Defined contribution pension funds boost real assets allocations – Aviva Investors research

29 January 2024

Inflation-linked returns & sustainability features continue to attract institutional investors.

  • Double-digit increase in percentage of DC schemes expected to increase allocation to real assets since 2022
  • Over half of institutional investors see performance as helping drive allocation to sustainable real assets
  • Real estate equity most sought-after asset class

More than two-thirds (69 per cent) of corporate defined contribution (DC) pension funds expect to increase allocations to real assets over the next two years, up from 51 per cent a year earlier, according to the sixth ‘Real Assets Study’ research paper by Aviva Investors, the global asset management business of Aviva plc.

Conversely, just six per cent of DC funds anticipate decreasing their allocations to illiquid asset classes over the same period compared to 29 per cent of respondents in 2022, according to the Study, which captures responses from 500 institutional investors, including corporate DB and DC pension plans, public pensions, insurers and financial institutions, from across the UK and Europe, Asia Pacific and North America, together representing $3.8 trillion of assets under management.

Whilst 53 per cent of DC pension funds currently only offer access to real assets via allocations within default funds, 45 per cent of those surveyed expect members will be able to self-select their exposure to real assets funds in the future.

DC funds emphasise capital growth (50 per cent), diversification (49 per cent) and capital preservation (47 per cent) as key benefits from real assets. The effect of the volatile market environment in 2023 reinforcing the value of real assets in providing diversification and uncorrelated returns was reflected across the survey as a whole:64 per cent of global institutional investors cited diversification as a primary reason for allocating to real assets today, up from 57 per cent in 2022.

Daniel McHugh, Chief Investment Officer at Aviva Investors, commented: “The findings from this year’s study capture one of the most pertinent structural shifts taking place in real assets investment and retirement saving. DC pension funds represent an increasingly large portion of the pension market, yet this important group of investors have not been able to access – or allocate to – real assets as they would like, or to the extent that optimises investment outcomes. The emergence of Long Term Asset Funds (LTAFs) has lowered these barriers, giving better access to a more diverse range of investment opportunities and this has driven demand sharply upwards.”

The importance that real assets create positive returns as well as supporting sustainability goals was also evident in the Study. Globally, 53 per cent of institutional investors see evidence of improved financial performance as driving them to invest – or increase investment – in sustainable real assets, followed closely by their ability to evidence sustainability-related impact (51 per cent). North American investors were most likely to prioritise performance over the ability to evidence impact (56 per cent vs. 30 percent), whilst for European investors the preference was inverted (49 per cent vs. 58 per cent).

More broadly, sustainability-related factors remain important for institutional investors in real assets, with 17 per cent of respondents citing them as a critical and deciding factor in real assets investment decisions. However, the picture varies through a regional lens. More than 15 per cent of North American institutions do not take such factors into account, compared with only four per cent of institutions in APAC and two per cent in Europe.

47 per cent of institutional investors globally have confidence in the actions needed for them to meet long-term net zero and sustainability commitments within real assets. Those based in Europe were most confident of the actions required (51 per cent somewhat or very confident), compared to 46 percent in Asia Pacific and 39 per cent in North America, highlighting the need for continued guidance and clarity to help shape long-term roadmaps in reaching this set of objectives.

Daniel McHugh added: “57 per cent of institutional investors globally have a commitment to reaching net zero, however less than half have confidence in the actions needed to meet these commitments within real assets. There is a huge opportunity for asset managers to guide clients and demonstrate how transformational their real assets investments can be in achieving those objectives whilst also delivering positive outcomes for savers.”

Looking at broad allocations to real assets, one-third of institutional investors with an allocation to real assets now hold 10-20 per cent of their total portfolios in these investments. Despite a significant repricing in the market over the last 12 months, real estate equity remains the most attractive proposition for investors, accounting for 27 per cent of real asset portfolios on average. Despite this, infrastructure debt (11 per cent) and infrastructure equity (14 per cent) now account for a larger share of real asset portfolios compared to previous years, whilst real estate debt (11 per cent) and real estate long income (12 per cent) have also risen since 2022.

51 per cent see real assets’ ability to deliver long-term income as becoming increasingly important over the next two years, with expectations of lower interest rates and therefore lower levels of income from fixed-income portfolios being a likely reason for such a view.

Daniel McHugh added: “64 per cent of respondents see diversification as a primary reason for allocating to real assets, whilst 60 per cent see it as a driver when looking ahead over the next two years. However, we think the track record of real assets in delivering long-term, inflation-linked income is also incredibly pertinent against the backdrop of today’s market environment and “a dash for cash” being a prevailing theme of the year.

“With 64 per cent of institutional investors globally also planning to increase their allocation to real assets over the next two years, 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.”

Elsewhere, 60 per cent of global institutions cited higher rates as being a key concern, ahead of global recession (51 per cent) and liquidity risks (34 per cent). However, as with other topics, there are regional nuances, with a higher proportion of North American investors (47 per cent) more worried about liquidity; those in other regions tend to cite political risk (Europe) or market volatility (APAC) as being the greater threats.

Source: Aviva
Multiple reports with cicle diagram and text

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