Returns from alternative assets have helped soften the blow of the slide in public equity and bond markets at some of the world’s largest public pension funds, according to performance details released in the first quarter of 2023.
March 30 (Preqin News) - Returns from alternative assets have helped soften the blow of the slide in public equity and bond markets at some of the world’s largest public pension funds, according to performance details released in the first quarter of 2023.
Hit by a rare simultaneous decline in both debt and stocks in 2022, several pension fund reports show that investments in real estate and infrastructure, for example, have helped limit negative returns or in some cases, helped push performance into positive territory.
On March 2, Korea’s National Pension Service reported that the country’s pension fund returned an 8.2% loss for the fiscal year ended December 31, 2022. Domestic equity investments retreated by 22.8%, while overseas equity holdings lost 12.3%. Both domestic and foreign fixed-income investments were down 5.56% and 4.91%, respectively. In contrast, alternative assets, which accounted for 16.4% of its total allocations, returned 8.94%. The fund had a preliminary value of KRW 890.5tn ($685.1bn) at fiscal year-end.
“Alternatives achieved higher returns than those of traditional assets on the back of capital appreciation and realized gains from real estate and infrastructure assets,” the fund’s management announced, adding that performance was also helped by a stronger US dollar.
Private equity and infrastructure investments were among those that helped the Ontario Teachers’ Pension Plan (OTPP) secure a net return of 4.0% for the year ended December 31, 2022, according to results announced by the plan’s board on March 14. Helping counter a 12.5% loss in public equity assets and a 5.9% decline in bonds, the plan’s private equity investments, which account for 23.8% of the total asset mix, returned 6.1%. Meanwhile, infrastructure assets (16% of the total) achieved a net return of 18.7%.
OTPP’s Chief Investment Officer, Ziad Hindo, said, “The changes made to the portfolio over the past few years addressed many of the challenges of high inflation. Assets correlated to inflation such as commodities, natural resources, and infrastructure all performed well last year.”
Public pension plans have increased their allocations to alternatives in recent years, seeking greater diversification from traditional, public investments, as well as reduced volatility following the upheaval of the 2008 – 2009 global financial crisis. According to Preqin data, US public pension fund allocations to alternatives have increased from around 15% in 2007 to more than 30% today.
Japan’s Government Investment Pension Fund (GIPF), which reported total assets of JPY191.5tn ($1.45tn) at the end of 2022, has introduced a manager registration system for alternatives, specifically targeting products such as funds of funds covering private equity, infrastructure, and real estate. The GIPF had allocated 1.43% of its total portfolio to alternatives as of December 31, 2022, compared with 0.92% the year before. The fund allows for a maximum 5% allocation to alternatives.