REAL ESTATE - It’s taken them five years but UK pension funds are at last warming to real estate in a bid to diversify away from equities, according to research conducted by Watson Wyatt Investment Consulting into its clients’ approach to alternative asset classes.
The research found pension funds awarded quadruple the number of alternative investment mandates – 61 – to fund managers in 2005 than they did in 2003.
Paul Deane-Williams, senior investment consultant at Watson Wyatt, said the results reflected the 2000 equity market correction. But governance constraints on pension funds had resulted in a five-year lag in their ability to steer themselves away from traditional bond-and-equity portfolios.
“We’re talking about part-timers and trustees making decisions, so everything takes longer,” he said, “but alternative assets have become mainstream. They’ve reached the tipping point.”
Although the highest number of mandates (14) went to real estate, Deane-Williams warned against reading too much into the numbers. He said: “It doesn’t make sense to compare alternative asset classes. The exact numbers can reflect cyclical factors.
“Commodities are a new area for pension funds, for instance. These funds look around to see who else is doing it. Some asset classes are harder to invest in than others and more expensive.”
He explained the belated thrall of real estate as the result of increasing familiarity among investors.
“Real estate is easy to go into because it’s more widely understood and the property industry is making it easy to invest in,” he said.
“Funds are moving more quickly but it isn’t a new trend in real estate – it’s just that real estate is easier for trustees to understand. Other vehicles, such as fund of funds, are also gaining more acceptance.”