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GLOBAL - Real estate investments still make up over half of the alternative assets managed by external managers on behalf of pension funds, and despite the economic downturn, suggests a study conducted by Watson Wyatt.

The consultancy firm's annual Global Alternative investments Survey found real estate asset managers dominate the top 100 alternatives managers assessed within the study, accounting for 58% of the assets held in alternatives by pension funds.

The study reviewed the activity of 206 alternatives managers acting in the real estate, private equity fund of funds (PEFoFs), fund of hedge funds (FoHFs), infrastructure and commodities - excluding single strategy hedge funds - and found the value of assets managed fell by 1% last year but real estate is still the popular alternative investment.

Private equity fund of funds were said to have amounted to 20% of assets while FoHFs made up 13% of allocations, infrastructure rose in interest to make up 9% of alternatives while commodities are still a small holding of 0.4%, although Watson Wyatt said more vehicle are being created to facilitate pension fund investing in commodities.

Within the top 10 ranking, eight of the fund managers operate in real estate though the largest asset manager within the review is Macquarie Group Limited, as it has been making headway within the last year to increase its position in the infrastructure market.

Within this analysis, the top 50 real estate manager funds - headed by ING Real Estate IM at the top of the chain - had assets of $485bn (€563bn) and invested at least 58% of their assets in North America - a jump from the 48% invested in North America in 2007. At least 28% of funds are now invested in European property while 10% is invested in Asia and 3% is placed elsewhere across the globe.

In contrast, over half (53%) of infrastructure assets were invested in Europe and just 31% were in North America, while approximately 43% of PEFoFs were invested in Europe against 47% placed in North American offerings.

The value of real estate funds is down just 5% or $27.25bn - not quite as high as the figure could have been considering the global property downturn - as the average fund lost $545m, however the smaller funds appear to have fared better the smallest fund with assets under management had increased in value by $321m compared with a $6.64bn loss for the largest manager within the sector.

And at least eight of the real estate managers who participated in last year's survey doubled their AuM, demonstrating the continuing interest of pension funds in alternatives, according to Carl Hess, global head of investment consulting at Watson Wyatt.

In spite of poor short-term performance, the demand for alternative assets by pension funds aiming to diversify their portfolio and access skills remains," said Hess. "As a result, inflows continued last year which, combined with their illiquid nature and less negative performances than pure equity, resulted in only a marginal decline in assets. However, according to our research allocations to alternative assets have continued to rise and now account for 17% of all pension fund assets globally, up from 7% 10 years ago."

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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