The steady fall in returns on alternative assets is forcing institutions into more niche investments, with one recent example being Korea’s Public Officials Benefits Association (Poba).
The $9 billion pension fund is exploring farmland, timberland, Asia-listed alternative funds and even more esoteric areas, such as royalty products. This comes after it made its first moves into insurance-linked securities and private debt at the end of last year.
Jang Dong-Hun, chief investment officer of Poba, said it aimed to deliver an annual absolute return of 5%, a target he saw as “impossible” to achieve by allocating only to traditional assets such as bonds and stocks.
Alternative investments, which account for about half of Poba’s assets under management, generated over 7% return in Korean won last year, Jang said, speaking on a panel at AsianInvestor's Asian Investment Summit last week.
Hence they are still worth investing in, he noted, though it is harder to obtain decent risk premiums this year than in the past.
Alternatives generally return about 70-150 basis points more than traditional assets, but are now moving towards the lower end of that range, agreed Jeffrey Hall, head of global alternative product management for the institutional business at US asset manager TIAA.
Speaking on the same panel as Jang, Hall said the shrinking risk premium has in turn driven down manager fees to 20-25bp or even 10bp in some cases, from 100bp in the past.
Another case in point is the hedge fund industry, which has witnessed the collapse of its traditional 2% management fee and 20% performance fee structure, as reported on Monday.
The increasingly meagre returns available from alternatives are fuelling investors' desire to look further afield for yield.
Poba has started reviewing royalty products, in areas such as the pharmaceuticals sector. Such investments involve the lending of money to companies in return for being paid a percentage of their revenue stream, or royalty.
The Korean institution is also finalising its first investment into an Asia-listed alternative open-ended fund, Jang told AsianInvestor on the sidelines of the summit.
Poba is looking cautiously at opportunities in farmland and timberland for the first time, he added, because it is difficult to find general partners (GPs) with long-term track records in such assets.
Of course, another benefit of alternatives is that they are often longer-term investments. “We are comfortable with long-duration and illiquidity,” noted Jang. Poba manages liabilities of more than 10 years, but its portfolio duration is much shorter than that, so it is expanding its investment horizon.
The institution is expanding its overseas alternatives allocation in particular. This month it said it would hand a total of $300 million to seven private equity firms for international investments, as reported. Poba did not disclose any names, as it is still doing due diligence on the managers.
Six of the seven mandates are focus on eurozone and/or US assets. Poba plans to build a “core” alternative asset base in the US and eurozone first and will then consider emerging markets, Jang told AsianInvestor.
Moreover, he added, Poba prefers alternative investments that provide regular cash flow – paying out at least once a year.
AsianInvestor will hold its annual Korea Institutional Investment Forum on June 20 at the Westin Chosun in Seoul. Please visit the website for more details.