Large LPs increase exposure to debt

Its survey of 62 institutional LPs in Europe, the Americas and Asia found that allocations ranged from 13 to 34 percent for fixed income, and 18 to 35 percent for alternative investments, with equities accounting for the lion’s share at 35 to 52 percent.

There has been significant movement in allocation strategies however over the last quarter (Q1 2013), largely in favour of alternatives at the expense of equities and fixed income products (particularly investment grade debt, domestic corporate bonds, and listed bond funds).

The big beneficiaries were infrastructure debt, which saw 17 percent of respondents raise their allocations, direct infrastructure (47 percent increased their exposure), listed real estate trusts (REITs, with 24 percent) and global corporate debt (nine percent). The survey showed modest growth in allocations in allocations to mezzanine (seven percent) and high yield (three percent).

Asian investors were the most likely to increase their exposure to debt instruments like mezzanine, the survey found.

Pension funds were the most likely class of LP to leave their allocations unchanged, AMP found.

The survey found 32 percent of respondents planned to expand into new asset classes, while 27 percent planned to actively reduce risk. A quarter said they would increase the number of managers they backed, whilst 19 percent said they would expand into new markets, and three percent said they would delever.

It also called into question the validity of the ‘great rotation’ theory, whereby investors rotate out of bonds into equities when bond yields fall far enough.

One mid-sized US pension interviewed by AMP said his fund would “continue capital deployment to support long-term targets, shifting away from an overweight of equities to income producing assets”.  Another said his fund would “cut exposure to long-term rates and continue to build out private markets”.

Investment in alternative assets doubled from 2005 to 2011, according to McKinsey’s 2012 study ‘The Mainstreaming of Alternative Investments’. With $6.5 trillion of capital invested in alternatives, it now represents a significant chunk of LPs’ portfolios.

One of the key lessons learnt from last year was the need for nimbleness. One respondent remarked that his biggest regret about last year was “Not moving fast enough”, while another cited the need for “timely rebalancing”.