Pension schemes to increase allocations on illiquid assets says asset manager

News Team, 06/09/2021

Research from Alpha Real Capital (Alpha) a manager of income producing real assets, shows UK pension schemes are increasing their allocations to illiquid assets thanks to greater transparency around the assets, increasing opportunities and the diversification benefits.

This research is timely given the recent news that The Pensions Regulator will not proceed with a proposal to cap investment in unquoted assets to no more than a fifth of a portfolio. Such a cap would clearly have been at odds with pension scheme intentions according to Alpha’s findings.

The survey of 100 UK professional pension fund investors found:

Some 85 percent of UK professional pension fund investors say the scheme they work for will increase its allocation to illiquid assets over the next three years, with 7 percent expecting a significant rise.

Illiquid assets are growing in popularity across the pension scheme sector as they offer the potential to earn a premium over more liquid assets.

Schemes already have substantial allocations to illiquid assets – around 58% of investors say their scheme allocates up to 25 percent to illiquid assets as part of their investment strategy.

Nearly two out of five (37 percent) say they allocate up to 10 percent of their portfolio to illiquid assets, and 3 percent allocate more than 25 percent. Just 2 percent say they have no specific allocation to illiquid assets.

Alpha’s research shows the main reason for increasing interest in illiquid assets is greater transparency around the asset class with 79 percent saying they are increasing allocations because of that. However, 69% say increased opportunities to invest in illiquid assets is driving interest.

Around 44 percent of those questioned say they are increasing allocations to illiquid investments because of a growing desire to diversify their portfolio while 8 percent say improvements in the premium for investing in illiquid assets is driving interest.

Most investors are happy with an additional premium for investing in illiquid assets of less than 1 percent, the research found. Around 58 percent say they expect an additional premium of between 0.5 percent and 1 percent while 4 percent will settle for less than 0.5 percent. However, a third expect a premium of between 1 percent and 1.5 percent while 4 percent look for an additional premium of more than 1.5 percent.

Boris Mikhailov, Head of Client Solutions at Alpha Real Capital commented: “Illiquid assets offer the opportunity to earn a premium above more liquid assets which helps explain their growing popularity with pension scheme investors.

“With returns on some other asset classes squeezed, it makes sense to consider illiquid assets and nearly six out of 10 schemes are already allocating up to 25 percent to the sector and the overwhelming majority are using illiquid assets in some shape or form.”

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