The growing interest from pension funds in alternative asset classes will provide a boost to established alternative asset manager revenues, according to a report by Moody’s Investor Services.
It said the “structural shift” into alternative investments would benefit those managers well established in the industry, with proven track records.
However, as other asset managers grow their capabilities, they can also benefit from the growth in alternatives assets being managed, it said.
The report highlights data from the UBS Pension Fund Indicators Report, which shows that alternative allocations for UK corporate pension funds reached 10% by 2013.
While alternative allocations began in 1995, no real growth was seen until 2007-08, as equity markets plummeted.
Soo Shin-Kobberstad, senior analyst at Moody’s, said: “Pension funds are increasingly seeking investments that offer protection against inflation and avoid undue price volatility. They are increasingly turning to alternative investments that generally offer higher returns driven by greater illiquidity and idiosyncratic risks.”
Despite a downward pressure on fee margins for traditional assets, those for alternatives funds are significantly higher, the report said.
Research done in 2011 by the Investment Company Institute calculated the expense ratio for equity mutual funds and bond funds at 0.79% and 0.62%, respectively.
However, in Preqin’s 2013 survey on alternatives, it found management fees as high as 2%, with additional performance fees ranging up to 20%, if the manager achieved a certain return level.
Even though traditional managers would like to enter the market, the research said it would be difficult for them, as the necessary expertise and resources are in short supply.
However, Shin-Kobberstad argued that higher fee margins could change this.
“Marginal revenue will likely exceed marginal cost for well-established traditional asset managers, lifting their overall net operating margin,” he said.
“However, downward pressures on fees will increase as competition in the alternative asset management sector escalates and institutional investors further gain their bargaining power.”
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