Alternative Investing
going mainstream globally
Australian institutional investors prefer real estate, but expect higher returns from private equity
SYDNEY, 6 December 2007 – “Alternative investments”, once considered fringe investments, are becoming mainstream as many institutional investors make these investments essential components of their portfolios, according to the eighth global report on alternative investing released today by Russell Investment Group. The pension funds, endowments and foundations that responded to the global survey expect to dedicate an even larger slice of their total investment portfolio to hedge funds, private equity and real estate over the next two years.
Since 1992, Russell has surveyed large institutions (public and corporate pension funds, endowments and foundations generally with assets of $1 billion or more) in North America, Europe, Japan and Australia to gauge their participation in and expectations for core alternative investing strategies. The results, based on responses from 326 organisations worldwide, are published in a detailed report, 2007-2008 Russell Investments Survey on Alternative Investing. The report presents data by region, investment category and type of institution and includes detailed analysis of use of investment strategies, investment types, geographic allocation and expected returns.
Top line findings from this year’s study include:
- Institutional respondents around the globe predict that their strategic allocations to hedge funds will increase by 2009, except in Australia where the hedge fund allocation is anticipated to remain steady at 4.1 percent.
- Strategic allocations to private equity by respondents increased in Europe, Australia and Japan and fell slightly in North America. However, all geographic areas forecast allocation increases through 2009.
- Across the globe, respondents’ return expectations are strongest for private equity, with expectations for hedge funds and real estate remaining steady. Median return expectations for private equity worldwide vary between 8 and 13 percent, with North American and European respondents expressing the greatest optimism for performance of this asset class.
- The utilisation of real estate as an investment strategy climbed worldwide over the past two years, particularly in Japan where utilisation rose from only one in five respondents in 2005 to nearly 40 percent this year.
Stephen Roberts, Managing Director, Institutional Investment Services, commented: “This year’s survey indicates that alternative investments are coming into their own as widely-accepted strategies used by institutional investors to enhance returns, reduce volatility and improve diversification for their portfolios. The survey also demonstrates that fund of funds is emerging as the dominant investment approach for private equity and hedge funds, which, we believe, well positions investment consultants such as Russell to meet these investors’ advice and product needs in these areas.”
For Australia, the report shows that, among the three alternative investment categories, real estate’s popularity continues to grow, used by 94 percent of Australian respondents. Private equity and hedge funds were less widely used (61 percent and 56 percent respectively) by Australian respondents. While private equity’s popularity comes in a distant second compared to real estate, Australian respondents’ mean return expectations for private equity over a 1 –3 year horizon are the highest – with an averaged expected return of 11.1 percent versus an average return for real estate and hedge funds of 9.8 percent and 9.4 percent, respectively.
The following are more details from the global survey:
1. Compared with 2005, real estate is attracting greater attention from Australian institutions as a way to invest globally, with 18 percent of real estate allocations now to ‘Global’ and ‘Other’, up from less than 2 percent in 2005. 55 percent of Australian respondents indicate that they expect to invest in a global real estate mandate in the next three years. Respondents also cited ‘Developed’ as a favoured region.
“While traditionally regarded as primarily a domestic investment strategy, real estate is emerging as a real global investment vehicle for Australian institutional investors,” Mr Roberts said. Strategic allocation to real estate among Australian respondents averages 9.6 percent of total fund assets. This relatively high level is expected to increase through 2009. Australian respondents continue to favour direct ownership in real estate, investing more than 40 percent of their real estate allocation in this category.
Australian respondents have historically invested in the developed areas of the Asia-Pacific region. However, since 2005 there has been a significant reallocation by Australian respondents towards North American, Western European and Global Real Estate Investment Trusts (REITs). The percentage of real estate assets reallocated outside “Asia Pacific Developed” increased from 3 percent to 32 percent.
2. Real estate investing in 2007 exhibited a gradual decrease in home bias as institutional respondents across the world seek to diversify their commitments outside of their local region. Institutional respondents in Australia and Japan each experienced dramatic increases in geographic diversification: Australian and Japanese respondents have historically invested in the developed areas of the Asia Pacific region, which accounted for 97 percent of both countries real estate allocations in 2005. These figures dropped to 68 percent and 78 percent respectively in 2007, as investors reallocated toward a more diverse portfolio of real estate assets. European investors on the other hand remain highly concentrated with 92 percent of real estate commitments located in Western Europe. North American respondents exhibit similar bias, with 85 percent of their real estate investments located in North America, although this number represents a decrease from 89 percent two years ago.
3. Hedge fund allocations expected to rise in nearly all regions. Hedge fund use among the respondents is most widespread in Japan – the percentage of respondents investing in hedge funds increased from 59 percent in 2005 to 71 percent in 2007. Hedge funds now make up more than 9 percent of the mean strategic allocation for institutional investors surveyed in Japan. Conversely, Japanese institutions expect hedge funds to return only 4.6 percent on average through 2009, while institutional investors in United States, Europe and Australia all expect hedge funds to return about 9 percent.
“Worldwide, hedge funds have matured as an investment tool for diversifying portfolios and reducing risk,” said Victor Leverett, Director, Hedge Funds, Russell Investments. “As more and more players enter the hedge fund marketplace, institutional investors are turning to consultants to help them select hedge fund providers and better understand the esoteric strategies they often employ. Consultant use rose by 25 percentage points from the last survey in North America, 32 in Australia and 20 in Japan while remaining stable in Europe.”
4. Leveraged buyouts (LBO) remained the most popular private equity strategy across the world among survey respondents and increased in commitments across all regions, except for a slight decline in Europe. The strategy dominates in North America, representing 71 percent of private equity commitments in 2007, a substantial increase from 57 percent in 2005. Australia and Japan saw similar leaps in commitments to leveraged buyouts, rising from 26 percent to 41 percent and from 47 percent to 63 percent, respectively, over the same time. In Europe, commitments to expansion capital increased from 6 percent to 12 percent, while commitments to mezzanine financing and other types of private equity investment, including secondaries and special situations, fell from 15 percent to 11 percent.
“The private equity community witnessed enormous volumes of LBO activity over the past two years, but investors may have come to the conclusion that the best and biggest buyouts have already occurred,” said Jay Pierrepont, Managing Partner, Pantheon Ventures-Russell Investments. “Institutional investors still have high expectations for private equity and are forecasting, with the exception of Japanese respondents’ expectations for 2007 and 2008, double digit returns, for the next two years derived predominately from venture capital and secondary opportunities.”
5. Worldwide, respondents continue to explore new strategies to add to the alternative investment mix beyond hedge funds, private equity and real estate. Many European respondents are either using or considering other forms of alternative investing. Among strategies currently being employed, currency overlay, absolute return and infrastructure were mentioned most frequently. Among strategies actively being considered, currency overlay, tactical asset allocation, portable alpha and infrastructure were most frequently mentioned.
In North America, the strategy most widely used – as well as the most widely considered – is portable alpha (currently used by 22 percent of survey respondents and under consideration by a further 45 percent). Currency overlays ranked highest in Europe, Japan and Australia with 41 percent, 38 percent and 53 percent respectively, of institutional respondents currently using this strategy.
In Australia, infrastructure investments tied with currency overlay, with 53 percent of survey respondents using these strategies.
About the Russell Survey on Alternative Investing
Since its inception in 1992, the Russell Investments Survey on Alternative Investing has been an important tool for institutional respondents in alternative investments - becoming a barometer for industry standards and investment levels. Published biennially, the report is intended to help institutions and respondents broaden their knowledge about industry best practices, stay abreast of trends and structure their alternative investment commitments intelligently. The 2007 report focuses on determining, on a percentage basis, the types of alternative investments that are being used by respondents, particularly the growth and composition of these investments, as well as geographic diversification.
The survey, which targets the largest superannuation/pension funds, foundations and endowments, is given in an objective format and respondents are asked about their views and methodologies concerning alternative investments. The 2007 survey results are based on the detailed information provided by 326 organisations in North America, Europe, Australia and Japan. Information from other surveys represented here are views from respondents at that point in time.
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (“RIM”). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Past performance is not a reliable indicator of future performance. Any potential investor should consider the latest Product Disclosure Statement (“PDS”) in deciding whether to acquire, or to continue to hold, an investment in any Russell product. The PDS can be obtained by visiting www.russell.com.au or by phoning (02) 9229 5111.
The 2007 - 2008 Russell Survey on Alternative Investing
A survey of organisations in Australia, Japan, North America and Europe More