Alternative Investment up 70% in Two Years

(February 13, 2013) — Intuitional investors have increased their allocations to alternative assets by 70% over the last two years, with a determined push towards direct holdings, investment consulting firm Towers Watson has revealed.

In 2012, pensions, sovereign wealth funds, and insurers, who use Towers Watson’s services, allocated $12 billion to hedge funds and private market strategies the firm said. This was a 70% increase on allocations made in 2010.

Macro, fixed income, and reinsurance funds gathered the most assets last year, Towers Watson said, with inflows mainly coming through direct investments. Real estate, private equity, and infrastructure funds also received predominantly direct inflows, the consultant said.

“Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures and greater transparency,” said Craig Baker, global head of investment research at Towers Watson.

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Infrastructure, which has had some powerful supporters in Europe and North America, saw three times’ more assets being allocated by Towers Watson’s clients to the strategy than in 2011.

Smart beta has also been a growing trend among Towers Watson’s clients, with $20 billion now allocated to the strategy.

“These Smart Beta strategies range from relatively simple ideas such as real estate securities and specialist infrastructure strategies to create liquid diversity to doing existing betas better, such as non-market cap weighted equities,” Baker said. “They also include more specialist solutions with niche asset managers, such as reinsurance, currency carry and volatility premia.”

Bond and equities remained popular, gathering $24 billion and $22 billion in global mandates respectively over 2012, Towers Watson said.

The real growth of the asset management industry will come from wealthy individuals, predominantly from the emerging market area, research by Casey Quirk shows.

(February 13, 2013) — Individual investors, not institutions, will drive asset management business growth going forward, according to predictions by Casey, Quirk & Associates.

According to the firm, four-fifths of an anticipated US$40 billion of net new revenue over the next five years will be derived from the increasing wealth of individuals worldwide. The rest will come from the institutional investing sphere.

The trend is perpetuated by the transfer among defined benefit and defined contribution schemes out of the institutional space as a result of payouts to participants. Meanwhile, big asset owners, such as pensions and sovereign wealth funds, are increasingly bringing asset management in-house to better utilize scarce resources, with institutions thus taking money out of the hands of professional money managers, Ben Phillips, a partner at Casey Quirk–, a management consultant to the global asset management industry–tells aiCIO. “There’s also growing wealth among individuals, particularly in the emerging market world,” he says. “The number of billionaires has erupted over the next decade.”

More specifically, Casey Quirk’s research also shows that investment managers worldwide will grow less than 1% from net new money annually for the next five years through 2017. “As a result, many asset managers, including some of today’s market share leaders, may struggle with shrinking revenue and a decaying book of legacy business,” according to a new whitepaper from the firm.

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The firm’s report–titled “The Complete Firm 2013: Competing for the 21st Century Investor”–notes that most of the industry’s future revenue growth will belong to a select group of firms that can innovate by globalizing their portfolios; incorporating alternatives into their investment strategies; orienting their business toward individuals and their growing demand for solutions; and pursuing opportunities in faster-growing emerging markets.

“Companies that can develop and enhance those capabilities will win 90% of net new revenue available over the next five years,” the firm said. “Most industry firms worldwide will compete for the remaining 10% of net new revenue, while defending their legacy clients from an increasingly zero-sum takeaway game.”