Numerous regulatory and legislative activity is affecting 401(k) plans in the US. Fee disclosure, target date fund disclosure and a rule on the provision of investment advice are areas with consequences for plan sponsors and participants.
At times when markets are moving around more than usual, such as in the past three years, institutional investors tend to pay more concern to the value of active management. New global figures from Mercer show that while they should be concerned there is still value to be found in active management.
The Australian Government released its report of the review into the governance, efficiency, structure and operation of the superannuation system, last week. Some of the recommendations have been met with controversy by industry participants, with continued support of innovative and alternative investments at risk.
The already heavy exposure to Asia of the S$186 billion ($134 billion) Temasek Holdings will be increased over the next decade as the investor favours the long-term secular growth of Asia over global growth.
“Directionally, we are likely to increase our exposure to Asia over the next decade, but will continue to maintain the full flexibility to shift our portfolio stance in response to major development, trends or market opportunities,” executive director of Temasek, Simon Israel, said.
Temasek has been an active investor in Asia since 2002, and in the year to March 2010, nearly 80 per cent of the underlying portfolio exposure was in Asia.
That included about 32 per cent in its native Singapore, while the rest of Asia, excluding Japan, stood at 46 per cent; and OECD and other economies at 22 per cent.
In its annual performance report and institutional review, Temasek Report 2010 – Making a Difference, it said “the European sovereign debt crisis points to the underlying structural imbalances and the bumpy re-adjustments ahead as past excesses are still being worked through”.
It quoted downside risks as inflation in the medium-term, as well as political, policy and regulatory risks in the near-term, and the potential cracks in the global credit system.
Chief executive of Temasek, Ho Ching, said: “We expect global growth to be slower in the medium-term with Asia maintaining its secular long-term growth. Our focus on Asia will continue.”
Temasek, which has had steady long-term returns of 17 per cent compounded annually since inception, takes a long view of its investment position, regularly reviewing and rebalancing.
“Since mid-2007, we have maintained the flexibility of remaining in cash and kept a steady investment pace. This followed from our early 2007 assessment of increasing medium-term geo-economic risks and signs of bubbly market conditions. By mid-2007, we stepped up our monetisation, and prepared to stay on the sidelines going into 2008,” she said.
Indeed Israel said a focus on the long-term nature of investments, as well as keeping a cool hand, helped ride the investment waves of 2007-2009.
“We maintained a liquid posture, kept our powder dry, made sure the home base was secure, and invested and divested steadily, taking advantage of opportunities which came along,” he said.
In the past financial year Temasek made about $7 billion in new investments and $4.3 billion of divestments. This included more than $2 billion of rights issues in and recapitalisations of its portfolio companies to enhance their financial flexibility.
This included the rights issue of Bank Danamon and Chartered Semiconductor Manufacturing in April, Neptune Orient Lines in July and CitySpring in September 2009, and a $1 billion injection into Singapore Power
New investments range from a platinum producer in South Africa, to a Canadian-listed oil and gas company, an LED manufacturer in Korea and an innovative biotechnologies company in Brazil.
It also established SeaTown Holdings, the wholly-owned global investment company with committed capital of more than $3 billion, bilateral co-investment rights between Temasek and SeaTown, and the potential for third-party co-investment in the medium term.
Infrastructure, commodities and private equity funds of funds (FoFs) were the fastest growing asset classes among alternatives invested by pension funds around the world last year, according to the annual alternatives survey from Towers Watson.
The survey, conducted in association with the Financial Times of London, showed continued support for alternatives by institutional investor, although the asset consulting firm says investors are being more selective than ever before.
The total pension fund assets invested through the top 100 alternatives managers was steady at $817 billion as at December 2009, however the survey results show some important trends within the alternatives space.
For instance, while real estate remains the most popular alternative asset class, its share of the total for alternatives was down from 58 per cent to 52 per cent.
And while pension funds globally on average have invested 17 per cent of portfolios in alternatives, compared with 6 per cent 10 years ago, private investors still account for most assets among the largest managers. Pension fund assets totalled 48 per cent of alternatives assets, against retail and privately derived assets totalling 52 per cent.
North America continues to account for most assets invested, followed by Europe and then Asia Pacific.
Thanks to the surge of interest in infrastructure, the largest alternatives manager of institutional assets in the world is Australia’s Macquarie Group. Most of the top 10, however, are invested primarily in real estate.
Pension assets in real estate total $424.9 billion, followed by private equity FoFs with $168.7 billion, hedge FoFs with $104.1 billion, infrastructure with $99.2 billion and commodities with $20.2 billion.
Assets of the top 50 private equity FoFs increased 50 per cent in the past year, which was the highest growth rate of the three main asset classes in the alternatives space. Infrastructure, however, increased by 33 per cent to 12 per cent of the total or just under $100 billion. Assets in the smallest asset class, commodities, tripled from about $6 billion to just over $20 billion. There were five commodities managers in the top 100 managers overall for the latest survey, compared with one only the previous year.
Towers Watson said there was a trend away from equity-based hedge funds and away from FoFs as investors looked for better diversification and were more concerned about costs.
But they added that some preferred strategies would require higher levels of governance than simple equity/bond portfolios.
“This will require careful planning and investors should demand a long-term return to compensate not just for higher risk and illiquidity but also greater complexity,” the consultants said.
Top Global Alternatives Managers
| Rank | Manager | Country | Pension assets US$m | Total assets US$m | Asset class |
| 1 | Macquarie | Australia | 51,632 | 92,671 | infrastructure |
| 2 | ING | Netherlands | 32,363 | 92,692 | real estate |
| 3 | JP Morgan | US | 27,771 | 32,431 | real estate |
| 4 | AEW Capital | US | 26,003 | 42,915 | real estate |
| 5 | Morgan Stanley | US | 25,759 | 64,419 | real estate |
| 6 | CB Richard Ellis | US | 24,850 | 34,716 | real estate |
| 7 | La Salle | US | 23,670 | 39,900 | real estate |
| 8 | RREEF | US | 23,339 | 53,883 | real estate |
| 9 | HarbourVest | US | 21,002 | 31,924 | PE FoF |
| 10 | Prudential | US | 20,884 | 22,878 | real estate |
Bonds have been the saviour for institutional investors in the global recovery, but a new bout of risk-aversion induced by concerns about sovereign risk threatens the stability of the traditionally defensive assets.