Survey: Alternatives in Vogue for US Institutional Investors

A recent study by Keefe, Bruyette & Woods has found that the hype over alternatives among institutional investors in the US is not expected to subside.

(August 30, 2011) — A recent survey by Keefe, Bruyette & Woods (KBW) has found that alternatives have remained a popular investment choice among US institutional investors.

The survey of 37 chief investment officers or other institutional investment executives with asset allocation responsibilities discovered that alternatives are expected to gain more attention, with close to 40% saying they’re seeking to increase allocations to hedge funds and commodities. Additionally, more than 30% of respondents said they are looking to add to their real estate, infrastructure, and energy investments.

Furthermore, the firm noted that the uptick in interest in alternatives will drive greater interest in money managers such as Franklin Resources, BlackRock, Affiliated Managers Group, and T. Rowe Price.

The study by KBW follows a poll earlier this month by SEI — completed by 106 pension executives overseeing assets ranging in size from $25 million to over $1 billion — that revealed that an increasing number of pension funds are using alternatives as funded status volatility continues to be a primary concern.

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More plans are using alternatives, but there has been a decrease in the number of pension plans allocating more than 10% of the portfolio to alternative asset classes, SEI found. In addition, use of liability-driven investment (LDI) strategies is completely inconsistent — especially among the well funded plans — according to the firm.

“Alternative investments continue to be integrated into pension portfolios as another channel for mitigating risk, while providing additional return apparently. However, ongoing volatility of interest rates continues to put liability risk as a primary concern for plan sponsors,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group, in a statement. “The poll results show numerous inconsistencies in the use of various investment strategies, including alternatives, over the past year as plan sponsors appear to be uncertain of what’s most appropriate. This might also explain an increased interest in outsourcing as now, more than ever, plan sponsors need to maximize the benefits of external resources and the expertise they provide.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

CalPERS Settles With Fitch Over 'Negligent Misrepresentations'

The largest public pension fund in the US has settled a lawsuit with Fitch Ratings over claims that it, as well as Moody's Investors Service and Standard & Poor's, assigned inaccurate ratings that resulted in massive losses.

(August 30, 2011) — The California Public Employees’ Retirement System (CalPERS), the largest public pension in the US, has settled a lawsuit with Fitch Ratings over claims that it, along with Moody’s Investors Service and Standard & Poor’s, assigned unreasonably high ratings on structured investment vehicles (SIVs).

However, CalPERS litigation continues against Moody’s and Standard & Poor’s, the Wall Street Journal reported.

In July 2009, the scheme sued Fitch, Moody’s, and S&P, in San Francisco County Superior Court claiming that their inaccurate ratings resulted in “hundreds of millions, and perhaps more than $1 billion, of investment losses for CalPERS,” the pension fund alleged in court documents obtained by the WSJ. The fund claimed that it purchased $1.3 billion of debt issued by Cheyne Finance LLC, Sigma Finance Inc, and Stanfield Victoria Funding LLC, which were SIVs that had received “triple-A” ratings. However, the scheme contended that the ratings were inflated and that consequently, the fund suffered huge losses beginning in 2007 when the investments plummeted.

The suit by CalPERS against the three rating agencies — collectively referred to as the Big Three for their market control — reflects how rating agencies are facing heightened pressure and scrutiny for their role in the economic crisis. Many industry sources believe that these agencies, blamed for inflated ratings of risky debt to win more business from issuers, were directly responsible for the credit crisis.

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Amid CalPERS’ lawsuit against Fitch, the fund has maintained a high mark from the ratings agency. In recent news, CalPERS kept its AAA credit rating for the pension fund’s credit enhancement program from Fitch Ratings, while the California State Teachers’ Retirement System (CalSTRS) has achieved AA+ in comparison. CalPERS’ exceptionally strong rating was due to its high liquidity funding, underwriting guidelines, and financial condition, the agency noted. “This rating validates the financial strength of CalPERS,” chief investment officer Joseph Dear said in a statement. “Our members and employers can be proud to be part of such a sound organization.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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