of income from fixed-income portfolios being a likely reason for such a view.
McHugh adds: “64 per cent of respondents see diversification as a primary reason for allocating to real assets, whilst 60 per cent see it as a driver when looking ahead over the next two years. However, we think the track record of real assets in delivering long-term, inflation-linked income is also incredibly pertinent against the backdrop of today’s market environment and “a dash for cash” being a prevailing theme of the year.”
The research also highlighted that institutional investors see the potential of real assets to create positive returns within a portfolio, as well as helping them meet net zero targets.
Globally, 53 per cent of institutional investors see evidence of improved financial performance as driving them to invest – or increase investment – in sustainable real assets, followed closely by their ability to evidence sustainability-related impact (51 per cent). North American investors were most likely to prioritise performance over the ability to evidence impact (56 per cent vs. 30 percent), whilst for European investors the preference was inverted (49 per cent vs. 58 per cent).
More broadly, sustainability-related factors remain important for institutional investors in real assets, with 17 per cent of respondents citing them as a critical and deciding factor in real assets investment decisions. However, the picture varies through a regional lens. More than 15 per cent of North American institutions do not take such factors into account, compared with only four per cent of institutions in APAC and two per cent in Europe.
McHugh adds: “57 per cent of institutional investors globally have a commitment to reaching net zero, however less than half have confidence in the actions needed to meet these commitments within real assets. There is a huge opportunity for asset managers to guide clients and demonstrate how transformational their real assets investments can be in achieving those objectives whilst also delivering positive outcomes for savers.”
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