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In Shift Toward Alternatives, Illiquid Alts Gain Ground

27/09/2016
In Shift Toward Alternatives, Illiquid Alts Gain Ground

Summary

With alternative investments being increasingly pressed into service, it’s critical to understand the benefits and challenges that alts bring to the table. Our new global RiskMonitor survey highlights the top issues facing institutional investors today.

Key takeaways
  • Our RiskMonitor study shows that a growing number of institutional investors are tapping alternatives for their performance benefits
  • 60% of the investors we surveyed strive to measure the risks posed by alternative assets, but 62% also want better risk-management tools
  • 23% would invest more in real estate, while only 10% would invest less; we saw similar results with private equity and infrastructure equity/debt
  • Most investors feel positive about liquid alts’ role in providing attractive risk-adjusted returns relative to traditional investments
  • There is a growing appetite for illiquid alts – particularly real estate, but also private equity and infrastructure equity/debt

Alternative investments are becoming an increasingly important part of institutional investors’ portfolios, but many don’t fully understand how alts work – nor are they fully happy with performance. Still, a growing number of investors are using alts for new purposes, like boosting portfolio returns, and many are beginning to tap illiquid alternatives like real estate, private debt and infrastructure debt.

These are some of the key findings published in the 2016 edition of RiskMonitor – our annual survey that reports on the top issues facing institutional investors around the world, from public pension plans to family offices and endowments.

How institutional investors view alternatives today

Most use alts for diversification, but performance is gaining traction: Our RiskMonitor research shows that 30 per cent of institutional investors use alternatives for the diversification benefits they provide, while about 25 per cent invest in alts because of their low correlation to other asset classes. However, a growing number of respondents (14 per cent) are now tapping this asset class for its performance benefits.

Income seekers are turning to alts: As the hunt for yield continues, illiquid alternatives appear to have found favor; 67 per cent of our respondents said illiquid alts can provide attractive risk-adjusted returns relative to traditional investment strategies.

Risk management is a growing focus: While 60 per cent of the institutional investors we surveyed strive to measure the risks posed by alternative assets, an equal number (62 per cent) want better risk-management tools (up from 49 per cent last year). More specifically, 38 per cent feel they do not have the necessary tools to properly assess cash flow patterns or liquidity risk.

Illiquid alts are on the rise: More than half (56 per cent) of respondents feel that illiquid alternatives are key to building portfolios in the current market. In fact, 23 per cent would consider investing more in real estate, while only 10 per cent would consider investing less. Similarly, more respondents said they would increase their allocations to private equity and infrastructure equity/debt.

Liquid alts still reign, but performance has disappointed: About three in five respondents (57 per cent) believe liquid alternatives have an important role to play in constructing portfolios. At the same time, when it comes to commodities – traditionally one of the most widely used types of liquid alternative investments – only 8 per cent are considering increasing their exposure, while 22 per cent are thinking about a decrease. This could be because 33 per cent of respondents are not satisfied with the performance of liquid strategies. Still, most investors (56 per cent) feel positive about the role liquid alternatives play in providing attractive risk-adjusted returns relative to traditional investments and asset classes.

Alternatives Are Widely Used by Institutions, Primarily for Diversification
A big reason why alternatives are employed by so many investors is that there are so many ways to use them in portfolios.

Does your organization invest in alternative assets?

Yes: 74% | No: 26%

Reasons for investing

  • 30% Diversification
  • 25% Low correlation to other investment strategies/asset classes
  • 14% Higher returns than conventional debt or equity investments
  • 8% Risk management
  • 8% Reduce overall portfolio volatility
  • 5% To manage liabilities and longevity risk
  • 4% Reliable income stream
  • 3% Hedge against inlation
  • 2% Reduce portfolio drawdowns
  • 1% Other


Source: AllianzGI RiskMonitor 2016.


Conclusions

With alternatives being increasingly pressed into service by a wide range of investors for an even wider range of reasons, it’s imperative that asset managers and financial intermediaries understand the benefits and challenges that alts bring to the table:

  • While investing in alternatives is virtually commonplace now, investors still need help understanding how alts work – and how to use them.
  • Increased market volatility could help more investors appreciate the low correlations of alternatives to other asset classes.
  • With rates at record lows, finding adequate yield is a major concern. The search for income has pushed many investors towards equities, but alternatives are also benefiting.
  • There is a growing appetite for illiquid alts – particularly real estate, but private equity and infrastructure equity and debt are also being put into action.
  • Liquid alternatives remain an important asset class that can potentially generate uncorrelated returns and decrease volatility while providing greater liquidity.

Learn more about RiskMonitor

For more information about RiskMonitor 2016 – including access to the full study and an interactive tool for viewing key data points – click here.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This material does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

© 2016 Allianz Global Investors. All rights reserved.

Pint-Sized Economics

Hans-Jörg Naumer | 29/09/2016
Oktoberfest

Summary

Germany's Oktoberfest is famous the world over for its traditional costumes and, most of all, its one-litre “Maß” mugs of beer. But have you thought about what beer can teach you about the world of finance and economics?

  • Number of Okoberfest Maß that EUR 10 buys
  • Growth of EUR 10 invested in German equities in 1960*
“As our research shows, the equivalent of EUR 10 in 1960 would have been more than enough to buy an entire round for you and nine friends. But thanks to inflation, the price of a Maß has gone from 95 cents in 1960 to EUR 10.50 today – not even enough for one drink. Yet if you had skipped your drinks in 1960 and invested EUR 10 in German equities, you would now have EUR 395. That would buy you an inflation-busting 37 Maß at Oktoberfest. Prost!”
Hans-Jörg Naumer, Head of Global Capital Market Analysis and Thematic Research

*Calculations for C-DAX as at end of January in 1960, 1980, 2000 and end of August in 2016; Past performance is not a reliable indicator of future results. Source: Datastream ; AllianzGI Global Capital Markets & Thematic Research, September 2016

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

AGI-2016-09-30-16476
Expert-Image

Hans-Jörg Naumer

Global Head of Capital Markets & Thematic Research
Hans-Jörg Naumer is Global Head of Capital Markets & Thematic Research with Allianz Global Investors which he joined in 2000. The focus of his work is on analysis relating to strategic and tactical allocations, specific investment opportunities and the identification of long-term investment trends. Before joining the firm, he worked for Société Générale, where he became the Head of Research Germany and was part of the French investment bank’s international research team. From his vantage point as an analyst and economist, he observed the establishment of the Economic and Monetary Union and thus ranked among the prime “ECB Watchers”. He started his professional career in the corporate banking division of Deutsche Bank in 1994. Hans-Jörg studied economics at the University of Mannheim, one of the leading universities for economics and business studies in Germany. During his studies, he worked at the Chair for Macroeconomics.
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