Study: Pensions Desert Equities in Favor of Alts, Worries Over Fees Persist

(July 10, 2011) — Over the last decade, as pension funds have increasingly fled equities in favor of alternative investments, they have remained skeptical over fees, according to data from Towers Watson. 

The firm’s Global Pension Asset Study — which collected responses from 271 asset managers — showed that North America continues to account for the largest amount of pension fund assets in alternatives, followed by Europe and Asia. The share of alternative investments in global pension fund portfolios has ballooned to an average of 19% in 2010 from 7% in 2000.

Yet, pensions still remain skeptical about fees charged by alternative investment managers, Towers Watson’s head of investment research Craig Baker told the Financial Times, describing their worry over being charged for skill when what is actually being delivered is traditional market returns.

The concerns over fees explained by Towers Watson reflect similar worries cited in a February study that showed UK fund managers have increased fees, often without adding value. The report by consultant Lane Clark & Peacock (LCP) said returns were largely fueled by strong markets as opposed to superior skills, reflecting a misalignment over fees. “Because assets grew as markets went up, managers have made a lot more in fees, even if actually they did not perform very well for their clients,’ said report author Mark Nicoll, who is also a partner at Lane Clark and Peacock. “Our research demonstrates that when markets rise, investment managers generally get paid higher fees even if they haven’t added any value. In our experience, pension scheme trustees will be better served by negotiating sensibly structured performance-related fees.”

Additionally, Towers Watson’s research showed that more of the consultant’s pension fund clients now accept the need for greater diversification, as more heavily diversified portfolios experienced lower losses during the financial crisis compared to those exposed mainly to equities. Furthermore, among the top 100 managers in the survey, the share of fund of hedge fund managers is down from 13% to 12%.

The Towers Watson study showed that global institutional pension fund assets in the 13 major markets increased by 12% during 2010 to reach a new high of $26 trillion. Global pension assets now amount to 76% of the global GDP, compared to 71% in 2009 and significantly higher than the equivalent figure of 61% in 2008.