Over two-thirds (69%) of corporate defined contribution (DC) pension funds are planning to increase their allocations to real assets in the next two years, marking a significant rise from 51% the previous year, is one of the key findings in the sixth real assets study by Aviva Investors, the global asset management division of the insurance and pensions group Aviva. This trend contrasts sharply with the previous year, where only 6% of DC funds expected to decrease their allocations to illiquid asset classes, a substantial drop from 29% in 2022.
The study, on Monday 29 January, gathered insights from 500 institutional investors, including corporate defined benefit (DB) and DC pension plans, public pensions, insurers and financial institutions across the UK, Europe, Asia Pacific and North America, represents a collective $3.8trn in assets under management.
Access to real assets
The research paper also revealed that while 53% of DC pension funds currently provide access to real assets only through allocations within default funds, 45% anticipate that members will have the option to self-select their exposure to real assets funds in the future. DC funds are increasingly recognising the benefits of real assets, with 50% emphasising capital growth, 49% on diversification and 47% on capital preservation, stated Aviva.
Diversification
The value of real assets in providing diversification and uncorrelated returns, particularly in the volatile market environment of 2023, was a recurrent theme in the survey. According to Aviva, 64% of global institutional investors cited diversification as the primary reason for allocating to real assets, an increase from 57% in 2022.
There seems to be growing consensus that opportunities exist to acquire assets at attractive valuations, particularly for those with capital to spare and who have a long-term mindset.
This shift underscores the evolving perspective of institutional investors towards real assets, viewing them as a crucial component for risk management and portfolio diversification in uncertain economic times, noted Aviva.
Aviva Investors also observed that institutional investors have slightly reduced their overall real asset allocations on a year-on-year basis, primarily due to market downturns and perceived risks in certain sectors, notably parts of the commercial real estate industry. Despite this, the asset class continues to attract investors, primarily for its diversification benefits, inflation-linked and long-term income prospects and its positive impact on environmental, social and governance factors.
Regional variation
Among the institutional investors with allocations in real assets, 52% hold up to 10% of their portfolios in these investments, while a third have allocations between 10% and 20%.
North American investors exhibit higher allocations, with nearly a quarter having 20% or more of their portfolio in real assets. Looking ahead, approximately 64% of investors globally anticipate increasing their allocations in the next two years, with Asia-Pacific investors being the most likely to augment their portfolios (69%).
However, there has been a noticeable decline in the proportion of North American investors planning to increase allocations, falling from 70% in 2022 to 60% in 2023, and 13% plan to reduce their real asset investments, an increase from 6% in 2022.
Investment strategies
Real estate equity, although slightly less prevalent than before, remains the dominant strategy, dropping from 31% three years ago to 27% in 2023. In contrast, there has been an upswing in allocations towards infrastructure debt (from 8% to 11%) and infrastructure equity (from 13% to 14%), along with real estate long income (increasing from 10% to 12%) and real estate debt (rising from 9% to 11%), from 2022 to 2023.
Additionally, the significance of inflation protection is expected to decrease, with 43% citing it as important over the next two years, down from 50% in 2023. The importance of cashflow matching is also predicted to decline sharply.
Long-term income
In contrast, the importance of long-term income and positive ESG impact is set to increase, found Aviva. This shift is reflected in the strategies of DC pension funds, half of which already offer access to real assets. For these funds, a combination of capital preservation, diversification capital growth, long-term income, inflation-linked income and a positive ESG impact are the most appealing attributes of real assets.
Risks
Regarding risks, 60% of investors consider high interest rates a major concern for real asset investments in the coming year. This is followed by fears of a global recession, cited by 51%, and liquidity risks, highlighted by 34%. Notably, there are regional variations in these concerns: North American investors are particularly wary of liquidity risks, while those in Europe and Asia-Pacific are more focused on political risks and market volatility, respectively.
The full 47-page report is available .